ustc historical __ fix_final__

THE UNITED STATES

AX COURT

______

AN HISTORICAL ANALYSIS

Harold Dubroff & Brant J. Hellwig

Second Edition

Revised and Expanded

12/23/14 9:13 AM

PREFACE AND ACKNOWLEDGEMENTS

From the Original Edition:

The United States Tax Court has played a key role in the development

of Federal tax law since its founding as the Board of Tax Appeals in 1924.

For this reason, and because of its unusual procedures and judicial status,

we determined that it would be useful if a comprehensive study were

prepared dealing with the history and evolution of the Court. To this end a

grant was arranged to permit Professor Harold Dubroff of Albany Law

School to undertake the project. Although members of the Court reviewed

Professor Dubroff’s manuscript from time to time, the content of the study

is solely the responsibility of Professor Dubroff and should not be taken to

reflect the views of the Court or any of its Judges.

Work on the Tax Court project was commenced in 1974 and concluded

in 1977. As the various parts of the study were completed, they were

published in the Albany Law Review. * * *

We believe that the study is an important piece of scholarly work which

will be useful to both the Tax Court and the public in providing insight into

the forces which created and shaped the Court, its procedures and its

jurisdiction. We appreciate the efforts of the Albany Law Review in

publishing the study and permitting Commerce Clearing House, Inc. to

photocopy its issues, thereby making possible a wide public distribution at a

modest cost.

C. Moxley Featherston, Chief Judge

United States Tax Court

Howard A. Dawson, Jr. Judge

United States Tax Court

Washington, D.C.

1979

The concept of a history of the United States Tax Court largely came

from Judge Howard A. Dawson, Jr., then Chief Judge, and I wish to

express my gratitude to him for the suggestion that I undertake the project

and for the continuing help and support he furnished me as the work

progressed. Without his involvement, this study would not have been

possible.

Other judges of the Court have also furnished their assistance during the

course of the work, and I wish to acknowledge my gratitude to them as

well. In particular, I would like to thank Chief Judge Moxley Featherston,

who made completion of the study possible, and Judge Charles R. Simpson,

who gave unstintingly of his time in reviewing manuscripts. Additionally,

Judge Bolon B. Turner, who served as a member of the Board of Tax

Appeals, and later as a judge of the United States Tax Court from 1937 to

1971, was of great assistance in providing me with valuable insights into

events which transpired during his long and productive tenure.

With respect to the research and writing of the book, several former

students provided valuable research assistance. Joseph R. Cook and Dan S.

Grossman deserve special thanks for their part in the preparation of Parts

V, VI, and VII [of the original edition.] Other former students whom I

wish to thank are Chris Boe, Judith L. Needham, and Kim Oster.

This book was originally published in six separate issues of the Albany

Law Review, and I am grateful for the editorial assistance provided by three

generations of law review members. My association with former Editor-in-

Chief Joseph H. Reynolds and former Managing Editor Gary Centola is one

which I will not soon forget.

Finally, I would like to thank my secretary, Iris Baum, whose persistent

good humor and cooperative spirit in the face of innumerable drafts and

redrafts were a constant source of wonder to me.

Harold Dubroff

Albany, New York

1979

Second Edition:

Following the publication of the original edition of this text, Professor

Dubroff published supplemental articles in the Albany Law Review that

brought the Tax Court study current to 1988. The original and

supplemental articles authored by Professor Dubroff represent a unique

source of detailed information about the Tax Court’s history and the

development and expansion of the Tax Court’s jurisdiction. In 2010, the

Court concluded that it would be appropriate to undertake a

comprehensive update of Professor Dubroff’s original work in this field.

Accordingly, the Court arranged for Professor Brant Hellwig of the

Washington and Lee University School of Law to draft the second edition

iii

of the text. The second edition updates the material originally authored by

Professor Dubroff and addresses important developments at the Tax Court,

including the considerable expansion of the Court’s jurisdiction subsequent

to the publication of Professor Dubroff’s work.

Work on the second edition commenced in 2010 and concluded in

2013. As a general matter, the second edition strives to bring the material

current to the beginning of 2013. The content of the revised text is solely

the responsibility of Professor Hellwig and should not be taken to reflect

the views of the Court or any of its Judges.

The Court appreciates the willingness of Professor Dubroff, Albany

Law Review, and CCH to graciously release any claim to the copyright so

that the second edition could be undertaken.

Michael B. Thornton, Chief Judge

United States Tax Court

John O. Colvin, Judge

United States Tax Court

Washington, D.C.

2014

Judge John O. Colvin, then Chief Judge of the United States Tax Court,

approached me in 2009 with an exciting albeit daunting proposition:

updating the seminal text authored by Professor Dubroff on the Tax

Court’s historical origins and its evolution as a court. I accepted, and the

second edition of the text is the product of that effort. The original

manuscript understandably served as a valuable source of information

about the Tax Court, and it is an honor to bring the text in line with more

recent developments.

The second edition leaves largely intact the first four Parts of the

original text, which provide a remarkably detailed history of the creation of

Board of Tax Appeals through the congressional chartering of the United

States Tax Court as a court of record established under article I of the

Constitution. Part V is a new chapter devoted to the judicial consideration

of the Tax Court’s constitutional status that culminated in the Supreme

Court’s 1991 decision in Freytag v. Commissioner.

Whereas the original text addressed procedural matters following the

discussion of the historical development of the Court, the second edition at

this point turns to an examination of the Court’s jurisdiction. This portion

of the text represents the largest source of new material. In addition to

incorporating various aspects of the supplemental articles authored by

Professor Dubroff in the 1980s, the second edition details the numerous

ways in which Congress has expanded the Tax Court’s jurisdiction in recent

times. Whereas the original text devoted a single, lengthy chapter to the

Tax Court’s jurisdiction, the second edition breaks this material into three

chapters. Part VI addresses foundational aspects of the Court’s jurisdiction,

such as its deficiency and refund jurisdiction. Part VII examines a number

of innovations in the Tax Court’s jurisdiction that, broadly speaking, are

intended to improve the efficiency of tax litigation. Lastly, Part VIII

explores the jurisdiction of the Tax Court to review the administration of a

variety of recently created taxpayer rights.

Following the examination of the Tax Court’s jurisdiction, the second

edition turns to a discussion of Tax Court procedure. Part IX is devoted to

pretrial matters, Part X to trial procedure, and Part XI to post-trial

considerations. Part XII is a new chapter devoted to the position of the

Special Trial Judge. Part XIII concludes by addressing the various means

by which the Court provides institutional support to self-represented

taxpayers.

In the course of this project, I have received considerable support from

several of the Court’s Judges and members of its professional staff. I

greatly appreciate the encouragement and guidance I have received from

Chief Judge Michael B. Thornton and Judge John O. Colvin. I wish to

extend a particular note of gratitude to Special Trial Judge Daniel A. Guy,

Jr. In addition to generously devoting his time in reviewing drafts of the

manuscript, he largely oversaw the project on behalf of the Court. Andrea

Blake and Audrey Nutt of the Court’s staff devoted significant effort to this

project by providing drafts of updates on discrete topics, and I greatly

appreciate their contributions.

Additionally, I am grateful for the research assistance I received from

law students over the years I worked on this project. One former student,

Christopher Hines, significantly improved the text through his editorial

efforts. As a final matter, I commenced work on this project while a

member of the Law School faculty at the University of South Carolina and

concluded it while a member of the Law School faculty at Washington and

Lee University. I thank both institutions for their support.

Brant J. Hellwig

Lexington, Virginia

2014

THE UNITED STATES TAX COURT

AN HISTORICAL ANALYSIS

TABLE OF CONTENTS

PART I

RIGINS OF THE TAX COURT ........................................................................... 1

A. Development of the Income Tax ............................................................... 1

B. Inadequacy of Preexisting Adjudicative Institutions .............................12

1. Dilemma of the Bureau ......................................................................13

2. The Judicial Remedy ...........................................................................29

3. Pre-Assessment Review Within the Bureau ....................................38

ART II

REATION OF THE BOARD OF TAX APPEALS:

HE REVENUE ACT OF 1924 ............................................................................49

A. The Revenue Act of 1924 ..........................................................................49

B. The Administration Proposal for a Board of Tax Appeals ..................53

C. Controversy and Modifications ................................................................57

1. Independence .......................................................................................58

2. Procedure ..............................................................................................63

3. Personnel ..............................................................................................70

4. Jurisdiction ............................................................................................76

5. Effect of Board Decision ...................................................................81

D. The Board from 1924–1926 ......................................................................84

1. Selection of Members .........................................................................86

2. Rules of Practice and Procedure .......................................................93

3. The Board in Operation .................................................................. 102

4. Success of the Board ........................................................................ 108

ART III

HE REVENUE ACT OF 1926:

MPROVING THE BOARD OF TAX APPEALS .............................................. 115

A. The Revenue Act of 1926 ....................................................................... 115

B. Status of the Board .................................................................................. 117

C. Appeals and Finality ................................................................................ 122

D. Jurisdiction ................................................................................................ 131

1. Exclusivity of Board Jurisdiction ................................................... 131

2. Effect of Payment and Limited Refund Jurisdiction .................. 133

3. Jeopardy Assessments ...................................................................... 136

E. Members .................................................................................................... 140

1. Number of Members ....................................................................... 141

2. Compensation of Members ............................................................ 144

3. Tenure of Members ......................................................................... 146

4. Removal of Members ...................................................................... 151

5. Restrictions on Practice ................................................................... 152

6. Background of Members ................................................................. 155

F. Practice and Procedure ........................................................................... 159

G. Division Decisions and Expediting the Board’s Workload .............. 163

H. Conclusion ................................................................................................ 170

ART IV

HE BOARD BECOMES A COURT ................................................................ 175

A. The Board of Tax Appeals from 1924 to 1942 ................................... 175

B. The Tax Court of the United States – An Independent Agency

in the Executive Branch of the Government ............................................ 185

1. The Revenue Act of 1942 – the Board of Tax Appeals is

Renamed the Tax Court of the United States .............................. 186

2. Attempts to Incorporate the Tax Court into the Federal Judicial

System ................................................................................................ 195

C. The United States Tax Court – A Court of Record Established Under

Article I of the Constitution ................................................................... 217

D. Questions Concerning Constitutional Status of the

Court’s Jurisdiction .................................................................................. 228

E. Proposals to Consolidate Tax Litigation Before the Tax Court ....... 232

F. Subsequent Developments Consistent With Judicial Status ............. 236

1. Court Security ................................................................................... 238

2. Tax Court Personnel System .......................................................... 238

3. Codes of Conduct and Public Disclosures .................................. 238

4. E-Government Act .......................................................................... 239

5. Admissions and Discipline ............................................................. 240

ART V

JUDICIAL EXAMINATION OF THE TAX COURT’S CONSTITUTIONAL

NATURE:

FREYTAG V. COMMISSIONER

.................................................... 241

A. Developments Before the Tax Court ................................................... 242

B. Decisions at the Courts of Appeals ...................................................... 247

C. The Supreme Court Decision ................................................................ 252

vii

D. Postscript ................................................................................................... 263

E. Conclusion ................................................................................................ 265

F. Subsequent Development: Kuretski v. Commissioner ............................ 266

ART VI

OUNDATIONAL PARAMETERS OF TAX COURT JURISDICTION ......... 269

A. Deficiency Jurisdiction ............................................................................ 271

1. Taxes Subject to the Tax Court’s Deficiency Jurisdiction ......... 272

2. Deficiency Jurisdiction: Procedural Requirements .................... 275

3. Jurisdiction to Restrain Premature Assessment and

Collection ........................................................................................... 298

B. Refund Jurisdiction .................................................................................. 301

1. Statute of Limitations on Overpayment Determinations .......... 304

2. Resolution of Potential Concurrent Overpayment

Jurisdiction ......................................................................................... 308

3. Authority to Order Refund of Overpayment .............................. 311

4. Proposals to Expand Refund Jurisdiction .................................... 315

C. Jeopardy Jurisdiction ............................................................................... 323

1. Jeopardy Assessments ...................................................................... 327

2. Termination Assessments ............................................................... 338

3. Review of Proposed Sale of Property Obtained Through

Jeopardy or Termination Assessment ........................................... 345

D. Scope of Judicial Powers......................................................................... 349

1. Enforcement Powers ....................................................................... 350

2. Power to Review Constitutionality of Laws ................................. 353

3. Equitable Powers .............................................................................. 357

ART VII

NHANCING THE EFFICIENCY OF TAX ADJUDICATION:

INNOVATION IN REMEDIES AND PROCEDURES ................................... 387

A. Declaratory Judgments ............................................................................ 387

1. Early Subjects of Declaratory Judgment Jurisdiction ................. 388

2. Expansions of Declaratory Judgment Relief ................................ 403

B. Review of Worker Classification Determinations .............................. 408

C. Innovations in Partnership Proceedings .............................................. 411

1. Uniform Partnership Proceedings Under TEFRA ..................... 412

2. Tax Treatment of Subchapter S Items .......................................... 433

3. Electing Large Partnership Provisions .......................................... 434

4. Declaratory Judgments Relating to “Oversheltered” Returns .. 438

viii

D. Supplemental Tax Court Jurisdiction ................................................... 441

1. Post-Decision Interest Determinations ........................................ 442

2. Continuing Jurisdiction Over Estate Tax Cases .......................... 445

ART VIII

AX COURT PROMINENCE IN JUDICIAL REVIEW

OF TAXPAYER RIGHTS ................................................................................... 447

A. Disclosure Actions ................................................................................... 447

B. Relief from Spousal Joint and Several Liability ................................... 456

1. Relief Under Former Section 6013(e) ........................................... 458

2. Section 6015(b) Relief ...................................................................... 461

3. Section 6015(c) Relief ...................................................................... 464

4. Section 6015(f) Relief ....................................................................... 465

5. Procedure for Requesting Innocent Spouse Relief ..................... 466

6. Tax Court Jurisdiction ..................................................................... 468

7. Standard and Scope of Review ....................................................... 472

8. Rights of the Nonrequesting Spouse............................................. 474

C. Jurisdiction to Review Denials of Interest Abatement ...................... 475

D. Review of Determinations in Collection Due Process

Proceedings ............................................................................................... 481

1. The Government’s Summary Collection Powers ........................ 481

2. The Pre-Deprivation Administrative Hearing ............................. 483

3. Judicial Review .................................................................................. 488

E. Reimbursement of Taxpayer Litigation and Administrative Costs .. 502

1. Pre-TEFRA Rules ............................................................................ 503

2. Taxpayer Rights as Expanded by TEFRA ................................... 507

3. Tax Court Jurisdiction ..................................................................... 526

F. Review of Whistleblower Award Determinations .............................. 530

ART IX

RETRIAL PROCEDURE .................................................................................. 539

A. The Deficiency Notice ............................................................................ 541

B. The Petition .............................................................................................. 545

1. Content of the Petition .................................................................... 546

2. Congestion of Appeals .................................................................... 553

C. The Answer ............................................................................................... 565

1. Filing Requirements ......................................................................... 565

2. The General Denial .......................................................................... 572

3. Affirmative Allegations .................................................................... 578

D. The Reply .................................................................................................. 585

1. Filing ................................................................................................... 586

2. Content and Form ............................................................................ 595

E. Stipulations ................................................................................................ 598

1. Stipulations from 1924 to 1945 ...................................................... 600

2. The 1945 Revision ............................................................................ 603

3. Putting Teeth into the Rule: 1955 Revision ................................ 605

4. Revisions of the 1960s ..................................................................... 606

5. 1974: Rule 31(b) Becomes Rule 91 ............................................... 614

F. Pretrial Conferences ................................................................................ 617

G. Discovery................................................................................................... 623

1. Adoption of Discovery Procedures ............................................... 631

2. Expanding Discovery Techniques ................................................. 633

3. Discovery of Expert Witnesses ...................................................... 641

4. Restructuring and Expansion of Deposition Procedures .......... 648

5. Limitations on the Use of Interrogatories .................................... 649

6. Sanctions for Discovery Abuse ...................................................... 649

H. Case Management Procedures ............................................................... 656

1. Joint Motion for Assignment of a Judge ...................................... 656

2. Motions Practice ............................................................................... 656

3. Calendaring Cases for Trial ............................................................. 657

4. Standing Pretrial Order and Pretrial Memorandum ................... 658

5. Standing Pretrial Notice .................................................................. 662

6. Final Status Report ........................................................................... 663

I. Alternative Dispute Resolution ............................................................. 663

ART X

RIAL PROCEDURE ......................................................................................... 667

A. Place of Trial ............................................................................................. 668

B. Evidence .................................................................................................... 673

C. Burden of Proof ....................................................................................... 682

1. Development of General Rule ....................................................... 682

2. Fraud................................................................................................... 690

3. New Matter ........................................................................................ 694

4. Reassignment of Burden of Proof Pursuant to Section 7491 ... 699

D. Damages for Frivolous or Groundless Proceedings .......................... 706

1. Pre-TEFRA Damages ...................................................................... 706

2. Damages Expanded by TEFRA .................................................... 711

3. Subsequent Statutory Developments ............................................ 720

ART XI

PINIONS, DECISIONS, AND APPEALS ...................................................... 729

A. The Decision Process .............................................................................. 729

B. Development of the Single-Member Division Structure ................... 731

C. Findings of Fact and Opinion................................................................ 736

D. Bench Opinions ....................................................................................... 739

1. The Amendment of Section 7459(b) ............................................. 739

2. The Proposal of Rule 152 ............................................................... 743

3. The Adoption and Employment of Rule 152 .............................. 747

E. Memorandum Opinions ......................................................................... 750

F. Court Conference .................................................................................... 754

1. Historical Origins ............................................................................. 755

2. Voting Procedures ............................................................................ 760

3. 1985 Amendments to Conference Procedures ............................ 764

G. Rule 155 ..................................................................................................... 777

H. Appeals ...................................................................................................... 784

1. Federal Rules of Appellate Procedure ........................................... 784

2. Time for Filing Appeal .................................................................... 785

3. Effect of Motion to Vacate ............................................................. 787

4. Finality of Tax Court Decisions ..................................................... 788

5. Reviewable Decisions ...................................................................... 789

6. Venue.................................................................................................. 792

7. The Appellate Process in Operation—Problems and

Controversies .................................................................................... 800

8. Scope and Standard of Review ....................................................... 802

9. Precedential Value of Decisions of Other Courts ...................... 814

ART XII

PECIAL TRIAL JUDGES .................................................................................. 823

A. Historical Origins ..................................................................................... 823

B. Early Expansion in Use of Special Trial Judges .................................. 830

C. Authority to Make Decisions in Certain Cases ................................... 831

D. Review of Special Trial Judge Reports ................................................. 835

E. Examining the Tax Court’s Procedures for Reviewing Special

Trial Judge Reports: The Saga of Ballard v. Commissioner ................... 840

1. Analysis of Rule 183 Procedures in Freytag v. Commissioner ........ 843

2. The Initial Tax Court Opinion in Ballard ...................................... 851

3. Post-Trial Developments ................................................................ 853

4. Treatment at the Circuit Courts of Appeals ................................. 856

5. Supreme Court Review .................................................................... 863

6. Release of the Initial Report of the Special Trial Judge ............. 871

7. Corrective Action ............................................................................. 875

8. Remand of the Proceedings to the Tax Court ............................. 876

9. The Tax Court’s Resolution of the Case on Remand ................. 878

10. The Unwelcomed Return to the Courts of Appeals ............... 879

11. Conclusion ..................................................................................... 881

ART XIII

HE SMALL TAX CASE PROCEDURE AND

UPPORT FOR SELF-REPRESENTED LITIGANTS..................................... 883

A. Small Tax Cases ........................................................................................ 883

1. Amount in Dispute .......................................................................... 887

2. Expansion in Scope of Small Tax Cases ....................................... 889

3. Election by the Taxpayer ................................................................ 891

4. Discontinuance ................................................................................. 894

5. Answers in Small Tax Cases ........................................................... 895

6. Pretrial Procedures ........................................................................... 896

7. Informal Procedures ........................................................................ 896

B. Court Measures to Support Self-Represented Taxpayers .................. 897

1. Taxpayer Information ...................................................................... 897

2. Low-Income Taxpayer Clinics ....................................................... 899

3. Bar Sponsored Calendar Call Programs........................................ 901

PPENDIX A

ORKLOAD OF BOARD OF TAX APPEALS AND

AX COURT 1925–2012 .................................................................................... 905

PPENDIX B

AX COURT CASELOAD BY TYPE (IN MODERN TIMES) ....................... 909

PPENDIX C

REAS OF FORMER TAX COURT JURISDICTION ..................................... 911

A. Renegotiation Cases ................................................................................. 911

1. Nature of Remedy ............................................................................ 915

2. Burden of Proof................................................................................ 916

3. Appellate Review .............................................................................. 919

B. Refunds of Processing Tax ..................................................................... 922

xii

APPENDIX D

OCATIONS OF TAX COURT HEARINGS .................................................... 925

PPENDIX E

TANDING PRETRIAL ORDER ...................................................................... 927

PPENDIX F

TANDING PRETRIAL NOTICE ..................................................................... 931

PPENDIX G

ECHNOLOGICAL DEVELOPMENTS AT THE COURT ............................ 935

A. The Tax Court Website ........................................................................... 935

B. Electronic Case Filing ............................................................................. 936

C. Electronic Courtroom ............................................................................. 937

D. Security and Privacy Protections ........................................................... 937

The Origins of the Tax Court 1

PART I

ORIGINS OF THE TAX COURT

As with most institutions, the Tax Court, which was created in 1924 as

the Board of Tax Appeals, originated in response to an existing need. In its

case the need was created by the combination of two factors. The first of

these was the development of the federal income and profits taxes and their

emergence during World War I as the preeminent devices for financing the

operations of Government. The second was the inadequacy of preexisting

institutions, both administrative and judicial, for adjudicating in an

acceptable manner the disputes growing out of the changed conditions

brought on by the new taxes.

A. Development of the Income Tax

Although the Tax Court has had other duties, the principal reason for its

creation was, and its main function has always been, the adjudication of

disputes involving the federal income and profits taxes.

For this reason,

the history of the court must start with the development and early history

of the modern income tax.

In present times, federal income taxes are of such a pervasive and

significant influence that it is easy to forget that these taxes did not exist for

In the course of its history, the Tax Court has also had jurisdiction to

redetermine deficiencies in estate and gift taxes, and excise taxes on foundations.

Additionally, for a period of almost three decades, it had jurisdiction to redetermine

excessive profits under the Renegotiation Acts. The jurisdiction of the Tax Court

is more particularly described in Parts VI through VIII.

Much of the material dealing with the development of the income tax and the

early administrative problems faced by the Bureau of Internal Revenue was derived

from secondary sources. These sources are identified below and, in general, will not

be cited further. B

ORIS I. BITTKER AND LAWRENCE M. STONE, FEDERAL INCOME,

ESTATE AND GIFT TAXATION (4th ed. 1972); ROY G. BLAKEY & GLADYS C.

BLAKEY, THE FEDERAL INCOME TAX (1940); BUREAU OF INTERNAL REVENUE,

HE WORK AND JURISDICTION OF THE BUREAU OF INTERNAL REVENUE (1948);

OHN C. CHOMMIE, THE INTERNAL REVENUE SERVICE (1970); LOUIS

ISENSTEIN, THE IDEOLOGIES OF TAXATION (1961); LAWRENCE M. FRIEDMAN,

A HISTORY OF AMERICAN LAW (1973); INTERNAL REVENUE SERVICE, INCOME

TAXES 1862–1962: A HISTORY OF THE INTERNAL REVENUE SERVICE (1962);

ANDOLPH E. PAUL, TAXATION IN THE UNITED STATES (1954); SIDNEY RATNER,

AMERICAN TAXATION (1942); 1 STANLEY S. SURREY, WILLIAM C. WARREN, PAUL

R. MCDANIEL & HUGH J. AULT, FEDERAL INCOME TAXATION (1972); Bolon B.

Turner, The Tax Court of the United States, its Origin and Function, in

THE HISTORY

AND

PHILOSOPHY OF TAXATION 31 (1955) [hereinafter cited as Turner].

2 The United States Tax Court – An Historical Analysis

much of the country’s history. The colony of New Plymouth had imposed

a rudimentary income tax as early as 1643 and other colonies and later some

states had made use of such taxes in the 17th and 18th centuries. However,

the first federal income tax was not imposed until the latter half of the 19th

century. Prior to that time, the small revenue needs of the Federal

Government were primarily satisfied by tariffs, although internal excise

taxes and the sale of public lands also played some part in financing the

Government.

The most important factor in the development of the income tax has,

unfortunately, been the financial exigencies attendant on the state of war.

Toward the end of the War of 1812, Alexander J. Dallis, Secretary of

Treasury, recommended enactment of an inheritance and income tax that

he thought could “be easily made to produce $3 million.” However, the

war ended before the proposal could be enacted and the following half-

century of relative peace resulted in little further attention being paid to

income taxation. That peace was shattered by the Civil War, which created

unprecedented revenue needs not capable of being fulfilled by traditional

techniques. Government expenditures jumped from $67 million in 1861 to

$475 million in 1862, $715 million in 1863, $865 million in 1864, and $1.3

billion in 1865, an increase of 19 fold in only five years.

During the war,

most revenue was raised by public debt financing, and budget deficits

amounted to more than two-thirds of the Union’s expenditures for the

years 1862–65.

The Government fell into such an unfortunate financial position as a

result of a combination of factors. First, the war had an unexpectedly high

cost because the Confederate armies proved to be a more formidable

adversary than the initially optimistic Union forces estimated. Second, the

Lincoln administration was not particularly adept in public finance. Many

years before his election, Lincoln himself conceded that he “had no money

sense” and did not “fret” over the subject. His Secretary of the Treasury

for the initial war years, Salmon P. Chase, was similarly ungifted. Chase’s

principal interests were in military and political affairs, and he relied heavily

on a noted financier of the day, Jay Cooke, to raise revenue through the sale

of government bonds. Finally, the United States since its inception had

been a country of low government expenditures and correspondingly low

taxes. By 1860 tax revenues had reached a high of only $56 million, and in

most prior years the budget was in surplus. Against this background,

neither the Congress nor the citizenry were well equipped to cope with

Statistical data contained herein was derived from the following sources:

OMM’R OF INTERNAL REVENUE, STATISTICS OF INCOME FOR 1941 pt. 1 at 270

(1945) (corporate return statistics, 1909–41); J

OINT ECONOMIC COMMITTEE, THE

FEDERAL TAX SYSTEM: FACTS AND PROBLEMS 1964, 88th Cong., 2d Sess. 214–15

(1964) (individual return statistics, 1913–61); 1962 T

REAS. ANN. REP., FINANCES,

508–15 (1963) (government receipts and expenditures 1789–1962).

The Origins of the Tax Court 3

financing the staggering new expenditures, which exceeded $2 million per

day for the war alone.

Nevertheless, the need for new and increased taxes soon became

painfully apparent since the major existing revenue source, tariffs, was

clearly inadequate to satisfy the revenue requirements. Some favored

supplementing tariffs only with direct taxes on real estate apportioned

among the states according to population, as required by the Constitution.

However, representatives of the Western states felt that this would unduly

favor the Northeast where it was thought there existed a heavier

concentration of wealth in proportion to population. In response to this

pressure, Congress adopted in 1861, and implemented in 1862, the first

federal income tax as part of a multi-faceted program of taxation.

This first income tax was a modest one. It exempted incomes below

$600, and taxed amounts above that level at a rate of only 3% from $600 to

$10,000 and at a rate of 5% on income above $10,000.

In its first year it

raised only $2.7 million as opposed to government expenditures for the year

of more than $700 million. Subsequently, as the need for revenues

mounted, the tax rates were increased. By 1865, the rates stood at 5% on

income from $600 to $5,000 and 10% on income above $5,000.

This was

to be the high water mark of income taxation for more than 50 years. With

the end of the Civil War the exemption was enlarged and the rates reduced,

and finally, effective in 1872, the income tax was repealed.

At no time did the Civil War income tax represent as significant a source

of government revenues as the modern day income taxes. The lowest yield

occurred in 1863 when $2.7 million was raised, and the highest yield

occurred in 1866 when $73 million was raised. This is to be contrasted with

total revenues in those years of $113 million and $559 million, respectively.

By 1872, the last year of the tax, its yield had declined to $14 million as

against total revenues of $374 million. But despite its relative unimportance

as a source of revenue, the income tax attracted a considerable amount of

attention during this period.

At the time of its adoption, the income tax was generally supported as a

necessary step in solving the financial needs of the war. The end of the war

Act of August 5, 1861, ch. 45, § 49, 12 Stat. 309; Act of July 1, 1862, ch. 119,

§ 89, 12 Stat. 473.

Act of July 1, 1862, ch. 119, § 90, 12 Stat. 473.

Act of March 3, 1865, ch. 78, 13 Stat. 479. In the interim between 1862 and

1865, the tax had been increased to 5% on income between $600 and $5,000, 7½%

on income between $5,000 and $10,000, and 10% on income in excess of $10,000.

Act of June 30, 1864, ch. 173, § 116, 13 Stat. 281.

Act of July 14, 1870, ch. 255, § 6, 16 Stat. 257. In 1867, the exemption was

increased to $1,000 and the rate reduced to 5%. Act of March 2, 1867, ch. 169,

§ 13, 14 Stat. 478. In 1870, the exemption was further increased and the rate further

reduced to $2,000 and 2½%, respectively. Act of July 14, 1870, ch. 255, §§ 6, 8, 16

Stat. 257–58.

4 The United States Tax Court – An Historical Analysis

and the reestablishment of regular surpluses of revenue over expenditures

brought increasing pressure for reduction and finally repeal of the tax.

Primarily, this pressure came from the banking and commercial interests of

the Northeast, which much preferred tariffs to income taxes since the

former had the double advantage of being taxes on consumption and

providing domestic products with a competitive advantage. The income tax

had its defenders who strenuously argued that taxation based exclusively on

consumption was unjust because it imposed disproportionately heavy taxes

on persons of lower income who by necessity consumed a higher

percentage of their income than persons with large incomes.

Despite these arguments, the anti-income tax forces prevailed essentially

because of their greater political power both as lobbyists and propagandists.

They argued that the tax was superfluous in periods of surplus, that it was

inequitable in many of its provisions, and that it necessitated the creation of

an inquisitorial enforcement bureaucracy which proved to be inefficient and

subject to political influence.

The quarter of a century following the repeal of the income tax was a

period of considerable social ferment in the United States. A severe

financial panic occurred in 1873 and was immediately followed by a

devastating depression. The farmers of the South and the West were

particularly hard hit during these years by declining prices for their products

with no corresponding decline in the prices they had to pay for supplies,

storage, and transportation. Economic power became concentrated in

banks, railroads, and various other industrial and commercial interests.

Against this background a strong agrarian and populist movement

developed to challenge the power of the Northeast. Among the important

objectives of these groups were cheap money, regulation or destruction of

the monopolies, and the imposition of an income tax.

Reinstitution of the income tax had been proposed by Southern and

Western congressmen throughout the post-Civil War period. It was not

until 1894, however, that a coalition of Populists and Southern and Western

Democrats succeeded in engineering its passage as part of a program to

reduce tariffs and tax the rich.

The measure was totally congressional in its

initiation and passage. President Cleveland, who favored reduced tariffs but

opposed passage of an income tax, allowed it to become law without his

signature.

The tax, which was miniscule by modern standards (2% of the income

of individuals and corporations, with an exemption of $4,000), was bitterly

opposed by the Eastern establishment, who viewed it as the opening salvo

in a class war of poor against rich. They found substantiation for their fears

in the new measure itself which exempted from tax all but the wealthiest 2

percent of the population, whereas under previous taxes this same group

paid only 2 percent of the total revenues generated. Moreover, if a 2% tax

Act of August 27, 1894, ch. 349, § 27, 28 Stat. 553.

The Origins of the Tax Court 5

on incomes above $4,000 could be imposed, nothing would prevent

imposition of a 20% tax on incomes above $40,000. It is not surprising,

therefore, that the rhetoric employed was extreme. In polite society the tax

was referred to as radical; in other circles it was characterized as an

adventure in “socialism, communism and devilism” devised by “the

professors with their books, the socialists with their schemes,” and “the

anarchists with their bombs.”

These, of course, were not charges of impressive legal weight, and when

the validity of the tax reached the Supreme Court in Pollock v. Farmers’ Loan

& Trust Co.,

the tax was challenged principally on three constitutional

grounds: (1) that it constituted a direct tax which did not meet the

constitutional requirement that such measures be apportioned among the

states on the basis of population;

(2) that because it exempted incomes

below $4,000, it violated the constitutional requirement that taxes be

uniform throughout the United States;

and (3) that it impinged on the

rights of state and local governments by taxing the interest on obligations

issued by these bodies.

Although the Supreme Court previously had

indicated that direct taxes included only land and capitation taxes,

and had

upheld the constitutionality of the Civil War income taxes,

it nonetheless

ultimately concluded in Pollock that taxes on income from real and personal

property were direct taxes within the meaning of the Constitution, that the

Federal Government could not validly tax the obligations of state and local

governments, and that the 1894 tax was so infected with unconstitutionality

that it was totally void.

The Pollock decision has been severely criticized by

students of constitutional law and others; nevertheless, it had the effect of

delaying general income taxation in the United States for almost two

decades.

The beginning of the twentieth century witnessed important social and

political changes in the United States. Public attention was increasingly

focused on the abuses of economic power characteristic of the time.

Extreme poverty among workers, exploitation of labor generally and child

labor in particular, increasing concentration of wealth, and monopolistic

and corrupt practices of corporate giants were all issues that were colorfully

ventilated by a new form of journalism, “muckraking.” Powerful new

157 U.S. 429, rehearing 158 U.S. 601 (1895).

U.S. CONST. art. I, § 9.

U.S. CONST. art. I, § 8, cl. 1.

Cf. U.S. CONST. Amend. X.

Hylton v. United States, 3 U.S. (3 Dall.) 171, 174 (1796).

Springer v. United States, 102 U.S. 586 (1880).

The Court did not pass on the question of whether the uniformity clause was

violated. Later, it was established that uniformity meant geographic uniformity

rather than rate uniformity—rates could be progressive so long as the same rates

applied equally throughout the nation. Knowlton v. Moore, 178 U.S. 41 (1900).

6 The United States Tax Court – An Historical Analysis

political leaders emerged, such as Robert LaFollette and Theodore

Roosevelt, who were sensitive to these issues. These events had an impact

on the question of income taxation and gave it a new respectability. Perhaps

the best illustration of this rested in remarks of President Roosevelt in 1906

on the occasion of the laying of the cornerstone of a new office building for

the House of Representatives.

[The President] made a flamboyant Fourth-of-July speech for ten

minutes, an uplift speech for fifteen, skinned the muckrakers within

an inch of their lives, and delivered a few light taps on Democratic

ribs. The mouths of the eminent Republican magnates were spread

in smiles reaching from ear to ear. They were having the time of

their lives, when suddenly, without any connection whatever with

anything he had said, apropos of nothing, he declared vehemently

for both a graduated income tax and a graduated inheritance tax.

The Democrats were jubilant and applauded hilariously, while the

smiles froze on the faces of the Republicans. They would not have

been more astonished if he had struck them betwixt the eyes with a

maul. They had to pinch themselves to see if they were awake. The

President seemed to be delighted with the sensation he had created

and the consternation he had wrought among Republican statesmen.

Their curses on him for that speech were not only deep, but loud.

Roosevelt continued to make statements supporting a graduated income

tax, but took little if any affirmative action to secure its adoption.

Nevertheless, the fact that a Republican President would even

philosophically support such a measure did much to defuse the temper of

the debate—one could hardly accuse the President of being a “bomb

throwing anarchist.” Furthermore, Roosevelt’s successor, William Howard

Taft, gave campaign speeches expressing support for such a tax when

demanded by revenue needs. In his view an income tax could be devised

which would be constitutional notwithstanding the Pollock decision. As

with Roosevelt, Taft did not initiate an income tax program and it has been

suggested that his public enthusiasm for the tax was manufactured as a

shrewd ploy to steal the thunder of his Democratic rival, William Jennings

Bryan, who was an outspoken advocate of income taxation.

Yet, it was during the Taft Administration that the seed of the modern

income tax was planted. This is ironic because during this period

Republicans, traditionally hostile to the measure, controlled not only the

White House but the House of Representatives and the Senate as well. The

irony is explained by the character of the congressional Republican

delegation which had changed from earlier years. Midwestern Republican

1 CHAMP CLARK, MY QUARTER CENTURY OF AMERICAN POLITICS 440

(1920).

The Origins of the Tax Court 7

progressives such as LaFollette and Cummins had recently entered the

Senate and forged an alliance with Democrats favorable to income taxation.

During the Senate consideration of the Payne-Aldrich Tariff Bill, this

coalition actively pressed for inclusion of a general graduated income tax.

The Republican hierarchy opposed the measure but could not control the

insurgents within their party. Ultimately, in an effort to save the tariff

legislation and also to prevent an open breach within the Republican party,

President Taft effected a grudging compromise. Taft had come to change

his mind on the question of whether Pollock would be overruled by the

Supreme Court and felt that the more prudent course was to amend the

Constitution to permit an income tax without apportionment. A proposal

for such an amendment constituted one element of his compromise plan.

The second element of the plan was the immediate enactment of a

corporation excise tax measured by corporate income. Taft felt that such a

tax would not be a direct tax and could withstand constitutional attack.

Although the Taft proposal was opposed by a few diehard advocates of an

immediate general income tax, it was reluctantly backed by the conservative

Republicans who saw it as the lesser of two evils. This support, along with

the approval of the moderate pro-income tax forces, was sufficient for

passage.

The corporation income tax, which was 1% of taxable income in excess

of $5,000, was upheld by the Supreme Court in 1911.

As anticipated by

Taft, the Court distinguished the Pollock case on the ground that the levy

was indirect since it was imposed on the privilege of doing business as a

corporation and not on the income from property. That the tax was

measured by income from property was not a constitutional defect, even

though a tax imposed directly on such income might be invalid.

By 1913, two thirds of the states had approved the Sixteenth

Amendment, which provides:

The Congress shall have power to lay and collect taxes on incomes,

from whatever source derived, without apportionment among the

several States, and without regard to any census or enumeration.

The debate concerning the Amendment was a lively one, but approval

was assured because of the new respectability of the income tax and

because the more numerous and less wealthy elements of society believed

such a tax would shift a greater portion of the tax burden onto the wealthy.

The arguments against the proposed amendment, that it would permit the

taxation of state and local bonds and that the income tax would be difficult

to administer and produce a nation of liars, were of insufficient persuasive

force to stanch the flow of popular support.

Act of August 5, 1909, ch. 6, § 38, 36 Stat. 112.

Flint v. Stone Tracy Co., 220 U.S. 107 (1911).

8 The United States Tax Court – An Historical Analysis

One month after final ratification of the income tax amendment,

Woodrow Wilson assumed the Office of President. Although Wilson was

not an advocate of free trade, he was decidedly hostile to what he saw as the

excesses of the existing tariff system, both in its adverse effect on

competition and in its use as an indirect tax on consumption. Similar

sentiments were commonplace in Congress. By the fall of 1913, legislation

had been adopted substantially cutting the tariff schedules and, more

importantly, imposing a general income tax to balance the lost customs

revenues.

Conservatives actively opposed adoption of the income tax, but

it was an idea whose time had come (for the third time) and the anti-tax

forces did not even succeed in their efforts to eliminate progressive rates.

They did, however, have some success in moderating the rates of tax. The

1913 legislation provided a 1% normal tax on taxable income of individuals

in excess of $3,000 ($4,000 in the case of married persons) plus a graduated

surtax.

Surtax

Rate

Income

$20,000 – $50,000

$50,000 – $75,000

$75,000 – $100,000

$100,000 – $250,000

$250,000 – $500,000

Over $500,000

Thus, the maximum rate of tax on individuals was 7% on taxable

income above $500,000. Corporations were subject to a flat rate of 1% on

all their taxable income.

In addition to providing relatively low rates, which produced only $28

million of revenue in the first year, the 1913 tax also contained a generous

exemption, with the result that for 1913 only 358,000 individual income tax

returns were filed in a nation with a population of 97 million. However, the

upcoming war was to change drastically the character of the income tax.

In 1914, World War I broke out in Europe. Initially committed to a

policy of neutrality, President Wilson by the spring of 1917 was compelled

to ask Congress for a declaration of war against Germany. The war had a

staggering impact on the financial affairs of the United States. One of the

first casualties was the customs receipts that soon dwindled as a result of

trade reduction. This was a significant setback to a nation that in 1913 still

derived almost one-half of its government revenues from these sources.

Act of October 3, 1913, ch. 16, 38 Stat. 114.

Id. §§ II(A), (C), 38 Stat. 166, 168.

Id. § II(A)(1), 38 Stat. 166.

The Origins of the Tax Court 9

The diminution in these revenues was felt as early as 1914 and resulted in

the enactment of the War Revenue Bill of 1914,

which levied various

internal excise taxes to make up for the lost revenue.

Of course, even more significant was the staggering growth of

expenditures required of a nation at war. The cost of operating the

Government grew from approximately $700 million in each of the years

1913–16, to $2 billion in 1917, $13 billion in 1918 and $19 billion in 1919.

For 1914 there was a deficit of $400,000; for 1919, the deficit was $13

billion.

Although Wilson’s hopes for neutrality were not finally extinguished

until 1917, he foresaw the possibility of American involvement as early as

1915, and toward that end the United States commenced a military

expansion program in 1916. The income tax was to play an increasingly

important role in financing both the military preparedness program and the

costs of subsequent entry into the war.

Within a period of three years, the Revenue Acts of 1916,

1917,

and

1918

(the latter being enacted in 1919 but made retroactive to January 1,

1918) escalated the income tax on individuals to a normal tax computed as

follows:

Additionally, there was imposed a surtax ranging from 1% on income in

excess of $5,000 to 65% on income in excess of $1,000,000.

Thus, the

maximum rate was 77%, which was 1,100% greater than the maximum rate

prevailing from 1913–1916. Corporate tax rates also advanced

spectacularly. By 1918, corporations were paying a tax of 12% on net

income,

plus a profits tax escalating from 30% to 80% of so-called excess

profits or war profits.

The excess profits tax was introduced by the Act of March 3, 1917,

just one month prior to the declaration of war against Germany. Although

the March 3 legislation was soon to be superseded by the War Revenue Act

Act of October 22, 1914, ch. 331, 38 Stat. 745.

Revenue Act of 1916, ch. 463, 39 Stat. 756.

War Revenue Act of 1917, ch. 63, 40 Stat. 300.

Revenue Act of 1918, ch. 18, 40 Stat. 1057.

Revenue Act of 1918, ch. 18, § 211, 40 Stat. 1062.

Id. § 230(a)(1), 40 Stat. 1076.

Id. § 301(a), 40 Stat. 1088.

Ch. 159, § 201, 39 Stat. 1000.

Normal Tax

Rate

Income

6 %

$2,000 – $6,000

12 %

Over $6,000

10 The United States Tax Court – An Historical Analysis

of 1917, enacted October 3, 1917,

the excess profits tax itself persisted

until it was repealed by the Revenue Act of 1921.

It was later to reappear

during World War II and the Korean War. The tax had the dual purpose of

curbing war profiteering and raising revenue from those best able to afford

to pay a larger share of tax. The tax was a complicated one in that it

required the measurement of excess profits. Whether such profits were

measured by income in excess of a percentage of capital

or by profits in

excess of those from a prior base period,

the determination created many

uncertainties and disputes.

These difficulties were to play an important

part in providing the impetus for the creation of the Board of Tax Appeals.

The effect of the wartime revenue measures on the importance of

income taxes was impressive. Government revenue rose from $780 million

in 1916 to $6.7 billion in 1920. As a result of the wartime revenue acts,

receipts from income and profits taxes over this same period rose from

$125 million to $3.9 billion. In 1916, they represented 16 percent of

receipts; by 1920, this percentage had risen to 55 percent.

These spectacular increases were accompanied by a corresponding, and

universally recognized, increase in the complexity of the law.

One

indication of this appeared in the increased length of the succeeding acts.

Excluding the tariff and excise provisions, the 1913 Act took up only 16

pages in the Statutes at Large, the 1916 Act took up 22 pages, and the 1918

Act required 53 pages. This increase in statutory length mirrored the

substantive evolution of the tax law. Several important and complicating

provisions were added by the 1916 legislation: the term “dividend” was

defined for the first time;

taxpayers were permitted to report income on a

method other than the cash method of accounting;

losses incurred in a

transaction for profit were made deductible even though not incurred in a

trade or business;

detailed statutory treatment was provided for

nonresident aliens;

the income of estates and trusts was subjected to tax

Ch. 63, 40 Stat. 300.

Revenue Act of 1921, ch. 136, § 1400(a), 42 Stat. 320.

Revenue Act of 1918, ch. 18, §§ 301, 312, 40 Stat. 1088, 1091 (relating to

excess profits tax).

Id. §§ 301, 311, 40 Stat. 1088, 1090 (relating to war profits tax).

Hearings Pursuant to S. Res. 168 Before the Senate Select Comm. on Investigation of the

Bureau of Internal Revenue, 68th Cong., 1st Sess., pt. 1 at 132 (1924) (statement of

David H. Blair, Comm’r of Int. Rev.) [hereinafter cited as Senate Select Comm.

Hearings].

See, e.g., Senate Select Comm. Hearings, supra note 34, pt. 1 at 120–21 (1924)

(statement of David H. Blair, Comm’r of Int. Rev.); Turner, supra note 2, at 32.

Revenue Act of 1916, ch. 463, § 2(a), 39 Stat. 757.

Id. § 8(g), 39 Stat. 763.

Id. § 5(a), 39 Stat. 759. It was later held that no such losses were allowed

under the 1913 Act. Mente v. Eisner, 266 F. 161 (2d Cir. 1920).

Ch. 463, § 6, 39 Stat. 760.

The Origins of the Tax Court 11

for the first time;

and the class of organizations exempt from tax was

substantially increased.

The most important change from earlier law

effected by the 1917 Act was, of course, the addition of the excess profits

tax.

The Act provided for the filing of consolidated returns for excess

profits tax purposes,

which added some complexity. The 1918 Act also

contained many important amendments: consolidated returns were

authorized for both income and profits tax purposes;

substantial

modifications were made in the profits tax;

provision was made for the

nonrecognition of gain in connection with corporate reorganizations;

authority was given to the Bureau to require the taking of inventories;

provision for the carryover of net operating losses was added;

and a

special amortization deduction was authorized for war facilities.

With the end of the war and the return of surplus revenues, pressure for

reduction in the income taxes became overwhelming. In addition to

eliminating the excess profits tax, the Revenue Act of 1921 substantially

reduced the individual and corporate income tax rates.

Even with the

Id. § 2(b), 39 Stat. 757.

Id. § 11, 39 Stat. 766.

War Revenue Act of 1917, ch. 63, § 201, 40 Stat. 303.

Revenue Act of 1921, ch. 136, § 1331, 42 Stat. 319 (construing provisions of

Revenue Act of 1917).

Revenue Act of 1918, ch. 18, § 240(a), 40 Stat. 1081.

See H.R. REP. NO. 65-767, at 15–21 (1918); S. REP. NO. 65-617, at 11–15

(1918).

Revenue Act of 1918, ch. 18, § 202(b), 40 Stat. 1060.

Id. § 203, 40 Stat. 1060.

Id. § 204, 40 Stat. 1060.

Id. §§ 214(a)(9), 234(a)(8), 40 Stat. 1067, 1078.

The 1921 Act provided a normal tax on married individuals (ch. 136, §§ 210,

216(c), 42 Stat. 233, 242) as follows:

Normal Tax

Rate

Income

$2,000 – $6,000

Over $6,000

In the case of a single person, these rates were 4% on income from $1,000–

$5,000, and 8% on income in excess of $5,000. In the case of a married couple

with income of not more than $5,000, the exemption was $2,500 instead of $2,000.

The individual surtax rates ranged from 1% of income over $6,000 to 50% of

income in excess of $200,000. Ch. 136, § 211, 42 Stat. 233. For the transition year

1921, these rates ranged from 1% on income in excess of $5,000 to 65% on income

in excess of $1 million.

Although the tax rate on corporations was increased from 10% to 12½% for

years following 1921 (§ 230, 42 Stat. 252), a $2,000 exemption (§ 236(b), 42 Stat.

257) and the elimination of the excess profits tax resulted in corporations being

12 The United States Tax Court – An Historical Analysis

reduction of rates in 1921, and the later reductions that were to take place

during the 1920’s, the income tax had firmly established itself as the

principal device for financing government activities. Since 1918, receipts

from the income (individual and corporate) and excess profits taxes have

rarely yielded less than half of annual government receipts; in some years

they have yielded considerably more than half.

B. Inadequacy of Preexisting Adjudicative Institutions

The income and excess profits taxes of the World War I period placed

an enormous strain on the Bureau of Internal Revenue and, to a lesser

extent, on the federal courts. In the first place, the taxes were considerably

more complicated than any other revenue device previously utilized by the

Federal Government. This problem was recognized at the very beginning

of the modern income tax. A friend who complained to Senator Elihu

Root of the complexities of the 1913 Act elicited the following response:

I guess you will have to go to jail. If that is the result of not

understanding the Income Tax Law I shall meet you there. We shall

have a merry, merry time, for all of our friends will be there. It will

be an intellectual center, for no one understands the Income Tax

Law except persons who have not sufficient intelligence to

understand the questions that arise under it.

Even the income tax of the Civil War period, while much simpler than the

later measures, was not without its complexities. For example, Abraham

Lincoln, an able lawyer of his day, overpaid his 1864 income tax by $1,250,

which sum was ultimately refunded to his estate in 1872.

The excess profits tax was, if anything, even more complicated than the

income tax. Dr. Thomas S. Adams, a distinguished political economist,

professor at Yale University, adviser to the Treasury Department, and

fervent supporter of income taxation, urged repeal of the profits tax in 1921

on the ground that its continuation would inevitably lead to the breakdown

of tax administration and the repeal of the income tax as well.

In addition to their complexity, the income taxes of the World War I

period affected vast numbers of people. The lowering of exemptions

resulted in a staggering increase in the number of returns filed. Until 1917,

subject to less overall tax than under the 1918 Act. See supra notes 27–28 and

accompanying text.

However, in recent years, social insurance taxes have represented an

increasing share of federal revenue, reaching as high as 42.3% in 2010. See S

TAFF

OF THE

JOINT COMM. ON TAX’N, OVERVIEW OF THE FEDERAL TAX SYSTEM AS IN

EFFECT FOR 2012, JCX-18-12, app. A-3 (Comm. Print 2012).

The Origins of the Tax Court 13

the number of income tax returns filed by individuals did not exceed

450,000 for any single year. In 1917, this number increased to 3.5 million

and by 1920 more than 7 million individual income tax returns were being

filed. Not until 1925 did the number of filings fall below 6 million.

Finally, the experience of the last century has demonstrated that,

regardless of the detail provided, it is impossible to draft an income tax

statute that clearly provides for all factual circumstances. Accordingly, in

addition to the taxing statute, an income tax system requires a sophisticated

administrative body to collect the tax and provide interpretations of the

statute. As shall be seen, such a body cannot be built overnight.

1. Dilemma of the Bureau

Revenue legislation in the United States dates back almost as far as the

formation of the Republic. The first July 4th after adoption of the

Constitution was marked by the enacting of a duty on goods, wares, and

merchandise imported into the United States.

This enactment even

preceded establishment of the Treasury Department.

Numerous revenue

measures followed, but until the Civil War these were almost exclusively

tariffs. Only during two brief periods was there resort to internal taxation:

1791–1802 and 1813–1817.

This sparing use of internal taxation seems to

have been consistent with the intention of the framers of the Constitution,

who felt that such techniques should be utilized only in exceptional

circumstances,

reminiscent as they were of the hated excises imposed in

the pre-revolutionary period by the British Parliament. Moreover, internal

taxation was not popular with the public and the first imposition of internal

excises on distilled spirits gave rise to an insurrection by Pennsylvania

farmers in the summer of 1794.

During each of the early periods of internal taxation, an office of

Commissioner of the Revenue was created to administer the levies.

However, the office was abolished each time the internal duties were

repealed.

The modern Internal Revenue Service traces its lineage to the

legislation imposing the income tax of 1862 and the various other internal

taxes that were established to finance the Union’s war effort.

The first

Commissioner appointed under the 1862 legislation, George Boutwell,

worked industriously to establish the organization, regulations and forms

Act of July 4, 1789, ch. 2, § 1, 1 Stat. 24.

Act of September 2, 1789, ch. 12, 1 Stat. 65.

For a detailed account of these measures, see BUREAU OF INTERNAL

EVENUE, THE WORK AND JURISDICTION OF THE BUREAU OF INTERNAL

EVENUE 5–28 (1948) [hereinafter cited as BUREAU OF INTERNAL REVENUE].

T HE FEDERALIST NO. 35, at 93-95, 124–25 (R.P. Fairfield ed. 1966).

B UREAU OF INTERNAL REVENUE, supra note 54.

Act of July 1, 1862, ch. 119, § 1, 12 Stat. 432.

14 The United States Tax Court – An Historical Analysis

necessary for tax administration. Within six months, the Bureau had grown

from a staff of one (Mr. Boutwell) to an organization of almost 4,000

employees.

In view of the enormous responsibilities suddenly thrust upon the

organization, it was not surprising that in its early years the Bureau was far

from an unqualified success. The United States Revenue Commission

established in 1865 to study the raising of tax revenues and the efficiency of

tax administration concluded that “in point of organization and

administration, . . . [the Bureau] is very far from what it should be.”

The

cited weaknesses of the Bureau included the following: lack of policy

making authority; inadequate pay; appointments based on patronage rather

than ability; and political interference with its decisions.

The income tax of the Civil War period was repealed effective 1872,

and most of the other internal taxes imposed to finance the War were

repealed by 1877. Nevertheless, the Bureau continued in existence to

administer the remaining internal taxes and those thereafter enacted, such

as the taxes on alcoholic beverages and tobacco.

Additionally, it was

given charge of various non-revenue regulatory measures such as the

bounty for United States sugar producers, the certification of Chinese

laborers, and the taxes on opium and oleomargarine.

The imposition of the corporation income tax in 1909 and the general

income tax in 1913 added new duties to the Bureau, and created a

concomitant growth in its size. But the changes wrought by the early

income tax acts were small compared to those of the World War I revenue

legislation. As a result of the introduction of the excess profits tax and the

expansion of the income tax, there was a more than ten-fold increase in the

number of returns filed. The Bureau was buried under a mountain of

paper. Because it was the policy of the Bureau to review virtually each

return filed,

and because the laws under which the returns were filed were

considerably more complicated than any previous tax measures,

monumental problems of administration arose. The turmoil that ensued

persisted for a decade.

The years 1917 through 1919 witnessed almost complete paralysis of the

Bureau. The personnel of the Washington office increased from 585 in

I NTERNAL REVENUE SERVICE, INCOME TAXES 1862–1962: A HISTORY OF

THE INTERNAL REVENUE SERVICE 7 (1962) [hereinafter cited as INTERNAL

EVENUE SERVICE].

Id. at 11.

Id.

Act of July 14, 1870, ch. 255, § 6, 16 Stat. 257.

See Senate Select Comm. Hearings, supra note 34, pt. 1 at 120 (1924)

(statement of David H. Blair, Comm’r of Int. Rev.); I

NTERNAL REVENUE SERVICE,

supra note 58, at 12.

See 1919 COMM’R OF INT. REV. REP. 18.

The Origins of the Tax Court 15

1917 to 4,088 in 1919,

but few of the Bureau’s staff were equipped with

the special legal, accounting, and engineering background necessary to

assess the accuracy of millions of the returns filed.

Particularly

troublesome were questions of property valuation on which depended

deductions for depreciation, amortization, and depletion, and on which

invested capital was computed for excess profits tax purposes.

According

to some, there were not sufficient trained people in the entire country to

satisfactorily audit the returns that poured in during the war period.

As a

result, only the simplest returns, approximately 40 percent of the total, were

processed before 1920.

Massive recruitment efforts were begun in 1919,

and 1,000 auditors were hired in the first six months of the year.

However, before they could commence work, the auditors required four to

six months of training in a discipline in which there were few teachers and

no textbooks.

Moreover, even after training, the solution of the difficult

questions presented under the wartime revenue acts eluded the grasp of

many. The problem was compounded by the fact that taxpayers also had

difficulty understanding the new laws, and frequently their accounting

records, especially in the case of the profits taxes, were inadequate.

This

made the settlement of many cases difficult because of the Bureau’s

insistence on absolute accuracy in the computation of tax liability.

Throughout its history, the Bureau has been plagued with personnel

problems. Levels of compensation prevailing in the private sector for tax

competency generally have been higher than in the Government. This was

especially true during the World War I period, when the Bureau had

difficulty attracting employees from a labor market already reduced by

virtue of the war effort.

Even more troublesome was the fact that when

the Bureau succeeded in hiring and training an able agent, the effort served

only to make his skills that more marketable, and the chances were that he

R OY G. BLAKEY & GLADYS C. BLAKEY, THE FEDERAL INCOME TAX 540

(1940).

Senate Select Comm. Hearings, supra note 34, pt. 1 at 3, 121 (1924) (testimony

and statement of David H. Blair, Comm’r of Int. Rev.).

Id. at 121; TREASURY DEP’T, SURVEY OF THE ADMINISTRATION OF INCOME

AND EXCESS-PROFITS TAXES, Vol. III at 21 (1927) [hereinafter cited as TREASURY

EP’T SURVEY].

Senate Select Comm. Hearings, supra note 34, pt. 1 at 3 (1924) (remarks of

Senator Jones).

Id. at 121 (statement of David H. Blair, Comm’r of Int. Rev.).

Id.

Id. at 121, 132.

Id. at 121.

T REASURY DEP’T SURVEY, supra note 66, at 4.

Senate Select Comm. Hearings, supra note 34, pt. 1 at 3 (1924) (testimony of

David H. Blair, Comm’r of Int. Rev.).

16 The United States Tax Court – An Historical Analysis

would soon leave for greener pastures.

Morale within the Bureau was

poor, and the chances for promotion slight.

Employee turnover was a

severe problem, especially since it was greatest among the highest paid and

most skilled Bureau personnel.

The scope of the problem is revealed by

the fact that in 1920, 50 percent of the personnel of the Income Tax Unit,

which had primary responsibility for income and excess profits tax

matters,

either resigned or were discharged.

The average tenure at that

time was approximately one year, and when the training period is taken into

account, the time actually spent on Bureau work by the average employee

was six to eight months. Additional problems were generated because of

periodic scandals involving corrupt agents. When disclosed, these practices

Id. at 132.

See 1923 COMM’R OF INT. REV. REP. 6.

1919 COMM’R OF INT. REV. REP. 32.

The operation of the Income Tax Unit was described as follows:

The Income Tax Unit is the agency of the Bureau of Internal Revenue for

administering the income and profits tax laws. Its duties are:

(a) To prepare regulations for the administration of laws relating to taxes

on income and profits;

(b) To conduct correspondence relating to the subject matter of income

and profits taxes;

taxes on income and profits;

(d) To audit and verify returns and consider and dispose of reports

relating to returns or questions appertaining thereto;

(e) To assess all original and additional income and profits taxes;

(f) To assemble and audit certificates of ownership;

(g) To review and dispose of claims for abatement and refund of income

and profits taxes;

(h) To compile statistics relating to income and profits taxes; and

(i) To control and operate all field forces verifying income and profits tax

returns.

The audit work consists of handling all income and excess-profits tax

returns of corporations, partnerships, fiduciaries, and individual income-tax

returns wherein the income is in excess of $5,000, filed under three separate

and distinct revenue acts. All returns filed for the year 1917 were audited

and handled by the Income Tax Unit’s forces, both in Washington and in

the field. For all years subsequent to the year 1917 all individual income tax

returns with an income of less than $5,000 were audited in the offices of the

collectors of internal revenue.

Senate Select Comm. Hearings, supra note 34, pt. 1 at 130–31 (1924) (statement of

David H. Blair, Comm’r of Int. Rev.).

George Maurice Morris, The Organization of the Federal Income Tax Unit, NAT’L

NC. TAX MAG. 9 (June, 1923); see also TREASURY DEP’T SURVEY, supra note 66, at

35, 155.

The Origins of the Tax Court 17

occasionally required the discharge of auditors and reorganization of review

sections.

It is therefore small wonder that an enormous backlog soon

accumulated. In April, 1921, approximately 25 percent of the 1917 returns

and 50 percent of the 1918 returns were still pending. As late as 1924,

more than 300,000 returns for the tax years 1917–20 remained unaudited.

Moreover, these unreviewed cases represented the larger and more

complicated returns.

Not until 1927 could Treasury report that the

Bureau was “practically current” with the processing of returns.

The Bureau

publicly recognized that it was falling behind in audits, and combined a plea

for adequate personnel with a statement of the importance of prompt

review of returns.

Were the millions of dollars assessable upon revenue agents’

discoveries left out of the question, it is still important that such

examinations and audits as are to be made, both out of and in the

office, should be made with a reasonable degree of promptness after

the returns are filed. After a year or two books are destroyed, the

details of transactions forgotten, and the returns themselves become

“ancient history,” so that an attempt to verify a return or check it up

with any available records is attended with difficulty, is often

unsatisfactory, and may result in an injustice to the taxpayer or to the

Government. Nothing has more served to render the income-tax

law unpopular or subject its administration to unfavorable criticism

than this one thing of delay in the examinations and audits. The

remedy lies through an efficient and sufficient working force to bring

the work up to date and keep it current which force will, in the

additional tax which it uncovers and causes to be assessed, repay the

Government its costs many times over.

Criticism of the backlog was common during the early 1920’s. Some

criticism was mild:

[T]o date there have been six general Revenue Acts placed on the

statute books since 1913. This is an average of one new law for

every two years. Each successive Act is more comprehensive and

probably more complicated than its predecessor. Under these

Income Tax Unit Stirred by Graft Exposures, NAT’L INC. TAX MAG. 28 (Dec.

1923).

R EPORT OF TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 9–10;

Senate Select Comm. Hearings, supra note 34, pt. 1 at 5, 131 (1924) (testimony and

statement of David H. Blair, Comm’r of Int. Rev.).

T REASURY DEP’T SURVEY, supra note 66, at 2.

1917 COMM’R OF INT. REV. REP. 22.

18 The United States Tax Court – An Historical Analysis

conditions it is not surprising that the Treasury Department is

considerably behind with the audit of returns.

Other commentators were not so understanding:

All those familiar with the situation at Washington are agreed that if

the income tax is to be preserved its friends will have to make a

vigorous fight for better administration. Delay has become almost a

scandal. Many of the 1917 and 1918 taxes are not yet finally

adjusted, and it is beginning to impress some people that this is one

of the ways by which enemies of the income tax propose to kill it.

Friends of the income tax should insist that its administration be

placed upon an efficient basis, so that it may not be discredited and

discarded as a result of indirection. Congress has appropriated funds

enough for administration and it is a question of either ability or

inclination.

In addition to its personnel problems and the attendant backlog, the

Bureau during this period struggled with other problems of administering

the income and profits taxes. Since the situation with which it was faced

was unprecedented, these problems were most often solved on a trial and

error basis. The pervasive influence of the backlog contributed to the

creation of some of these problems and also may have been influential in

the selection of erroneous solutions for other problems.

Early income tax administration was characterized by the policy of

centralizing the audit function in Washington. All returns for tax years

through 1917 were forwarded to Washington for audit.

For tax years

following 1917, an increasing number of returns were initially audited in the

field before being sent to Washington, but as late as tax year 1925 all

corporate returns and all returns of individuals showing gross income in

excess of $25,000 were still being forwarded directly to Washington.

There seems to have been two reasons for centralization. First, the scarcity

of trained auditors to deal with the complexities of the new laws created

strong pressures for maximizing the efficiency of the available work force.

Initially it was felt that this could best be accomplished by concentrating a

specialized and more sophisticated force in the central office, rather than

1 WALTER E. BARTON & CARROLL W. BROWNING, BARTON’S FEDERAL

AX LAWS CORRELATED, Vol. 1, v (2d ed. 1925).

H.C. McKenzie, A Look Ahead into Prospective Tax Legislation, NAT’L INC. TAX

AG. 12 (Nov. 1923).

1920 COMM’R OF INT. REV. Rep. 9.

T REASURY DEP’T SURVEY, supra, note 66, at 10–11.

The Origins of the Tax Court 19

spreading it abroad in the field.

Second, centralization was justified as a

means of assuring the development of a uniform and detailed body of

precedent that would serve as a guide for the disposition of future cases.

A policy instituted in 1918 directed at increasing the benefits of

centralization by specializing auditors within industrial classifications

was

apparently unsuccessful and was abandoned in 1924.

Although it was always recognized that centralization was a temporary

expedient,

the policy had serious drawbacks. Questions frequently arose

in an audit that could not be answered from the taxpayer’s return. In most

cases the taxpayer’s residence or office was outside the Washington area

and an attempt was made to resolve these questions by correspondence.

This proved to be a cumbersome procedure that materially added to the

time and expense necessary to audit a return.

The situation was equally

burdensome to the Government and the taxpayer. As a partial solution to

the problem, initial efforts were made at decentralization by which the basic

audit responsibility was maintained in Washington, with field agents

obtaining desired information directly from the taxpayer.

Later, the entire

responsibility for the initial audit was shifted to the field with the central

office reserving authority to verify field actions.

This latter phase was

completed in 1927. It was believed that as the field agents became more

proficient fewer instances would arise when the Washington office would

be required to reverse field judgments.

Unquestionably, decentralization was necessary and desirable, but the

early attempts to combine centralized auditing functions with the activities

of field agents generated organizational problems. In many instances the

Bureau was unable to coordinate its operations,

and it was not uncommon

for determinations of field agents to be overruled in Washington with the

result that taxpayers were audited several times with respect to the same tax

year. The problem was heightened by the Bureau’s willingness to reopen an

audit whenever an error was suspected or a new administrative position was

1918 COMM’R OF INT. REV. REP. 18–21; see also REPORT OF TAX

IMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 6 (1923).

1920 COMM’R OF INT. REV. REP. 9; 1919 COMM’R OF INT. REV. REP. 18–19.

1918 COMM’R OF INT. REV. REP. 18–21.

1924 COMM’R OF INT. REV. REP. 8.

1920 COMM’R OF INT. REV. REP. 9–10; 1919 COMM’R OF INT. REV. REP. 36.

R EPORT OF TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 7

(1923).

Senate Select Comm. Hearings, supra note 34, pt. 1 at 135 (1924) (statement

of David H. Blair, Comm’r of Int. Rev.).

T REASURY DEP’T SURVEY, supra note 66, at 10–11.

1919 COMM’R OF INT. REV. REP. 36.

This problem was even recognized, although delicately, by the Bureau. Id. at

36–38.

20 The United States Tax Court – An Historical Analysis

taken with respect to an issue involved in a return.

A popular pastime of

the day was the recounting of horror stories growing out of these

problems.

A comparatively small concern in an inland city far from Washington

filed its 1917 return and paid tax thereon. Later it found that it had

omitted certain income and filed an amended return. After

correspondence additional tax was assessed and paid. In 1920 an

office audit was made and the company advised of an additional

assessment of some $20,000.00. The company with its attorney, who

was not very well versed in tax matters, went to Washington. As a

result of a hearing, the additional assessment was reduced to

$10,000.00 and as stated by the president of the company, this

additional tax, while it was feld [sic] to be unjust, was paid “with tears

in their eyes.”

In 1922 a field examination was had and the field agent reported that

an over assessment of approximately $10,000.00 had been made and

recommended a refund. The company was about to declare an extra

dividend when it was advised by an A-2 letter that the field agent was

in error, that there was no refund, and $18,000.00 more was due. The

company engaged experts and at a considerable expense in the

compiling of evidence and after several hearings at Washington and

considerable time succeeded in having the additional assessment

eliminated and a refund of some $6,000.00 ordered. There was no

doubt in the minds of the company or its representatives but that the

refund should have been the full $10,000.00 recommended by the

field agent.

The problem of multiple audits attracted considerable attention.

100

1921 the practice was considered to be so abusive that the Revenue Act of

1921 specifically prohibited unnecessary examinations or more than one

inspection of a taxpayer’s books for a taxable year unless the taxpayer

requested the additional audit or the Commissioner, after investigation,

R EPORT OF TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 4

(1923).

E.g., C.P.A. MAG. (June, 1923); NAT’L INC. TAX MAG. 14–15 (July, 1923); 67

ONG. REC. 3855–57 (1926).

N AT’L INC. TAX MAG. 24–25 (July, 1923).

100

Id.; see also H.R. REP. NO. 67-350, at 16 (l921); S. REP. NO. 67-275, at 31

(1921); R

EPORT OF TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 4

(1923); 67 C

ONG. REC. 3855–57 (1926); 63 CONG. REC. 217 (1922); 61 CONG.

EC. 5202, 5855 (1921).

The Origins of the Tax Court 21

notified the taxpayer that the additional examination was necessary.

101

1923, on the recommendation of the Tax Simplification Board, the

Commissioner ordered that closed returns should not be reopened in the

absence of fraud or gross error.

102

These actions did not completely

ameliorate the problem, as evidenced by the fact that in 1926 an attempt

was made, albeit unsuccessful, to make the legislation even more restrictive

by absolutely barring more than two audits with respect to the same year.

103

Another troublesome practice characteristic of the World War I period

was the omission of any procedure by which a taxpayer could obtain an

administrative hearing before being assessed for an underpayment of tax.

Until 1921, the statute did not require such a hearing or, indeed, require

notice that an assessment was contemplated, before the tax was assessed.

Once the tax was assessed and notice and demand for payment made, the

statute provided that the tax be paid forthwith; in the absence of such

payment the Bureau could commence collection proceedings such as

distraint and levy on the taxpayer’s property.

104

Inasmuch as the decision to

assess was frequently made by auditors in Washington, a few taxpayers

never even received informal notice in advance of an actual assessment.

105

The absence of any right for an administrative appeal of a determination

of underpayment led to an unfortunate practice prevalent between 1919

and 1921. The Bureau had fallen far behind in the auditing of returns, and

it was felt that many of the returns contained errors that if corrected would

result in greatly increased revenues needed for the war effort. To obtain

this revenue as promptly as possible, the Bureau embarked on a program of

superficially auditing large numbers of returns, disallowing all questionable

deductions, and immediately assessing the additional tax.

106

Besides raising

large amounts of revenue, it was hoped that this practice would result in the

closing of many unaudited returns and thereby reduce the backlog. The

Bureau believed that any errors made through this procedure could be

subsequently corrected either by claims for refund or claims in abatement.

A claim for refund was precisely what its name implied. A taxpayer who

had paid more tax than he felt was due could file a claim for refund with the

Commissioner. An audit would then be made, and the tax would be

refunded if the Commissioner determined the claim to be meritorious. If,

101

Revenue Act of 1921, ch. 136, § 1309, 42 Stat. 310 (now codified at I.R.C. §

7605(b)).

102

Order of Comm’r of Internal Revenue, Jan. 20, 1923, quoted in REPORT OF

AX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 4, 15 (1923).

103

See H.R. REP. NO. 69-356, at 55 (1926).

104

See Revenue Act of 1918, ch. 18, §§ 250(b), (d), (e), 40 Stat. 1083; Revenue

Act of 1916, ch. 463, § 9(a), 39 Stat. 763; H.R. R

EP. NO. 67-350, at 14–15 (1921).

105

See Senate Select Comm. Hearings, supra note 34, pt. 1 at 35 (1924)

(testimony of James G. Bright, Deputy Comm’r of Int. Rev.).

106

1919 COMM’R OF INT. REV. REP. 38; Senate Select Comm. Hearings, supra

note 34, pt. 1 at 133–34 (1924) (statement of David H. Blair, Comm’r of Int. Rev.).

22 The United States Tax Court – An Historical Analysis

on the other hand, the Commissioner rejected the claim or did not approve

it within a certain period of time, the taxpayer could commence a suit in

either district court or the Court of Claims to recover the excessive tax.

107

The claim in abatement, on the other hand, was not a procedure to

secure a refund of tax paid. Rather, the procedure permitted the taxpayer

to administratively appeal an assessed tax prior to paying the assessment.

The claim in abatement was initially a purely administrative creation

108

that

permitted a taxpayer to defer payment if he provided a bond for the

payment of the tax and any interest or penalties thereon.

109

The claim was

required to be supported by affidavits of the taxpayer and the

Commissioner was to presume that the assessment was correct in

considering the validity of the claim. The claim in abatement was not,

however, a completely adequate solution for a taxpayer who believed he

had erroneously been assessed. It was not permitted with respect to an

assessed tax that had been administratively reviewed. Once administrative

action was completed, the assessed tax would have to be paid.

Furthermore, although the cost of a bond was less than the tax assessed, the

cost was not insubstantial and could not be recovered even if the

assessment was abated. Moreover, taxpayers in financial straits might not

be able to obtain a bond at all, with the result that they were not able to

avail themselves of the abatement procedure. Finally, the filing of a claim

in abatement was no guarantee that collection efforts would be suspended;

if the collector in his discretion felt collection of the tax was in jeopardy, he

could collect the tax regardless of the fact that a claim in abatement was

filed. In such a case, the taxpayer was consigned to a remedy based on a

claim for refund. The claim in abatement became less important with the

enactment of section 250(d) of the Revenue Act of 1921,

110

which

provided, in most cases, for pre-assessment review of tax deficiencies

107

See infra notes 142–197 and accompanying text.

108

A limited statutory claim in abatement was provided by the Revenue Act of

1918 in the case of deductions resulting from a “material reduction . . . of the value

of the inventory . . . or from the actual payment after the close of [the] . . . year of

rebates in pursuance of contracts entered into during such year upon sales made

during such year.” Revenue Act of 1918, ch. 18, §§ 214(a)(12), 234(a)(14), 40 Stat.

1068, 1079. The Revenue Act of 1924 abolished claims in abatement except those

made with respect to jeopardy assessments. Revenue Act of 1924, ch. 234, § 279,

43 Stat. 300.

109

Treas. Reg. 45, Art. 1032 (1921); I.T. 1869, II-2 CUM. BULL. 244 (1923).

The statutory basis for the claim in abatement was Rev. Stat. § 3220 (1873), which

provided the Commissioner with authority to refund taxes erroneously assessed or

collected. Treas. Reg. 45, Art. 1031 (1921). Procedures for filing claims in

abatement went back at least as far as 1879. See T

REASURY DEP’T, Series 7, No. 14

(1879), revised as Treas. Reg. 14 (1903).

110

Ch. 136, § 250(d), 42 Stat. 265.

The Origins of the Tax Court 23

within the Bureau. When such review was available, no claim in abatement

could be made.

111

Despite its shortcomings, the claim in abatement procedure resulted in

the failure of the abbreviated audit and assessment policy. Instead of

paying the tax assessed, many taxpayers filed claims in abatement with the

result that little additional revenue was collected. Other taxpayers who paid

the assessment filed claims for refund. Returns temporarily closed by

assessment of additional tax had to be reopened for a complete audit of the

merits of the claims in abatement and claims for refund.

112

This unfortunate episode in the history of tax administration made

apparent the undesirability of summary assessments.

113

The Revenue Act

of 1921 provided a partial answer to this vexing problem by requiring the

Commissioner to give the taxpayer notice of his intention to assess and an

opportunity, within 30 days after notice was mailed by registered letter, to

file an administrative appeal.

114

The appeal would afford the taxpayer an

opportunity for a hearing, and no assessment could be made until the

appeal was concluded. Significantly, however, the statute permitted the

Commissioner to assess without notice or opportunity for hearing if he

believed that the ensuing delay would jeopardize collection of the amount

due.

As a result of the audit backlog and the operation of the statute of

limitations on assessment, even after the enactment of the 1921 provision,

many taxpayers did not obtain the opportunity for an administrative hearing

prior to assessment. The early revenue acts provided a period of either

three, four, or five years from the filing of the return within which an

underpayment of tax could be assessed.

115

After the period expired, no

further tax could be demanded. In many cases the expiration of the

statutory period would become imminent before the audit was completed,

and, until 1926, the running out of the statutory period was considered

justification for making a jeopardy assessment

116

unless the taxpayer agreed

to an extension of the period.

117

The assessment, not based on a well-

considered audit, would be exaggerated by resolving every questionable

111

T.D. 3269, I-1 CUM. BULL. 303, 304 (1922).

112

Senate Select Comm. Hearings, supra note 34, pt. 1 at 134 (1924) (statement

of David H. Blair, Comm’r of Int. Rev.).

113

Id. at 135.

114

Ch. 136, § 250(d), 42 Stat. 265.

115

Revenue Act of 1916, ch. 463, §§ 9(a), 14(a), 39 Stat. 763, 772 (three years);

Revenue Act of 1918, ch. 18, § 250(d), 40 Stat. 1083 (five years); Revenue Act of

1921, ch. 136, § 250(d), 42 Stat. 265 (four years for returns filed for 1921 and later

years and five years for returns filed for prior years).

116

I.T. 1333, I-1 CUM. BULL. 305 (1922); TREASURY DEP’T SURVEY, supra note

66, at 31.

117

Senate Select Comm. Hearings, supra note 34, pt. 1 at 35 (1924) (testimony

of Dr. T. S. Adams).

24 The United States Tax Court – An Historical Analysis

issue against the taxpayer.

118

These assessments were in many cases

additionally burdensome because, coming many years after the tax period in

issue, the taxpayer’s economic situation had deteriorated with the result that

the assessment spelled financial ruin, unless the taxpayer was in a position

to defer payment of the tax by filing a claim in abatement.

119

A post-war

business recession served to heighten this effect.

120

A final problem that emerged in the early years of the administration of

the modern income tax concerned the application and publication of

precedents. One source of precedents, court decisions construing the tax

laws, provided useful guidelines to the Bureau and taxpayers. But court-

made law accumulates slowly, and frequently the judicial resolution of an

issue is not finally settled until reviewed by the Supreme Court. In the case

of complex statutory provisions, such as income and profits taxes, many

questions of statutory interpretation arise, and resolution of these questions

solely by the courts is inadequate.

Another source of precedents was Treasury decisions and regulations,

which were published guidelines of interpretation of the statute and

represented the most persuasive authority that could be issued by the

Treasury Department. The early income and profits tax acts were both

vague and unrealistic on many important points; legislative correction of

these deficiencies was, in many cases, impracticable, and the publication of

regulations was employed with some success to fill the void.

121

Particularly

notable in this regard was the assembling of a task force known as the

Excess Profits Tax Advisers, a group of experts who worked with Treasury

staff to draft regulations dealing with the difficult problems raised by the

first excess profits taxes.

122

But the promulgation of regulations was itself a time consuming

process, and regulations, like court decisions, could not adequately answer

the myriad questions arising under the statutes. Naturally, the Bureau in

reviewing returns was engaged in a continuous process of interpreting and

applying the statute. Rulings generated in the audit process were recorded

118

See id.

119

See Senate Select Comm. Hearings, supra note 34, pt. 1 at 139 (1924)

(statement of David H. Blair, Comm’r of Int. Rev.). It was the general practice of

the Bureau to permit claims in abatement with respect to jeopardy assessments.

Kingman Brewster, Procedure and Practice on appeal from the Action of the Income Tax

Unit, in P

ROCEEDINGS OF THE SIXTEENTH ANNUAL CONFERENCE ON TAXATION

OF THE

NATIONAL TAX ASSOCIATION 322, 327 (1923) [hereinafter cited as

Brewster]. However, a taxpayer without substantial resources might not be able to

take advantage of a claim in abatement because of the bond requirement. See supra

notes 108–111 and accompanying text.

120

See Turner, supra note 2, at 32–33.

121

1918 COMM’R OF INT. REV. REP. 9.

122

Id.; George O. May, Accounting and the Accountant in the Administration of Income

Taxation, 47 C

OLUM. L. REV. 377, 380–82 (1947).

The Origins of the Tax Court 25

by the Bureau and served as precedent in future cases.

123

However, these

rulings of the Bureau were rarely made available to the public prior to 1922,

and, prior to 1925, publication was on a sporadic basis.

124

The pressures of

disposing of the backlog of cases were such that there was simply no time

either to issue rulings on prospective or hypothetical situations or to reduce

such rulings to publishable written form on a systematic basis.

125

Additionally, the Bureau during this period exercised considerable caution

in publishing positions that had not been fully considered in the regulation-

making process.

126

Despite these justifications, the existence of secret

rulings

127

aroused a good deal of criticism.

In early 1926 the Senate Select Committee on Investigation of the

Bureau of Internal Revenue reported that the absence of published rulings

had resulted in a variety of problems:

1. Information for the guidance of the employees of the income

tax unit is so incomplete that gross discrimination results from the

failure to apply uniform principles to similar cases.

2. Taxpayers, in many instances, have failed to claim allowances

granted others similarly situated.

3. To secure the benefit of unpublished precedents, taxpayers are

forced to employ former employees of the income tax unit to advise

and represent them in tax cases.

4. Their exclusive possession of information as to the

unpublished precedents and practices of the income tax unit has

placed an artificial premium upon the value of the services of ex-

employees which enables them to demand and receive immense fees

for information which should be freely available to everybody.

5. This artificial premium, thus placed upon the exclusive

information possessed by the employees of the Income Tax Unit,

and the opportunity thus afforded for highly lucrative outside

123

1920 COMM’R OF INT. REV. REP. 9.

124

See Senate Select Comm. Hearings, supra note 34, pt. 17 at 3643–44 (1925)

(testimony of C.R. Nash, Ass’t to the Comm’r of Int. Rev.).

125

“If you turn these committeemen loose to write opinions they would want

to write a real judicial opinion.” Senate Select Comm. Hearings, supra note 34, pt. 1

at 30 (1924) (testimony of David H. Blair, Comm’r of Int. Rev.); 1919 C

OMM'R OF

NT. REV. REP. 17.

126

1919 COMM’R OF INT. REV. REP. 16–18.

127

“[W]e have a list of secret rulings . . . ” Senate Select Comm. Hearings,

supra note 34, pt. 1 at 30 (1924) (testimony of David H. Blair, Comm’r of Int. Rev.).

26 The United States Tax Court – An Historical Analysis

employment, is the cause of the extraordinary turnover among the

employees of the unit and of the difficulty experienced by the unit in

retaining the services of competent employees at salaries within the

range of the salaries paid by the Government for comparable service.

6. The failure to consider closed cases as precedents and to

publish the principles and practices followed in closed cases as

precedents has deterred the formation of a body of settled law and

practice. The unsettled state of the law and practice has encouraged

the filing of claims for allowances and require the constant

rediscussion and reconsideration of questions, which should be

settled by precedents established by closed cases.

7. The fact that a ruling will be published and the benefit of its

principles claimed by taxpayers similarly situated is the strongest

possible deterrent against making unsound rulings.

8. During the course of the hearings there has been a great deal

of evidence tending to show that it is the policy of the bureau to fix

taxes by bargain rather than by principle. Rulings based upon

bargains cannot be published as precedents. The best and most

persistent trader gets the lowest tax and gross discrimination is the

inevitable result of such a policy.

128

In evaluating these criticisms it is important to note that the Select

Committee was dominated by senators, particularly Senator James Couzens

of Michigan, who were hostile to virtually every aspect of the tax policy of

Secretary of the Treasury, Andrew Mellon. The Committee was spawned in

a period of intense anti-Bureau sentiment, its activities were highly

controversial, and the criticism on both sides was frequently bitter.

129

It is

generally believed that personal animosity was behind a deficiency of $9.5

million asserted against Senator Couzens in respect of the sale by him of a

large block of stock in the Ford Motor Co.

130

Ironically, Senator Couzens

found salvation in a ruling of the Board of Tax Appeals,

131

an agency that

Secretary Mellon was largely responsible for creating.

132

128

S. REP. NO. 69-27, at 7–8 (1926).

129

E.g., 65 CONG. REC. 2387–90, 6224 (1924).

130

ROY G. BLAKEY & GLADYS C. BLAKEY, THE FEDERAL INCOME TAX 552–

57 (1940); R

ANDOLPH E. PAUL, TAXATION IN THE UNITED STATES 150 (1954).

131

Couzens v. Commissioner, 11 B.T.A. 1040 (1928). For a detailed account

of the feud between Senator Couzens and Secretary Mellon, see George K. Yin,

James Couzens, Andrew Mellon, the “Greatest Tax Suit in the History of the World,” and

Creation of the Joint Committee on Taxation and Its Staff, 66 T

AX L. REV. 787 (2013).

132

See Part II.

The Origins of the Tax Court 27

In view of the many problems encountered in administering the new

taxes, it is not surprising that the Bureau in the post-World War I years was

the subject of continuing investigation and criticism. Undoubtedly some of

the criticism was politically inspired, but much of it was well founded. This

is not to say that these shortcomings were the result of incompetent or

venal management; to the contrary, it would appear that many of the

officials involved in tax administration were men of great ability.

133

The

inadequacies resulted from the enormity of the task of creating an

administration for a mass income and profits tax in a short period of time

and in the absence of an adequate supply of trained manpower. Regardless

133

In a healthy spirit of partisanship, endorsements of Administration officials

occasionally got out of hand:

At the head of the Treasury Department is a farsighted financier, the

greatest Secretary of the Treasury since Alexander Hamilton. Under his

leadership financial order has come out of chaos. Liberty bonds that were

lingering around 86¾ cents on the dollar under Democratic

mismanagement were brought to par under the Mellon policies. Debts that

had piled mountain high under the Democratic policies of extravagance

were paid off at the rate of $2,000,000 per day while other nations were

piling up more debts every day. The financial record made by the

administrations of Presidents Harding and Coolidge is unsurpassed in the

annals of history. This success is very largely due to the wise policies and

farsighted genius of Andrew W. Mellon, of Pittsburgh. There is widespread

demand for the enactment of legislation for the reduction of taxes. The

Mellon plan is known in every hamlet in the land and uncounted millions

look to Congress for its enactment. It is the hope of the enemies of this

plan that one result of the so-called investigation of the Treasury

Department will be the crippling of the Mellon tax-reduction plan. By

innuendo against Mr. Mellon it is hoped to break down the Mellon plan.

The work which President Coolidge and his Cabinet are carrying forward

is the work planned and so well begun by President Harding. Warren

Harding—how fine and frank and honorable he was! The poisoned arrows

of malice lie broken at his feet. There is only pity and disgust for the

cowardly cur who would seek to cast suspicion on his motives, or leave

scandal on the doorstep of the tomb. In the few short months of his

administration more great problems were grappled with and solved than

ever before in a like period of our history.

65 C

ONG. REC. 7432 (1924) (address by Senator Frank B. Willis [Rep., Ohio] at

Americus Club banquet, Pittsburgh, Apri1 26, 1924).

Politics aside, it would appear that there was general respect for the integrity

and efficiency of Treasury and Bureau officials. See, e.g., 65 C

ONG. REC. 2622

(1924) (remarks of Mr. Young); R.H. M

ONTGOMERY, EXCESS PROFITS TAX

ROCEDURE 13 (1921); see also George O. May, Accounting and the Accountant in the

Administration of Income Taxation, 47 C

OLUM. L. REV. 377, 379–81, 384–85 (1947)

(lauding the work prior to the close of World War I of lawyers and accountants in

administering and improving the tax laws; the article, however, decried the rise of

what was viewed as excessive legalism following the war).

28 The United States Tax Court – An Historical Analysis

of the reasons, however, there can be no doubt that problems existed and

that these problems supplied an important impetus for the creation of

various bodies to investigate and correct the abuses of early tax

administration. These bodies included the Excess-Profits Tax Advisers,

134

the Excess-Profits Tax Reviewers,

135

the Advisory Tax Board,

136

the

Committee on Appeals and Review,

137

the Tax Simplification Board,

138

the

Senate Select Committee on Investigation of the Bureau of Internal

Revenue,

139

the Joint Committee on Internal Revenue Taxation,

140

and the

United States Board of Tax Appeals.

141

The purpose of the Board of Tax Appeals, as it ultimately evolved, was a

narrow one, to assure that in most cases a taxpayer could obtain an

independent review of the assertions of a tax deficiency before the

deficiency would be assessed and collected. But before the legislative

history of the Board is detailed, it is necessary to consider two additional

features of income tax administration extant at the time. The first of these

was the judicial remedy for challenging Bureau action. The inadequacy of

134

See supra notes 121–122 and accompanying text; infra notes 203–205 and

accompanying text.

135

See infra notes 202–212 and accompanying text.

136

See infra notes 213–221 and accompanying text.

137

See infra notes 221–265 and accompanying text.

138

See infra notes 258–259 and accompanying text.

139

See supra notes 128–132 and accompanying text.

140

The Joint Committee, a standing committee of Congress, was created by the

Revenue Act of 1926, ch. 27, § 1203, 44 Stat. 127 (now codified at I.R.C. §§ 8001–

23). Its duties were:

(1) To investigate the operation and effects of the Federal system of

internal-revenue taxes;

(2) To investigate the administration of such taxes by the Bureau of

Internal Revenue or any executive department, establishment, or agency

charged with their administration;

(3) To make such other investigations in respect of such system of taxes

as the Joint Committee may deem necessary;

(4) To investigate measures and methods for the simplification of such

taxes, particularly the income tax;

(5) To publish, from time to time, for public examination and analysis,

proposed measures and methods for the simplification of such taxes and to

make to the Senate and the House of Representatives, not later than

December 31, 1927, a definite report thereon, together with such

recommendations as it may deem advisable; and

(6) To report, from time to time, to the Committee on Finance and the

Committee on Ways and Means and, in its discretion, to the Senate or the

House of Representatives, or both, the results of its investigations, together

with such recommendations as it may deem advisable.

Revenue Act of 1926, ch. 27, § 1203(c), 44 Stat. 127 (now codified at I.R.C. § 8022).

141

Revenue Act of 1924, ch. 234, § 900, 43 Stat. 336.

The Origins of the Tax Court 29

these procedures was a key element in providing the need for a body such

as the Board of Tax Appeals. The second feature was the character of the

administrative remedy available to forestall erroneous Bureau action. The

administrative bodies and procedures established within the Bureau in the

World War I and immediate post-war periods were the direct ancestors of

the Board of Tax Appeals.

2. The Judicial Remedy

For those taxpayers who believed themselves aggrieved by erroneous

Bureau action, judicial review was available. Before 1924 such review was

generally restricted to one of two types of refund suits: (1) an action of

mixed legal ancestry against the collector of internal revenue to whom the

disputed tax was paid; and (2) a statutory action under the Tucker Act

against the United States. These proceedings were virtually exclusive, and

only in extraordinary cases could taxpayers obtain judicial review of a tax

determination of the Bureau prior to actual payment of the tax.

142

The common law right to sue a tax collector for refund of wrongfully

collected taxes was first recognized by the Supreme Court in 1836, in the

case of Elliott v. Swartwout.

143

The action was maintainable against the

collector personally and was in assumpsit for money had and received.

Because the liability of the collector was considered to be that of an agent

who had wrongfully collected a tax for his principal, the Court held that the

action would only lie if the collection of the tax was protested by the payor

at the time of its payment to the collector.

144

Absent such protest, the agent

would not be on notice that his claim to the taxes was questioned and

would not be entitled to withhold the payments from his principal. Of

course, without its consent, the principal was immune from suit as a

sovereign. This immunity extended as well to virtually all suits to restrain

the assessment or collection of a tax.

145

Thus, refund suits against

142

The claim in abatement did not permit judicial review prior to collection of

the tax. Rather, it permitted the continuation of administrative review of a matter

after the tax was assessed, but before it was collected. See supra notes 108–111 and

accompanying text.

143

35 U.S. (10 Pet.) 137; see also Bend v. Hoyt, 38 U.S. (13 Pet.) 263 (1839).

144

35 U.S. (10 Pet.) at 156. Although not clearly stated, there was some

suggestion that a protest lodged following payment of the tax to the collector but

prior to its transmission to the Treasury would also be adequate. Id. at 154.

145

Since 1867 this bar has been statutory, Act of March 2, 1867, ch. 169, § 10,

14 Stat. 475 (now codified at I.R.C. § 7421(a)), but the statute was apparently

merely a restatement of previously recognized doctrine. See Miller v. Standard Nut

Margarine Co., 284 U.S. 498, 509 (1932); Louisiana v. McAdoo, 234 U.S. 627, 632

(1914); Minnesota v. Hitchcock, 185 U.S. 373, 388 (1902); Belknap v. Schild, 161

U.S. 10, 17 (1896); Boeing Air Transport Inc. v. Farley, 75 F.2d 765, 768 (D.C. Cir.

1935); Note, 13 N.C. L. R

EV. 265 (1935).

30 The United States Tax Court – An Historical Analysis

collectors generally were the sole judicial recourse of taxpayers prior to the

creation of the Court of Claims in 1855 and the enactment of the Tucker

Act in 1887.

Although not clearly entitled by law to do so, following the decision in

Elliott v. Swartwout collectors routinely refrained from paying taxes over to

the Treasury when collected under protest.

146

It soon developed that these

funds were being unlawfully converted by the collectors for their personal

purposes. In 1839, Congress enacted legislation requiring the payment of

the taxes into the Treasury regardless of the fact that they were collected

under protest but requiring the Secretary of the Treasury to refund taxes

paid under protest when such taxes were shown to be excessive.

147

As a

result of this legislation, the Supreme Court in Cary v. Curtis

148

held that if a

collector was not free to retain protested taxes, he could not be personally

accountable in assumpsit. The basis of the action was a promise implied in

law to repay sums wrongfully taken. Because the new legislation made it

illegal for collectors to pay the tax to anyone but the Government, no

promise could be implied to the taxpayer. “[T]he law . . . never implies a

promise to do an act contrary to duty or contrary to law.”

149

After the

decision in Cary v. Curtis, there was a short period of time in which a serious

question existed as to whether any judicial remedy was recognized for the

review of the legitimacy of tax collections. The Court in Cary v. Curtis

expressly refused to rule on this question.

150

Although the subject has been

treated in dicta, the Supreme Court has never had to face the question of

whether Congress could, consistently with due process, withdraw all judicial

review over tax matters. The dicta has not been altogether consistent, so it

is not clear how the question would be resolved.

151

Happily, however, 36

146

See Cary v. Curtis, 44 U.S. (3 How.) 236, 240, 261–62 (1845).

147

Act of March 3, 1839, ch. 82, § 2, 5 Stat. 348.

148

44 U.S. (3 How.) 236 (1845).

149

Id. at 251.

150

“The legitimate inquiry before this court is not whether all right of action

has been taken away from the party, and the court responds to no such inquiry.”

Id. at 250.

151

Compare Graham & Foster v. Goodcell, 282 U.S. 409, 430 (1931) (indicating

that some form of judicial remedy for illegal tax exactions must be afforded) with

Anniston Mfg. Co. v. Davis, 301 U.S. 337, 341–43 (1937); Bull v. United States, 295

U.S. 247, 259 (1935); Kentucky R.R. Tax Cases, 115 U.S. 321, 331 (1885); McMillen

v. Anderson, 95 U.S. 37, 41 (1877) (each indicating that no constitutional right to

judicial review exists). In a broader article examining the constitutional status of the

Tax Court against the separation-of-powers aspect of article III of the Constitution,

Professor Deborah Geier has characterized the Tax Court’s small tax case

procedures contained in § 7463 as presenting “the most troubling aspect of the Tax

Court’s current jurisdiction in article III terms” because those procedures

necessitate a pre-trial waiver of any appellate review, much less appellate review

before an article III tribunal. See Deborah A. Geier, The Tax Court, Article III, and

The Origins of the Tax Court 31

days after Cary v. Curtis was decided, Congress in effect overruled it by

passing legislation providing that nothing in the 1839 legislation should be

construed to eliminate the right to sue collectors for customs duties paid

under protest.

152

The legislation also provided that to preserve the action,

the taxpayer’s written protest setting forth his objections had to accompany

or precede the disputed tax payment. In 1924, the requirement of protest at

the time of payment as a condition of maintaining suit for refund was

eliminated. Thenceforth suit could be commenced after a claim for refund

was denied or after six months from the filing of the claim, whichever came

earlier.

153

The claim itself could generally be filed up to four years after

payment of the disputed tax.

154

As might be expected, the early cases dealing with refund actions against

collectors all involved customs duties. The first case involving internal

taxes was City of Philadelphia v. Collector,

155

an 1866 decision in which the city

contested a tax imposed upon illuminating gas. The Court held that, as

with the case of customs duties, actions in assumpsit would lie against a

collector of internal revenue taxes for wrongfully collected amounts. The

principal difficulty encountered by the Court in reaching this conclusion

was that as with customs collections, collectors of internal revenue were

required to pay their tax collections to the Treasury regardless of any

protest as to the legality of the collections.

156

The collector argued that this

provision required reasoning similar to Cary v. Curtis because, unlike the

case with customs, there was no explicit statutory provision recognizing

assumpsit actions in the case of internal taxes. The Court, however,

rejected this argument on the ground that other statutory provisions dealing

with removal of tax proceedings from state to federal courts

157

and directing

the Commissioner to pay judgments against collectors

158

indicated

congressional recognition that the assumpsit action should be recognized.

Until the corrective legislation following Cary v. Curtis, there was no

statutory provision bearing on refund suits against the collector. For this

reason the action could be said to have arisen under common law. In fact,

this was clearly the position of the Supreme Court.

159

As time passed,

however, the nature of the refund action became murky. Some courts held

that the action was a statutory form of remedy against the United States

the Proposal Advanced by the Federal Courts Study Committee: A Study in Applied

Constitutional Theory, 76 C

ORNELL L. REV. 985, 1032 (1991).

152

Act of Feb. 26, 1845, ch. 22, 5 Stat. 727.

153

Revenue Act of 1924, ch. 234, § 1014, 43 Stat. 343.

154

Id. § 1012, 43 Stat. 342.

155

72 U.S. (5 Wall.) 720.

156

Act of March 3, 1863, ch. 74, § 18, 12 Stat. 725.

157

Act of March 2, 1833, ch. 57, § 3, 4 Stat. 633.

158

Act of June 30, 1864, ch. 173, § 44, 13 Stat. 239; Act of March 4, 1863, ch.

74, § 31, 12 Stat. 729.

159

Cary v. Curtis, 44 U.S. (3 How.) 236, 239–40 (1845).

32 The United States Tax Court – An Historical Analysis

with the collector the nominal defendant,

160

and others have taken the view

that it remained a common law action against the collector personally.

161

Unfortunately, the nature of the refund action was not a purely

academic problem, and several questions arose that turned on this difficult

issue. The issues that arose included: whether a decision in a refund action

against a collector would be res judicata in a subsequent action against the

United States;

162

whether a suit could be maintained against the collector

holding office when the action was commenced, when the collector who

had actually collected the tax had left office or died;

163

and whether interest

could be recovered against a collector in a refund action although a

sovereign, absent consent, is generally not liable therefor.

164

The answers

160

Flora v. United States, 362 U.S. 145, 151–58 (1960); George Moore Ice

Cream Co. v. Rose, 289 U.S. 373, 383 (1933); Wickwire v. Reinecke, 275 U.S. 101,

105–06 (1927); Arnson v. Murphy, 109 U.S. 238, 243 (1883); Collector v. Hubbard,

79 U.S. (12 Wall.) 1, 14, 16 (1870); Curtis’s Adm’x v. Fiedler, 67 U.S. (2 Black) 461,

479 (1862); William T. Plumb, Jr., Refund Suits Against Collectors of Internal Revenue, 60

ARV. L. REV. 685, 688–91 (1947) [hereinafter cited as Plumb].

161

See Smietanka v. Indiana Steel Co., 257 U.S. 1, 4 (1921); Sage v. United

States, 250 U.S. 33, 36–38 (1919); Patton v. Brady, Ex’x, 184 U.S. 608, 614, 15

(1902); Erskine v. Van Arsdale, 82 U.S. (15 Wall.) 75, 77 (1872); M. Carr Ferguson,

Jurisdictional Problems in Federal Tax Controversies, 48 I

OWA L. REV. 312, 328–29 (1963)

[hereinafter cited as Ferguson].

162

Before 1942, the rule had developed that res judicata and collateral estoppel

could not be invoked in a refund action against the United States with respect to a

prior judgment in a suit against a collector. Thus a taxpayer who had lost a suit

against a collector was not barred from suing the United States on the same issue

for the same or different tax years. United States v. Nunnally Inv. Co., 316 U.S.

258 (1942); Bankers Pocohantas Coal Co. v. Burnet, 287 U.S. 308 (1932); Sage v.

United States, 250 U.S. 33 (1919). On the other hand, a judgment in a suit against

the United States or the Commissioner was a bar to a later action against a

collector. Tait v. Western Md. Ry., 289 U.S. 620, 626–27 (1933). In 1942, the

Internal Revenue Code of 1939 was amended to apply estoppel when the refund

action against the collector occurred first. Revenue Act of 1942, ch. 619, § 503, 56

Stat. 956 (now codified at I.R.C. § 7422(c)).

163

Smietanka v. Indiana Steel Co., 257 U.S. 1 (1921) (suit must be maintained

against collector who was in office when tax was collected, even if at the time suit

was commenced he had left office); Patton v. Brady, Ex’x, 184 U.S. 608, 615 (1902)

(if collector dies while suit is pending, action may be revived against his estate);

Smith v. Hoey, 153 F.2d 846 (2d Cir. 1946) (collector died, suit commenced against

his executrix); Swenson v. Thomas, 68 F. Supp. 390 (N.D. Tex. 1946). These

rulings were predicated on the suit being personal against the collector. Contra,

Flora v. United States, 362 U.S. 145, 151–52 (1960).

164

Erskine v. Van Arsdale, 82 U.S. (15 Wall.) 75, 77 (1872) (interest permitted

on refund from collector from time of payment to time of judgment); Mellon v.

United States, 36 F.2d 609, 610 (D.C. Cir. 1929) (in absence of statute, no interest

on refund after issuance of certificate requiring United States to pay judgment

against collector; United States then became liable for refund but, in absence of

The Origins of the Tax Court 33

given to these questions were never wholly satisfactory.

165

As a result, the

refund action against a collector was beset by procedural uncertainties and

criticism.

166

In 1966, it was discontinued by act of Congress.

167

Refund suits directly against the United States first became available in

1855 with the creation of the Court of Claims.

168

However, until 1866, the

decisions of the Court of Claims were advisory and required approval by

Congress.

169

With the enactment of the Tucker Act in 1887,

170

refund suits

against the United States were permitted in either the Court of Claims or

the district courts.

171

The essential features of suit in the Court of Claims

have remained essentially unchanged since 1866. No jury trial is available,

and no monetary limitation is imposed as a condition of jurisdiction. Until

1982, an appeal from a Court of Claims decision lay only with the Supreme

Court. Currently, an appeal from the Court of Federal Claims lies with the

Court of Appeals for the Federal Circuit.

172

waiver of sovereign immunity, was not liable for interest). Statutory provisions

enacted between 1921 and 1928 secured to taxpayers the right to interest on

refunds from the time the overpayment was made to 30 days prior to refund,

without regard to whether the refund was recovered in a refund action against a

collector or against the United States. Revenue Act of 1921, ch. 136, § 1324, 42

Stat. 316; Revenue Act of 1926, ch. 27, § 1117, 44 Stat. 119; Revenue Act of 1928,

ch. 852, § 615(a), 45 Stat. 877. Until this legislation was enacted interest was not

recoverable in a refund suit under the Tucker Act against the United States. The

basis for permitting the recovery of interest against collectors was that the action

was personal.

165

See Ferguson, supra note 161, at 327–31; Plumb, supra note 160, at 685.

166

See Plumb, supra note 160.

167

Act of November 2, 1966, Pub. L. No. 89-713, § 3(a), 80 Stat. 1108.

168

Act of February 24, 1855, ch. 122, 10 Stat. 612.

169

In 1863, Congress attempted to grant the power to render final decision to

the Court of Claims and permit appeals to the Supreme Court therefrom. Act of

March 3, 1863, ch. 92, 12 Stat. 765. In 1865, the Supreme Court in Gordon v.

United States, 69 U.S. (2 Wall.) 561 (1865), concluded the legislation was deficient

because judgments of the Court would be paid only upon further action by the

Secretary of the Treasury and Congress. Act of March 3, 1863, ch. 92, § 14, 12

Stat. 768. Accordingly, the Court refused to review decisions of the Court of

Claims. In 1866, the offensive provisions were removed. Act of March 17, 1866,

ch. 19, 14 Stat. 9. See Williams v. United States, 289 U.S. 553, 561–64 (1933).

170

Act of March 3, 1887, ch. 359, 24 Stat. 505 (now codified at 28 U.S.C.

§§ 1346, 1491).

171

Suits up to $1,000 were to be brought in district court, and suits of more

than $l,000 but not more than $10,000 in circuit court. Act of March 3, 1887, ch.

359, § 2, 24 Stat. 505.

172

The Federal Courts Improvement Act of 1982 replaced the Court of Claims

with the U.S. Court of Claims (renamed the U.S. Court of Federal Claims in 1992),

and established the U.S. Court of Appeals for the Federal Circuit. The Court of

Appeals for the Federal Circuit was given jurisdiction to hear appeals from Federal

district courts in matters of copyright, patent, and trademarks. Additionally, the

34 The United States Tax Court – An Historical Analysis

On the other hand, refund actions against the United States in district

court have undergone significant modifications. Unlike the situation with

respect to refund actions against collectors, jury trial was not initially

available in district court suits against the United States and there could be

no allowance of costs to the taxpayer. In 1954, jury trial was authorized;

173

in 1966, costs in favor of the taxpayer were permitted.

174

Additionally, the

subject matter jurisdiction of the district courts has changed. Originally,

these actions could only be brought if the amount in controversy did not

exceed $10,000,

175

but in 1921 jurisdiction was expanded to permit suits

against the United States, regardless of the amount at issue, if the collector

had died before action was commenced.

176

Apparently this amendment was

based on uncertainty over the question of whether a suit against a deceased

collector could be commenced against his estate.

177

In 1925 the statute was

further liberalized to remove any dollar limitation if the collector was out of

office at the time the suit was commenced.

178

These amendments obviated

the venue difficulties of a taxpayer living in, say, Minnesota who wished to

sue in district court for the recovery of more than $10,000, when, by the

time suit was commenced, the collector of the disputed tax had retired to

Florida. Suit could be brought under the Tucker Act and venue based upon

the residence of the taxpayer.

179

Finally, in 1954, all dollar restrictions in

district court actions were lifted.

180

The diversity of judicial remedies for excessive tax collections, each of

which had its own peculiarities, was sometimes the source of difficulties for

taxpayers. Most troublesome were suits against collectors, because the

action had to be maintained against the particular collector to whom the

Court of Appeals for the Federal Circuit was designated as the primary court of

appeals for the territorial courts and the reconstituted Court of Claims. See Federal

Courts Improvement Act of 1982, Pub. L. No. 97-164, §§ 105(a), 122–133, 96 Stat.

25, 36–41 (1982) (amending 28 U.S.C. §§ 171–173, 1291, 1292, 1295, 1491–1507).

173

Act of July 30, 1954, ch. 648, § 1, 68 Stat. 589 (now codified at 28 U.S.C.

§ 2402).

174

Act of July 18, 1966, Pub. L. No. 89-507, 80 Stat. 308 (now codified at 28

U.S.C. § 2412).

175

Act of March 3, 1887, ch. 359, § 2, 24 Stat. 505.

176

Revenue Act of 1921, ch. 136, § 1310, 42 Stat. 310.

177

H.R. REP. NO. 67-486, at 57 (1921); 61 CONG. REC. 7506–07 (1921)

(remarks of Senator Jones). In Flora v. United States, 362 U.S. 145, 151–52 (1960),

the Court assumed that such an action could not be commenced. At least one

commentator has taken a different view of the matter. Plumb, supra note 160, at

692.

178

Act of February 24, 1925, ch. 309, 43 Stat. 972.

179

Act of March 3, 1887, ch. 359, § 5, 24 Stat. 506 (now codified at 28 U.S.C.

§ 1402(a)).

180

Act of July 30, 1954, ch. 648, § 1, 68 Stat. 589 (now codified at 28 U.S.C.

§ 1346(a)(1)).

The Origins of the Tax Court 35

disputed tax was paid. An error in selecting the proper defendant could

result in dismissal of the action at a time when the statute of limitations

barred commencement of another action.

181

Nevertheless it is probably

true that the introduction of a new tax tribunal, the Board of Tax Appeals,

would not have been considered necessary had the existing judicial

remedies not shared two common drawbacks. First, neither permitted suit

to enjoin or restrain the assessment or collection of tax.

182

Second, each

required full payment of the tax as a condition of maintaining suit.

183

Throughout the entire history of tax litigation, these limitations on the

jurisdiction of the district courts and the Court of Federal Claims have

remained generally constant.

A limited exception, “narrow but ill defined”

184

on the bar to restraining

tax collections has been recognized, but only in those exceptional cases in

which it appears that there is no basis in law for the assessment and

collection of the tax would result in irreparable injury to the taxpayer.

185

Even rarer have been those suits in which the taxpayer has been permitted

to seek refund of a tax when less than the full tax assessed has been paid.

186

Although it has been suggested that an exception based on similar grounds

to those which permit restraining assessment or collection should be

recognized in refund suits,

187

the most definitive pronouncement of the

Supreme Court on the issue indicates a flat bar on refund suits unless the

181

See Wolinsky v. United States, 271 F.2d 865 (2d Cir. 1959); Buhl v.

Menninger, 251 F.2d 659 (6th Cir. 1958); Hammond-Knowlton v. United States,

121 F.2d 192 (2d Cir. 1941).

182

See supra note 145.

183

See Flora v. United States, 362 U.S. 145 (1960).

184

Ferguson, supra note 161, at 324.

185

Miller v. Standard Nut Margarine Co., 284 U.S. 498 (1932), is the leading

authority in this area, and the doctrine has been applied in a score of other cases.

The constitutionality of the 1894 income tax act was tested in equitable

proceedings, but the relief requested was not an injunction against the collection of

the tax, but rather an injunction of the corporate taxpayer, of which the petitioner

was a shareholder, barring it from paying an unconstitutional tax. Pollock v.

Farmers’ Loan & Trust Co., 157 U.S. 429, 553–54, rehearing, 158 U.S. 601 (1895).

More recently, Congress has confirmed that taxpayers may seek to enjoin the

assessment and collection of a tax that serves as the subject of a notice of

deficiency during the period in which the taxpayer may petition the Tax Court for a

redetermination of the deficiency. See I.R.C. § 6213(a). If the taxpayer has

petitioned the Tax Court for a redetermination of the subject tax, the Tax Court

possesses concurrent jurisdiction with the Federal district courts to issue an

injunction. For a discussion of Tax Court’s jurisdiction in this context, see Part

VI.A.3.

186

See Flora v. United States, 362 U.S. 145, 170–75 (1960).

187

Ferguson, supra note 161, at 336.

36 The United States Tax Court – An Historical Analysis

entire tax has been paid.

188

The general denial of access to the federal

courts absent full payment of the disputed tax has been continued in the

Declaratory Judgment Act. When it was pointed out that as originally

enacted in 1934,

189

declaratory judgments were available in tax matters,

190

Congress promptly amended the Act to exclude controversies “with respect

to Federal taxes.”

191

Except as subsequently superseded by statute,

192

this

bar has been applied without exception.

193

Apparently this scheme of judicial review worked well enough for the

first century and a quarter of the Republic. This is not remarkable when it

is considered that, prior to World War I, federal taxes were generally neither

high nor complicated. The War Revenue Act of 1917 and succeeding acts

effected drastic changes in the level of taxation, the degree of complexity of

tax laws and the number of individuals and businesses covered. When

combined with the administrative difficulties being encountered by the

Bureau of Internal Revenue, these acts created an entirely different

situation.

194

The scope of the problem was suggested by the increase in the

number of refund suits being brought in district court. As of June 30, 1917,

there were 472 district court civil tax cases pending that involved the United

States.

195

By June 30, 1924, this number had more than tripled to 1,507.

196

188

Flora v. United States, 362 U.S. 145 (1960). For a critique of the full-

payment rule of Flora, see Steve R. Johnson, Reforming Federal Tax Litigation: An

Agenda, 41 F

LA. ST. L. REV. 205, 267–71 (2013).

189

Federal Declaratory Judgment Act of 1934, ch. 512, 48 Stat. 955, as amended,

28 U.S.C. §§ 2201–02.

190

Frank J. Wideman, Application of the Declaratory Judgment Act to Tax Suits, 13

AXES 539 (1935).

191

Revenue Act of 1935, ch. 829, § 405, 49 Stat. 1027.

192

Congress has more recently permitted taxpayers to seek declaratory

judgments on discrete issues of federal taxation. See, e.g., I.R.C. § 6234 (Tax Court

jurisdiction to issue declaratory judgment concerning adjustment of losses on an

oversheltered partnership tax return); I.R.C. § 7428 (Tax Court jurisdiction to issue

a declaratory judgment regarding the classification or status of any organization

formed under §§ 501(c)(3), 170(c)(2), 509(a), 4942(j)(3), or 521(b)); I.R.C. § 7476

(Tax Court jurisdiction to determine initial or continuing qualification of retirement

plan under §§ 401 or 403); I.R.C. § 7477 (Tax Court jurisdiction to issue declaratory

judgment concerning the value of taxable gift); I.R.C. § 7478 (Tax Court

jurisdiction to determine whether interest on prospective government bonds will be

entitled to the § 103(a) exclusion from gross income); I.R.C. § 7479 (Tax Court

jurisdiction to determine whether an estate qualifies for deferred payment of estate

tax pursuant to § 6166). The Tax Court’s expanded declaratory judgment

jurisdiction is examined in Part VII.A.

193

See Ferguson, supra note 161, at 325.

194

See CHARLES D. HAMEL, PRACTICE AND EVIDENCE BEFORE THE U.S.

OARD OF TAX APPEALS 4–5 (1938); Turner, supra note 2, at 32.

195

1918 ATT’Y GEN. ANN. REP.

The Origins of the Tax Court 37

Although no figures are available, it is reasonable to assume that a similar

increase occurred in refund actions against collectors. The Attorney

General commented on burgeoning tax litigation in his 1924 report.

There has . . . been a marked increase in the number of [tax]

cases . . . handled in the courts. A great many cases which arose out

of the business prosperity of the war era have furnished and are still

furnishing quite a volume of tax litigation. These cases involve not

only large sums of money but extremely important principles. Their

decision is making for a greater certainty in the administration of the

various revenue acts which is highly desirable not only from the

standpoint of the taxpayer but as an aid to efficient administration of

the law.

197

Despite the general satisfaction expressed by the Attorney General with

respect to the situation, the increasing litigiousness of taxpayers resulted

from changed circumstances that demanded provision for a remedy not

theretofore available—independent review of tax determinations without

the requirement of payment. As will be seen in succeeding pages, the

Bureau had for several years struggled with the problem of providing full

and impartial pre-assessment review. Whether such review was either full

or impartial was a matter of some question, but there could be no question

that it was not independent.

196

1925 ATT’Y GEN. ANN. REP. Listed below are the number of civil tax cases

involving the United States pending at the close of fiscal years 1912–32. (Source

1913–1933 A

TT'Y GEN. ANN. REPS.)

Year

No. of Cases

Year

No. of Cases

1912

633

1923

1,185

1913

604

1924

1,507

1914

631

1925

1,751

1915

590

1926

1,872

1916

495

1927

2,144

1917

472

1928

3,136

1918

560

1929

3,303

1919

705

1930

3,468

1920

795

1931

3,056

1921

1,238

1932

2,787

1922

1,777

197

1924 ATT’Y GEN. ANN. REP. 82.

38 The United States Tax Court – An Historical Analysis

3. Pre-Assessment Review Within the Bureau

Until 1921, the law permitted the Bureau to summarily assess and collect

whatever amount of tax it deemed proper.

198

Neither notice nor

opportunity for hearing was required by the statute prior to assessment.

Thus, taxpayers who felt aggrieved by Bureau action could have been

restricted to obtaining redress solely by way of a refund suit.

However, it would have been shortsighted to administer the tax law in

this manner. The income and profits taxes, which raised the bulk of the

revenue necessary for the war effort, were not designed to be coercively

extracted. The initiative was with the taxpayer to make out his return and

remit the tax. Without his active cooperation, the system would have been

wholly inoperable. A citizenry that perceived the tax collection system as

arbitrary could hardly be expected to cooperate.

The Bureau was obviously concerned with its public image and

endeavored to foster a positive attitude towards tax administration. One

step along these lines was the formulation of the claim in abatement, which

permitted a taxpayer to obtain a full administrative review of an assessment

without the necessity of paying the disputed tax.

199

Another action

designed to bolster public confidence in the system was the enlisting of

distinguished private citizens to participate in the drafting of rules and

regulations under the new laws.

200

Finally, and perhaps most importantly,

the Bureau and Congress embarked on a program which stemmed from

early recognition of a need for a procedure to afford taxpayers pre-

assessment administrative review on disputed matters before a sophisticated

group of experts. The need for such review was widely perceived. Income

and profits taxes had become of great personal importance to many

taxpayers. The Bureau, as a result of its spectacular growth, had lost some

of its earlier efficiency, and it was generally felt that inexperienced

government auditors were making numerous errors, most of them in favor

of the Bureau. These errors frequently resulted in erroneous summary

assessments that had disastrous consequences for taxpayers.

201

There

resulted a succession of reviewing bodies that was ultimately to culminate in

establishment of the Board of Tax Appeals.

Because the excess profits tax, first imposed in 1917,

202

was probably the

most complex and troublesome of the new measures, it is not surprising

that the first such body was charged with resolving the knotty problems it

198

See supra note 104 and accompanying text.

199

See supra notes 108–111 and accompanying text.

200

See supra notes 121–122 and accompanying text; infra notes 203–205 and

accompanying text.

201

See Albert L. Hopkins, The United States Board of Tax Appeals, 12 A.B.A. J.

466, 466–67 (1926) [hereinafter cited as Hopkins].

202

Act of March 3, 1917, ch. 159, § 201, 39 Stat. 1000.

The Origins of the Tax Court 39

raised. The Excess Profits Tax Reviewers, established in 1918, was largely

dominated by the same men who had comprised the Excess Profits Tax

Advisers,

203

a group of distinguished lawyers, accountants, and

businessmen, appointed by the Secretary of the Treasury to assist the

Commissioner in drafting excess profits tax regulations. The chairman of

the Advisers was Dr. T. S. Adams. Other notable members were Arthur A.

Ballantine, who was later to become the Solicitor of the Internal Revenue

Service and Under Secretary of the Treasury, and J. E. Sterrett, a noted

accountant and later a member of the Tax Simplification Board.

204

The

Commissioner appeared well satisfied with the technique of public

participation in tax administration.

The appointment of the excess-profits tax advisers had the

immediate effect of inspiring confidence in the purpose of the

Department to administer the law with due regard for established

business practices and with proper consideration of the effect the

large rates of tax would have upon business activities. The tide of

general criticism that had arisen against the law was stemmed, and

the Bureau began to receive innumerable expressions of confidence

and offers of cooperation and assistance from accountants, lawyers,

bankers, and business men [sic] throughout the country.

205

The Excess Profits Tax Reviewers, successors to the Advisers, were

principally concerned with giving expeditious review to two types of

cases.

206

The first of these were cases arising under section 209 of the

Revenue Act of 1917, which provided a separate formulation of excess

profits tax liability in the case of a business that had “no invested capital or

not more than a nominal capital.”

207

Obviously, the proper application of

this statute to a particular taxpayer could be quite difficult, but because of

the importance of the question in the computation of tax liability, the

Commissioner felt it should be resolved in any case in which it was raised

before any assessment was made.

208

The second type of case concerning the Excess Profits Tax Reviewers

was even more difficult. Section 210 of the Revenue Act of 1917

209

authorized the Secretary of the Treasury to estimate a taxpayer’s invested

capital, when such capital could not otherwise satisfactorily be computed,

203

1918 COMM’R OF INT. REV. REP. 13.

204

George O. May, Accounting and the Accountant in the Administration of Income

Taxation, 47 C

OLUM. L. REV. 377, 380–81 (1947).

205

1918 COMM’R OF INT. REV. REP. 9

206

1918 COMM’R OF INT. REV. REP. 12–13

207

Ch. 63, 40 Stat. 307.

208

1918 COMM’R OF INT. REV. REP. 12.

209

Ch. 63, 40 Stat. 307.

40 The United States Tax Court – An Historical Analysis

on the basis of invested capital employed by other taxpayers “in a like or

similar trade or business.” As with the section 209 cases, the Commissioner

felt this to be a question of such basic importance that it had to be resolved

before any assessment could be made.

The Excess Profits Tax Reviewers held formal “hearings” in a “large

number” of these cases at which taxpayers were permitted to present their

views.

210

Presumably, the Commissioner acted in accordance with the

Reviewers recommendations.

The Commissioner never intended that the Reviewers would be a

permanent body. Rather, its purpose was to serve as a vehicle for providing

experience in these matters to the Bureau personnel assigned to work with

the Reviewers, with such personnel to be absorbed into other

administrative units within the Bureau organization.

211

The Excess Profits

Tax Reviewers apparently ceased functioning as a separate unit in 1919,

212

but it was replaced by a group with broader jurisdiction, the Advisory Tax

Board.

Section 1301(d) of the Revenue Act of 1918

213

provided for the creation

of the Board, composed of no more than six members appointed by the

Commissioner with the approval of the Secretary of the Treasury.

Membership was largely drawn from the Reviewers and included Dr.

Adams, Mr. Sterrett, Fred T. Field, a distinguished Boston lawyer later to

serve as Chief Justice of the Supreme Judicial Court of Massachusetts,

Stuart W. Cramer, a businessman and engineer, and Luther F. Speer,

formerly Deputy Commissioner of Internal Revenue.

214

The jurisdiction and function of the Advisory Tax Board was described

by statute as follows:

The Commissioner may, and on the request of any taxpayer directly

interested shall, submit to the Board any question relating to the

interpretation or administration of the income, war-profits or excess-

profits tax laws, and the Board shall report its findings and

recommendations to the Commissioner.

215

The Advisory Tax Board had a more formalized procedure than its

predecessors.

216

In order for a taxpayer to bring an appeal to the Board, he

must first have received a determination of the Income Tax Unit. The

210

1918 COMM’R OF INT. REV. REP. 13.

211

Id.

212

1919 COMM’R OF INT. REV. REP. 12–13.

213

Ch. 18, 40 Stat. 1141.

214

1919 COMM’R OF INT. REV. REP. 14.

215

Revenue Act of 1918, ch. 18, § 1301(d)(2), 40 Stat. 1141.

216

The rules of procedure before the Board were set forth in Treas. Reg. 45,

Arts. 1701–02.

The Origins of the Tax Court 41

request for Board review was required to be made within 30 days of

notification to the taxpayer of the decision of the Income Tax Unit.

Evidence could not be adduced before the Board that had not been

brought to the attention of the Income Tax Unit. Although Board

consideration of a question did not take the form of a judicial proceeding,

taxpayers were permitted, in the discretion of the Board, to orally argue

their cases.

The Board was given a statutory life of two years, but the Commissioner

was authorized to dissolve it earlier with the approval of the Secretary. The

Commissioner exercised this authority on October 1, 1919, some six

months after the Board was organized.

217

In the words of the

Commissioner, it had become “necessary for the members of the Board to

return to their own personal affairs, from which they had only temporarily

separated themselves.”

218

Publicly, the Commissioner praised the Board:

The members of the Board have rendered, through a period of heavy

administrative pressure and strain, assistance of great value. Their

constant endeavor has been to assist in the upbuilding within the

Bureau of regular units designed to render permanently the special

service which they have provided in a period of emergency.

219

However, in view of the sudden termination of the Advisory Tax Board,

it would seem that the Commissioner regarded the body with somewhat

less affection than he professed. This may well have been due to its quasi-

independent nature. Its successor, the Committee on Appeals and Review,

was purely a Bureau creation and was fully staffed by Bureau personnel.

Due to its brief tenure, the Board did not have an important quantitative

impact on the adjudication of tax controversies. It heard only 54 cases

brought before it by taxpayer request. Additionally, it considered 75

questions submitted by the Commissioner and examined 112 legal opinions

of the Solicitor of Internal Revenue, the latter being an officer of the Justice

Department who acted as legal adviser to the Commissioner.

220

Nevertheless, the Advisory Tax Board did play a significant role in the

development of the adjudication of tax controversies. It was the first body

of statutory origin to have as its principal function the review of

determinations made by the regular Bureau organization. It was staffed by

217

The Revenue Act of 1918 was not enacted until February 24, 1919, and the

Board was organized on March 13, 1919. Brewster, supra note 119, at 325–26.

218

1919 COMM’R OF INT. REV. REP. 13–14.

219

Id. at 13.

220

Id. The office of Solicitor of Internal Revenue was abolished by the

Revenue Act of 1926. Revenue Act of 1926, ch. 27, § 1201(a), 44 Stat. 126. The

duties of that office were thereafter reposed in the Treasury Department in a newly

created office, General Counsel for the Bureau of Internal Revenue.

42 The United States Tax Court – An Historical Analysis

persons of considerable expertise and assured the opportunity for a hearing

to any taxpayer meeting the requirements of its procedural rules.

Simultaneously with the discontinuance of the Advisory Tax Board, the

Commissioner created the Committee on Appeals and Review to carry on

the work of the Board.

221

During the entire period of its existence, the

Committee on Appeals and Review was a part of the Bureau of Internal

Revenue. Although it was separate from the Income Tax Unit, which had

general charge of administering the income and profit taxes, it was staffed

by former members of the Unit who were either lawyers, accountants, or

engineers.

222

The Committee was directly responsible to the Commissioner

and could act only in an advisory capacity. Thus, the Commissioner was

theoretically free to disregard Committee recommendations.

223

Although a matter was usually considered by a single member initially,

the Committee functioned as a collegial body, and before any

recommendation was made to the Commissioner, several members of the

Committee would meet to approve the recommendation.

224

In the early

years, the full Committee would meet to approve each recommendation of

a member.

225

Later, when the number of members increased and the

Committee was divided into subcommittees, each subcommittee would

meet to approve recommendations of subcommittee members; thereupon

the recommendation would be forwarded to the chairman of the full

committee for his review.

226

These procedures were an important feature

of Committee operations and were apparently felt to be necessary to assure

uniformity in Committee recommendations. They were later to be carried

forward by the Board of Tax Appeals.

227

Aside from its creation, the most important single event in the life of the

Committee was the enactment of section 250(d) of the Revenue Act of

1921.

228

As previously described, Congress had become dissatisfied with

the power of the Bureau to summarily assess additional taxes without giving

the taxpayer either notice of, or the opportunity for a hearing with respect

to, the assessment.

229

Once notice of the assessment was given to the

taxpayer he was required to either promptly pay the tax or file a claim in

221

1920 COMM’R OF INT. REV. REP. 14–15.

222

Brewster, supra note 119, at 327.

223

But see infra notes 249–253 and accompanying text.

224

A. E. Graupner, The Operation of the Board of Tax Appeals, 3 NAT’L INC. TAX

AG. 295 (1925) [hereinafter cited as Graupner]; Clarence A. Miller, The United

States Board of Tax Appeals: Its Jurisdiction and Practice, 11 A.B.A. J. 169 (1925)

[hereinafter cited as Miller].

225

1922 COMM’R OF INT. REV. REP. 15.

226

Brewster, supra note 119, at 330.

227

See Part II.

228

Ch. 136, 42 Stat. 265.

229

See supra notes 104–114 and accompanying text.

The Origins of the Tax Court 43

abatement secured by a bond. Section 250(d) of the 1921 Act radically

revised this procedure by providing:

If upon examination of a return made under the Revenue Act of

1916, the Revenue Act of 1917, the Revenue Act of 1918, or this

Act, a tax or a deficiency in tax is discovered, the taxpayer shall be

notified thereof and given a period of not less than thirty days after

such notice is sent by registered mail in which to file an appeal and

show cause or reason why the tax or deficiency should not be paid.

Opportunity for hearing shall be granted and a final decision thereon

shall be made as quickly as practicable. Any tax or deficiency in tax

then determined to be due shall be assessed and paid, together with

the penalty and interest, if any, applicable thereto, within ten days

after notice and demand by the collector as hereinafter provided, and

in such cases no claim in abatement of the amount so assessed shall

be entertained: Provided, that in cases where the Commissioner

believes that the collection of the amount due will be jeopardized by

such delay he may make the assessment without giving such notice

or awaiting the conclusion of such hearing.

The Committee was the body chosen to afford the review required by

the 1921 Act, and its workload changed dramatically. In fiscal year 1922,

the Committee received 1,148 appeals from taxpayers.

230

This was an

increase from 971 and 434 appeals received in the two preceding years.

231

In 1923, 3,889 appeals were received,

232

and in 1924 there was a further

increase to 4,879.

233

As a result of these events, several important changes were made in the

Committee. Of major importance was the increase in the size of the

Committee. For its first two years of existence it was composed of five

members.

234

In 1922 its membership was increased to ten, and in 1923

there was a further increase to 20.

235

During the latter part of its operation

the Committee was divided into six subcommittees of three members each,

comprised of a lawyer, an accountant, and an engineer.

236

There were other important changes in the operation of the Committee.

Throughout its existence the Committee had two functions that had carried

over from the Advisory Tax Board: (1) to hear appeals initiated by

taxpayers; and (2) to serve in an advisory capacity to the Commissioner with

230

1922 COMM’R OF INT. REV. REP. 15.

231

1921 COMM’R OF INT. REV. REP. 15; 1920 COMM’R OF INT. REV. REP. 15.

232

1923 COMM’R OF INT. REV. REP. 8.

233

1924 COMM’R OF INT. REV. REP. 10.

234

1920 COMM’R OF INT. REV. REP. 15; 1921 COMM’R OF INT. REV. REP. 14.

235

1922 COMM’R OF INT. REV. REP. 15; 1923 COMM’R OF INT. REV. REP. 9.

236

Brewster, supra note 119, at 327.

44 The United States Tax Court – An Historical Analysis

respect to the preparation of Treasury decisions, regulations, and rulings.

In its early years, the Committee’s non-appeal function was significant; it

reviewed many administrative rulings for the Commissioner and

additionally served in an advisory capacity to other Bureau personnel. A

significant amount of its time was taken up by consideration of questions

arising during the pendency of audits by the Income Tax Unit. After

enactment of the Revenue Act of 1921, however, the overwhelming portion

of the Committee’s work soon became the consideration of section 250(d)

cases.

237

The duties of the Committee became “more closely confined

to . . . [those] of a purely appellate body.”

238

The increasing workload was

also reflected in an increase in the number of smaller cases brought before

the Committee. This increase led to the creation in 1923 of the Special

Committee on Appeals and Review, which only considered cases involving

deficiencies of less than $2,500.

239

This Special Committee, consisting of

only four members, disposed of 3,058 cases in its first and only year of

operation.

240

Another form of specialization had started in the previous

year with the establishment of the Committee on Review and Appeals,

which reviewed estate tax cases.

241

Until 1923, hearings before the Committee could be held only in

Washington, D.C. The increased number of section 250(d) cases, and

especially the presence of a large number of cases involving relatively small

deficiencies, induced the Committee to dispatch subcommittees to hear

cases involving taxpayers located west of the Mississippi. In 1923 and 1924,

these subcommittees heard more than 500 cases in Kansas City, Los

Angeles, Portland, St. Paul, and San Francisco.

242

As with the practice of

collegially deciding cases, this circuit riding aspect of the Committee was to

be carried forward as an important and distinctive characteristic of the

Board of Tax Appeals.

243

In its later years, the Commissioner referred to the Committee as a

“quasi-judicial body of appellate jurisdiction.”

244

Emphasis must be placed

on the word “appellate” because unlike the Board of Tax Appeals, the

Committee was not a fact finder. The taxpayer generally was permitted to

introduce evidence to the Committee only in affidavit or documentary form

and could not adduce evidence that had not been considered by the Income

237

Compare 1922 COMM’R OF INT. REV. REP. 15, with 1923 COMM’R OF INT.

REV. REP. 8–9.

238

1923 COMM’R OF INT. REV. REP. 8; See also A.R.M. 219, III-1 CUM. BULL.

319(1924).

239

1924 COMM’R OF INT. REV. REP. 11.

240

Id.; Brewster, supra note 119, at 327.

241

1923 COMM’R OF INT. REV. REP. 11–12.

242

1923 COMM’R OF INT. REV. REP. 9; 1924 COMM’R OF INT. REV. REP. 11–12.

243

See Part II.

244

1923 COMM’R OF INT. REV. REP. 8.

The Origins of the Tax Court 45

Tax Unit.

245

The Committee could in its discretion accept new evidence,

but if it did so, it was free to resubmit the case to the Unit.

246

Throughout its history, the Committee operated under general rules of

procedure and afforded taxpayers the opportunity for an oral hearing.

247

no oral hearing was desired, the matter could be submitted on the written

record alone. Briefs on behalf of the taxpayer could also be submitted in

addition to oral argument.

248

Until 1924, the rules applicable to committee

practice provided that if the case involved a question of law, the Solicitor of

Internal Revenue was to designate two members of his office to “sit with

the Committee . . . for the purpose of hearing the appeal.”

249

The

Solicitor’s Office could then “if the Solicitor so desires” make a

“recommendation” to the Committee “in the form of an opinion or

memorandum.”

250

However, it was not contemplated that the proceeding

was to be an adversary one between the Solicitor and the taxpayer, with the

Committee sitting as the impartial arbiter. This impression is confirmed by

the fact that until 1924 the Solicitor of Internal Revenue reviewed

Committee decisions on behalf of the Commissioner and readily exercised

authority to amend or reverse them.

251

In 1924, this practice was

discontinued, and the determination of the Committee with respect to an

appeal became the final determination of the Bureau and could only be

reopened as a result of a subsequent change in law or regulations.

252

Significantly, once this change in practice was effected, the rules no longer

called for the Solicitor’s representatives to “sit” with the Committee.

253

a result of its nonadversarial and informal nature, Committee proceedings

frequently became negotiating sessions; in these cases, Committee

recommendations were no more than settlements of disputed issues rather

than judicial determinations of legal questions.

254

245

A.R.M. 219, III-1 CUM. BULL. 319, 319–120 (1924).

246

Id.

247

Requirements for perfecting and prosecuting an appeal to the Committee

were published. E.g., T.D. 3492, II-1 C

UM. BULL. 170 (1923); O.D. 709, 3 CUM.

BULL. 370 (1920); A.R.M. 219, III-1 CUM. BULL. 319 (1924).

248

A.R.M. 219, III-1 CUM. BULL. 319 (1924); O.D. 709, 3 CUM. BULL. 370

(1920).

249

O.D. 709, 3 CUM. BULL. 370 (1920).

250

Id.

251

REPORT OF TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 2

(1923).

252

A.R.M. 219, III-1 CUM. BULL. 319, 320 (1924); T.D. 3492, II-1 CUM. BULL.

170, 171 (1923).

253

Id.

254

Graupner, supra note 224, at 295; Miller, supra note 224, at 169.

46 The United States Tax Court – An Historical Analysis

With the creation of the Board of Tax Appeals, section 250(d) of the

Revenue Act of 1921 was repealed

255

and the Committee on Appeals and

Review was abolished.

256

New provision was made for prosecuting an

appeal within the Bureau prior to the issuance of a deficiency notice, which

was a condition precedent to petitioning the Board of Tax Appeals.

257

The

Committee had, however, left its mark. In many respects the Board of Tax

Appeals was a continuation of the Committee. Moreover, several former

members of the Committee were to join the Board. In fact, the first

Chairman of the Board, Charles D. Hamel, had come to that office directly

from the chairmanship of the Committee on Appeals and Review.

Pressures for the replacement of the Committee with the Board were

largely the result of two factors. First and most importantly, the Committee

was not independent of the Bureau of Internal Revenue. The Tax

Simplification Board, created by the Revenue Act of 1921

258

to investigate

the administration of the internal revenue laws, made a detailed study of the

Committee and identified lack of independence as its principal weakness.

In discussing its recommendation to discontinue the Solicitor’s power to

countermand determinations of the Committee, the Board stated:

This recommendation and the investigation which preceded it and

the discussion which followed it convinced practically everyone who

participated in the discussions that it would never be possible to give

to the taxpayer the fair and independent review to which he is of

right entitled as long as the appellate tribunal is directly under, and its

recommendations subject to the approval of, the officer whose duty

it is to administer the law and collect the tax. As long as the

appellate tribunal is part and parcel of the collecting machinery it can

hardly maintain the attitude essential to a judicial tribunal. It is the

situation which was developed in this way that leads our Board to

make the recommendation relative to the establishment of a board of

tax appeals hereinafter set forth.

259

The difficulty was heightened by the fact that three separate

administrative bodies were formulating tax rulings—the Income Tax Unit,

the Solicitor of Internal Revenue, and the Committee on Appeals and

Review. In many cases, the rulings were unpublished; they were also

frequently inconsistent. Yet Bureau reviewing agencies felt compelled to

follow earlier rulings, regardless of their merits, when they favored the

255

Revenue Act of 1924, ch. 234, § 1100(a), 43 Stat. 352.

256

1924 COMM’R OF INT. REV. REP. 12.

257

T.D. 3616, III-2 CUM. BULL. 275 (1924).

258

Ch. 136, § 1327, 42 Stat. 317.

259

REPORT OF TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 4

(1923).

The Origins of the Tax Court 47

Government. To be effective as a creator of precedent for the guidance of

the Bureau and taxpayers, many felt that the expert reviewing body had to

be independent of the Bureau and free to disregard earlier administrative

rulings.

260

It was also observed that regardless of their good faith, the members of

the Committee on Appeals and Review could hardly ignore the fact that a

determination by them in favor of the taxpayer precluded further review of

the question of tax liability. The Bureau would not and could not seek to

challenge its own determination before an independent judicial body. On

the other hand, a determination in favor of the Bureau did not foreclose a

taxpayer from pursuing his judicial remedies. For this reason, doubtful

questions were believed to be regularly disposed of by the Committee in

favor of the bureau, even though at least some statistical data supported the

conclusion that the Committee favored taxpayers more frequently than

not.

261

The second criticism of the Committee which had an important impact

on the legislation creating the Board of Tax Appeals dealt with the nature of

the proceedings. They were not adversarial, they were not public, they did

not permit the introduction of new evidence, and they were not conducted

pursuant to traditional judicial standards of practice and procedure. During

this period, many people were highly suspicious of large refunds of tax

made by the Bureau that had come to public attention.

262

Although these

suspicions may have largely been the result of political opportunism, it was

nonetheless true that the informal and secret nature of the Committee

permitted them to flourish in the first place. The Bureau was on the horns

of a dilemma. On the one hand, it was excoriated for “negotiating” tax

liability and not applying the letter of the law equally to everyone.

263

On the

other hand, the Bureau was criticized for insisting on absolute correctness

in every assessment—a practice that some felt to be the fundamental curse

of the administrative quagmire of the World War I period.

264

The creation

of the Board represented a victory for those forces of righteousness

demanding absolute precision and equal applicability of the law without fear

or favor. However, the controversy did not terminate in 1924, and the

260

See Hopkins, supra note 201, at 467.

261

R. MONTGOMERY, EXCESS PROFITS TAX PROCEDURE 12–13 (1921); see also

H.R. R

EP. NO. 68-179, at 7–8 (1924); S. REP. NO. 68-398, at 8–9 (1924); Miller,

supra note 224.

262

See, e.g., Sully, Those Refunded Millions, SATURDAY EVENING POST, June 21,

1924, at 36, 156.

263

S. REP. NO. 69-27, at 8 (1926) (Report of the Senate Select Committee on

Investigation of the Bureau of Internal Revenue); see also Graupner, supra note 224,

whereas it was charged that this procedure resulted in undue delays.

264

See TREASURY DEP’T SURVEY, supra note 66, at 4–5.

48 The United States Tax Court – An Historical Analysis

Administration, which favored some flexibility in the administration of the

law, was to reassert this position in the future.

265

Id.; see also statement of President Coolidge in signing the Revenue Act of

1924, quoted at Part II, note 97; Hearings on Revenue Revision, 1925, Before the Ways

and Means Committee, 69th Cong., 1st Sess. 932–33 (1925) (testimony of A.W. Gregg,

Solicitor of the Bur. of Int. Rev.).

Creation of the Board of Tax Appeals 49

PART II

CREATION OF THE BOARD OF TAX APPEALS:

THE REVENUE ACT OF 1924

A. The Revenue Act of 1924

In March 1923, William Green of Iowa, Chairman of the Ways and

Means Committee, requested that Secretary of the Treasury Andrew Mellon

appoint an ad hoc committee to study revision of the Revenue Act of

1921.

Thus were initiated the steps that led to enactment of the Revenue

Act of 1924,

legislation that was to be the most sophisticated tax measure

theretofore adopted. The committee was specifically directed to prepare

recommendations to remove “inequities” in the existing tax law, to close

“loopholes” that permitted evasion and fraud, and to “simplify” tax

administration. In compliance with the request, the Secretary appointed a

committee composed of A.W. Gregg, a precocious tax wizard of 24 who

was the Special Assistant to the Secretary, had formerly been Chairman of

the Special Committee on Appeals and Review, and was later to become

Solicitor and General Counsel to the Commissioner; William S. Moorehead,

a Pittsburgh attorney then serving as Chairman of the Tax Simplification

Board; and J.G. Bright, Deputy Commissioner of Internal Revenue in

charge of the Income Tax Unit. The committee was assisted in its task by

the units of Treasury and the Bureau that were concerned with tax matters.

Working with the committee on behalf of Congress were Middleton

Beaman and Fredrick P. Lee, directors of the Legislative Drafting Services

in the House and Senate.

The committee regularly consulted Secretary

Mellon and Under Secretary of the Treasury Garrard B. Winston; final

responsibility for the draft was, of course, with the Secretary.

By the fall of 1923, the ad hoc committee had completed most of its

task and on November 10, 1923, Secretary Mellon sent a letter to Chairman

For a discussion of this revision effort, see Hearings on H.R. 6715, Before the

Comm. on Finance, 68th Cong., 1st Sess. 1–8 (1924) [hereinafter cited as 1924 Senate

Hearings].

Ch. 234, 43 Stat. 253.

The Legislative Drafting Service had been created in 1918. Revenue Act of

1918, ch. 18, § 1303, 40 Stat. 1141. In the Revenue Act of 1924, its name was

changed to the Office of the Legislative Counsel. Ch. 234, § 1101, 43 Stat. 353.

Garrard Winston, Changes Made by the Revenue Act of 1924, PROCEEDINGS OF

THE SEVENTEENTH ANNUAL CONFERENCE ON TAXATION OF THE NATIONAL

TAX ASSOCIATION 265 (1924) [hereinafter cited as Winston].

50 The United States Tax Court – An Historical Analysis

Green outlining a comprehensive tax program.

Subsequently, on

December 17, 1923, Secretary Mellon sent Chairman Green draft legislation

of the Treasury proposals, which the Ways and Means Committee

immediately began to consider.

Some six months later, the Revenue Act of

1924 became law. The provisions of the Act that ultimately emerged from

the Mellon proposals were described as divisible into three parts: (1)

political; (2) structural; and (3) administrative.

The political aspects of the legislation included the rates of income and

estate taxes, the imposition of the gift tax, and the publicity of tax returns.

Naturally it was these provisions, and especially the question of income tax

rates, that attracted the most attention.

President Coolidge and Secretary Mellon believed the 1921 Act rates

were excessive. In their view, high tax rates destroyed initiative, encouraged

tax evasion and avoidance, and reduced the flow of capital into

economically productive activities. The effect of such taxation was to

encourage investment in the tax exempt securities of state and local

governments, which the President and the Secretary regarded as

nonproductive. They were alarmed that a continuation of this trend would

not only reduce tax revenues, but would also have catastrophic

consequences for the economy. The key element of the “Mellon plan,” as

the Treasury proposal came to be known, was the substantial reduction of

income taxes paid by individuals—a 25% reduction in the normal tax and a

50% reduction in the surtax. Under the 1921 Act, the maximum individual

tax rate was 58% on incomes in excess of $200,000;

under the Mellon plan,

the maximum rate would have been reduced to 31% on incomes in excess

of $100,000. Additionally, the Mellon plan increased the level at which the

surtax became effective from $6,000 to $10,000, and provided an “earned

income” credit equal to 25% of the tax attributable to such income.

Even though tax reduction was politically popular in some quarters, the

Mellon plan aroused considerable opposition from liberals who viewed the

proposal as class legislation in favor of the rich. Neither side had the power

to completely work its will, and compromise was inevitable. The earned

income credit and the normal tax reduction were enacted substantially as

Filed at the U.S. Tax Court in “Revenue Act of 1924: Memoranda and

Correspondence.”

A copy of the covering letter is filed at the U.S. Tax Court in “Revenue Act of

1924: Memoranda and Correspondence” [hereinafter cited as Mellon Letter]. The

December 17, draft legislation was printed for the Ways and Means Committee on

December 28, 1923, and designated as Committee Print No. 1 [hereinafter cited as

1924 Administration Bill].

Winston, supra note 4.

Id. at 266.

Revenue Act of 1921, ch. 136, §§ 210–211, 42 Stat. 233.

Creation of the Board of Tax Appeals 51

proposed by the Secretary,

but the surtax was cut by 20% instead of

50%,

and the maximum tax rate came to 46% instead of the 31%

proposed by Mellon.

Additional setbacks were suffered by the Administration in the area of

estate and gift taxes. Mellon regarded these taxes as enemies of prosperity

because they directly reduced capital; he therefore opposed any increase in

the estate tax, originally enacted in 1916, and also opposed adoption of a

gift tax. However, he failed to achieve his goal, and the Act not only

included a gift tax

but also increased the estate tax by 60% at each tax

bracket.

Finally, over strenuous Treasury opposition, the Revenue Act of 1924

required the Commissioner to publish lists of each person filing an income

tax return and the amount of tax paid.

Additionally, congressional

committees, state officials, and, upon order of the President, the public

were given access to the returns themselves.

As will be seen below, the

same impulses that led to the elimination of tax return confidentiality were

also to play an important part in molding the procedural rules that would

govern the Board of Tax Appeals.

It is interesting in connection with these publicity provisions to consider

the curious reversal of ideological roles that occurred over the years. By the

latter half of the twentieth century, the cause of confidentiality of tax

information had been identified with the liberal position supporting strict

respect for Fourth and Fifth Amendment rights. Those urging broader

dissemination of tax information had been regarded as conservative in

preferring the interest of efficient criminal investigation.

In 1924,

Revenue Act of 1924, ch. 234, § 209, 43 Stat. 263 (earned income credit).

Mellon recommended a normal tax of 3% of the first $4,000 of net income, and

6% of net income above $4,000. As enacted the normal tax was 2% on the first

$4,000 of income, 4% on the next $4,000, and 6% on net income in excess of

$8,000. Id. § 210(a), 43 Stat. 264.

Id. § 211(a), 43 Stat. 265.

Id. §§ 319–324, 43 Stat. 313.

Compare Revenue Act of 1921, ch. 136, § 401, 42 Stat. 277 (25% of net estate

in excess of $10 million), with Revenue Act of 1924, ch. 234, § 301(a), 43 Stat. 303

(40% of net estate in excess of $10 million). For a thorough account of the

circumstances leading to the publicity provisions included in the 1924 Act, see

George K. Yin, James Couzens, Andrew Mellon, the “Greatest Tax Suit in the History of the

World,” and Creation of the Joint Committee on Taxation and Its Staff, 66 T

AX L. REV. 787

(2013).

Revenue Act of 1924, ch. 234, § 257(b), 43 Stat. 253.

Id. § 257(a), 43 Stat. 293.

For discussion of the issue of return confidentiality, see STAFF OF THE JOINT

COMM. ON TAX’N, STUDY OF PRESENT-LAW TAXPAYER CONFIDENTIALITY AND

DISCLOSURE PROVISIONS AS REQUIRED BY SECTION 3802 OF THE INTERNAL

52 The United States Tax Court – An Historical Analysis

however, the positions of those then identified as liberals and conservatives

were reversed. The liberals, led by Senator George Norris, were suspicious

that some wealthier members of society were not paying their fair share of

taxes, either because of loopholes in the law or because of chicanery by

Administration officials.

The activity of the Couzens committee, which

was commissioned to investigate the Bureau of Internal Revenue during

this period, was a pointed illustration of the liberals’ concern.

Disclosure

of who was paying how much tax would give them an opportunity to

validate their suspicions. On the other hand, the conservatives of the

Coolidge administration opposed publicity of tax information on the

ground that it would encourage tax evasion; taxpayers who might otherwise

be willing to pay their taxes would be reluctant to do so if as a consequence

they were required to open their private financial affairs to public scrutiny.

The “structural changes” effected by the 1924 Act were largely

noncontroversial and were adopted substantially as proposed by Mellon.

The more important of these changes were a limitation on the reduction of

tax as a result of capital losses to 12%—the maximum rate of tax for capital

gains;

a disallowance of interest and net loss deductions to the extent

attributable to tax exempt interest income;

and a substantial revision of

the corporate reorganization provisions.

The Treasury proposal also suggested numerous administrative changes,

such as a revision of the statute of limitation provisions, a requirement that

tax exempt income be reported for statistical purposes, and a clarification of

the situations in which consolidated returns were authorized.

Most of

these were adopted as proposed; however, one administrative proposal, the

creation of a board of tax appeals, aroused considerable controversy.

REVENUE SERVICE RESTRUCTURING AND RELIEF ACT OF 1998, JCS-1-00 (Comm.

Print 2000) (two volumes); Hearings on Tax Reform Before the Ways and Means Comm.,

94th Cong., 1st Sess. 699–716 (1975) (testimony and statement of Professor Meade

Emory).

See 65 CONG. REC. 1207–09 (1924).

See Part I, notes 128–129 and accompanying text; S. REP. NO. 69-27 (1926)

(report of the Couzens committee). For the riveting backstory of the events

leading to the formation of the Couzens committee, see Yin, supra note 13.

See Winston, supra note 4, at 266.

Revenue Act of 1924, §§ 208(b), (c), 43 Stat. 263.

Id. §§ 206(a)(5), 214(a)(2), 234(a)(2), 43 Stat. 260, 270, 283.

Id. § 203, 43 Stat. 256.

Winston, supra note 4, at 270–71.

See 1924 Senate Hearings, supra note 1, at 1.

Creation of the Board of Tax Appeals 53

B. The Administration Proposal for a Board of Tax Appeals

In his December 17, 1923 letter to Chairman Green, Secretary Mellon

described the proposal for creation of the Board of Tax Appeals as follows:

A board of tax appeals is created to hear all appeals from the

assessment of additional income and estate taxes, which will sit

locally in the various judicial circuits throughout the country. The

cases of both the Government and the taxpayer are presented before

the board which acts impartially and the practice there is similar to

that before the Interstate Commerce Commission. Upon a decision

in favor of the Government, the additional tax can be assessed by

the Commissioner of Internal Revenue and the taxpayer is left to his

remedy in the courts for a recovery of the tax. If the decision is in

favor of the taxpayer, the Commissioner may not assess the tax but

is left to his remedy in the courts in a suit to collect the additional

tax. In a hearing in the courts, the findings of the board shall be

taken as prima facie evidence of the facts contained therein.

Creation of a board of tax appeals had been advocated before the 1923

Treasury proposal. As early as 1920, the American Mining Congress had

proposed creation of such a body.

The United States Chamber of

Commerce also had been an early advocate of a body independent of

Treasury to adjudicate tax controversies.

In 1922, Senator Atlee

Pomerene introduced a bill to create a “United States Court of Appeals on

internal revenue questions.” It was Senator Pomerene’s hope that such a

court would assure taxpayers that they were getting a “square deal” and

would also serve to terminate the secrecy cloaking Bureau rulings and

procedures.

Perhaps the most influential recommendation came from the Tax

Simplification Board, which had been created by the Revenue Act of 1921

to investigate the administration of the internal revenue laws.

The Board

was composed of three members representing the public who were

appointed by the President, and three members representing the Bureau

who were selected from the Bureau by the Secretary of the Treasury.

Mellon Letter, supra note 6, at 3.

See Hearings on Revenue Revision, 1924, Before the House Comm. on Ways and Means,

68th Cong., 1st Sess. 436–37 (1924) [hereinafter cited as 1924 House Hearings].

Id. at 459.

62 CONG. REC. 8913–14 (1922).

Ch. 136, § 1327, 42 Stat. 317.

Id. § 1327(a).

54 The United States Tax Court – An Historical Analysis

Many of the Board’s suggestions were adopted by the Bureau.

Among its

most important recommendations were those designed to improve the

operation of the Committee on Appeals and Review.

However, the Tax

Simplification Board was convinced that there were definite limits on the

possible improvements that could be made in the operation of the

Committee. Because the Committee was a part of the Bureau of Internal

Revenue, it could never function as a truly judicial body and could not

provide a completely adequate solution to the problem of pre-assessment

review.

Accordingly, the final report of the Tax Simplification Board

contained a fairly detailed proposal for the creation of the Board of Tax

Appeals.

It was not surprising that the recommendation contained in the

These reforms included various improvements in the operation of the

Committee on Appeals and Review, limitations on reopening closed cases,

requiring information returns with respect to dividends, and improving tax forms.

EPORT OF THE TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 2–6

(1923).

For example, as a result of a Tax Simplification Board suggestion, the

Solicitor of Internal Revenue ceased to have review powers over Committee on

Appeals and Review recommendations. Id. at 3–4.

See Part I, note 259 and accompanying text.

The proposal read as follows:

In the foregoing portion of our report dealing with the recommendations

made touching the procedure of the committee on appeals and review, we

adverted to the anomaly of providing for an appeal by a taxpayer from an

additional assessment of taxes proposed to be made by the Commissioner

of Internal Revenue and prescribing that this appeal be taken to the officer

who had announced his intention of making the additional assessment. The

function of the Commissioner of Internal Revenue is to assess and collect

the taxes. This function is administrative and not judicial. The appeal given

to the taxpayer from the action or proposed action of the commissioner

should be to a judicial body independent of the commissioner. It should be

borne in mind that this appeal by the taxpayer must be heard and decided

before the additional tax is collected. It is, therefore, important that the

appellate tribunal be so constituted that its decisions may be made

expeditiously and its work kept approximately current with the appeals

which are taken to it. If this were not so, the collection of the public

revenue would be seriously impeded. It is, therefore, essential that the

number of persons on the board of tax appeals may be increased or

decreased according to the influx of work. To insure the proper

functioning of the board so as not to impede the collection of revenue, it

would seem advisable that the appointments to the board be made by the

Secretary of the Treasury. Adequate salaries should be provided to secure

the services of able men, for the questions that will come before them will

be difficult and will involve large sums. In establishing such an appellate

body, the following essentials should be borne in mind:

Creation of the Board of Tax Appeals 55

Mellon plan bore a striking similarity to this proposal, since William S.

Moorehead, Chairman of the Tax Simplification Board, and J.G. Bright, a

representative of the Bureau on the Board, were both members of the ad

hoc committee established by Secretary Mellon to draft the Revenue Act of

1924.

Under the Administration proposal, the Board of Tax Appeals was to be

established within the Treasury Department, but separate from the Bureau

of Internal Revenue.

The Secretary of the Treasury was given authority to

appoint as many members, numbering between seven and 28, as he deemed

necessary.

From these members, the Secretary would designate a

chairman.

Also reserved to the Secretary of the Treasury was the power

to approve the selection of the Board divisions and chiefs thereof,

and the

power to approve procedural rules adopted by the Board.

The members were to be appointed for terms of ten years except that to

secure rotation in office, the Secretary could designate original

appointments for terms of two, four, six, or eight years.

The members

were to be compensated at $10,000 per year,

a rather large sum that

(a) The board’s decision should be independent and not subject to review

by the Commissioner of Internal Revenue;

(b) Its proceedings should be informal;

order to dispose of the work;

(d) The members should be appointed by the Secretary of the Treasury.

If a taxpayer is dissatisfied with the decision of the board of tax appeals

he should be required to pay his tax, but should still have the opportunity of

bringing a suit in court to recover back the amount paid. If the

Government is dissatisfied with the decisions of the board, it should be

permitted to bring suit in court to collect the asserted tax liability, but

should not be permitted summarily to assess and collect the tax.

It is the belief of our board that if such a tribunal were established

taxpayers would feel that they would receive a fair and impartial hearing

before being required to pay any additional tax assessments. We believe

that the law creating the board should be so drafted as to permit the

members to function in groups in various parts of the United States.

EPORT OF THE TAX SIMPLIFICATION BOARD, H.R. DOC. NO. 68-103, at 10–11

(1923).

1924 Administration Bill, supra note 6, § 1000(a).

Id.

Id. § l000(b).

Id. § 1000(e).

Id. § 1000(a).

Id.

56 The United States Tax Court – An Historical Analysis

compared favorably to the $8,000 salary of court of appeals judges and the

$7,500 salary of district court judges and congressmen.

Under the Administration bill, the jurisdiction of the Board was to be

limited to cases in which a deficiency had been declared in income, profits,

or estate taxes.

Within 30 days after the Commissioner sent notification

of a deficiency by registered mail, the taxpayer could petition the Board for

a redetermination of the deficiency.

The Board also was to have

jurisdiction over cases involving jeopardy assessments in which claims in

abatement had been filed.

The Board was to have no jurisdiction over

refund cases.

Decisions of the Board were not to be final determinations as to tax

liability. A decision in favor of the taxpayer would preclude the

Government from summary assessment procedures, but within one year

the Government could institute a court proceeding to collect any additional

tax it believed was due.

Conversely, a decision by the Board in favor of

the Government would permit the immediate assessment and collection of

the tax, but the taxpayer could, after paying the tax, file a claim for refund,

and if it was disallowed, institute a refund action in either district court or

the Court of Claims.

In any further judicial proceedings, the factual

findings of the Board were to be accepted as prima facie evidence.

Board proceedings under the Administration bill were to be informal

with decisions “made as quickly as practicable.”

No provision was made

for trial by jury; fact finding was to be solely by members of the Board.

Written findings of fact were to be made in each case, but no written

opinions were required unless otherwise ordered by the Chairman.

The

Chairman, with the approval of the Secretary, was authorized to appoint

three-member divisions and chiefs thereof to hear cases.

Decisions by

such divisions would be final unless within 30 days the Chairman directed

full Board review.

The headquarters of the Board was to be in

See 65 CONG. REC. 3283, 7694 (1924).

1924 Administration Bill, supra note 6, § 1000(c).

Id. § 274(a).

Id. §§ 279, 312, 1000(c).

Id. § 274(b).

The 1924 Administration Bill, supra note 6, did not contain a specific

provision authorizing a refund suit following an unfavorable Board determination.

However, it was clearly the intent of the Administration that such a remedy be

available. Mellon Letter, supra note 6, at 3.

1924 Administration Bill, supra note 6, § l000(d).

Id. § 1000(e).

Id.

Id. § 1000(b).

Id.

Creation of the Board of Tax Appeals 57

Washington, but the Board or its divisions could sit throughout the United

States at the direction of the Chairman.

The Administration proposal was not revolutionary; rather in most

respects it was simply a codification of the then existing Committee on

Appeals and Review. Both supporters and critics of the proposal

recognized this fact.

The two most important changes were that the body

was to be removed from Commissioner supervision to Secretary of the

Treasury supervision, and that the members were to receive a substantial

increase in salary. Congressional consideration of the proposal, however,

led to more fundamental changes.

C. Controversy and Modifications

Secretary Mellon was probably surprised by the controversy surrounding

his proposal for the Board of Tax Appeals; later, he was to be displeased by

the Board as it finally emerged from Congress. Two central characteristics

of the proposal proved ultimately to be unacceptable to a majority of

Congress. These were the degree of control to be exercised by the

Secretary over the Board, and the informality of Board procedures. The

debate stirred by these two features will be discussed in detail in the

following pages. Additionally, other aspects of the Administration proposal,

although not as fundamental as independence and informality, also proved

to be controversial and of continuing importance. They are also hereafter

discussed.

Id. § 1000(e).

The following excerpts from the Congressional Record reflect this

understanding:

As originally drawn in the Treasury Department, it was merely, in my

opinion, an increase in salaries of those who make up the present

arrangement. . . .

65 C

ONG. REC. 3283 (1924) (remarks of Mr. Garner).

The reason why this board is being appointed is because we are unable to

keep the proper class of men in the departments at this time on the salaries

that are paid down there.

Id. at 3282 (remarks of Mr. Green, Chairman, House Comm. on Ways and Means).

Now, you are not by this bill creating a new board, as someone said. We

have appeal boards down at the Treasury now. What we are proposing is to

make a better board, make better procedure, protect the taxpayer, and give

him a chance to have his rights passed upon inexpensively, quickly and

properly.

Id. at 3284 (remarks of Mr. Young).

58 The United States Tax Court – An Historical Analysis

1. Independence

Under the Administration proposal, the Board of Tax Appeals was to be

“established within the Department of the Treasury.” The Secretary of the

Treasury would determine the number of members between seven and 28;

he was to have plenary power to appoint members without the approval of

the Senate and, at least initially, to designate their terms of office between

two and ten years; he could designate the Board’s Chairman; and his

approval was to be required for procedural rules adopted by the Board as

well as for the selection of divisions and division chiefs. Although not

explicitly stated in the proposal, there could be implied a power of the

Secretary to remove Board members at will.

Some believed that the Mellon plan envisioned an independent Board

and that subsequent congressional amendments were merely clarifications.

However, it is difficult to believe on the basis of the Administration bill that

Secretary Mellon did not intend to retain substantial control over the Board.

Few executives wish to preside over the reduction in size or influence of

their organization. As Secretary of the Treasury, Mellon had at least

indirect control of the Committee on Appeals and Review, which was part

of the Bureau of Internal Revenue. It was contemplated that the Board of

Tax Appeals would replace the Committee, and a fully independent Board

would result in a net loss of power to the Treasury.

One can only speculate as to the other motives behind the Treasury

proposal to locate the Board within the Department. Possibly, the

experience with the Advisory Tax Board was a consideration. The

Advisory Tax Board, organized on March 13, 1919, pursuant to the

Revenue Act of 1918, was disbanded by the Commissioner some six

months later.

Although not formally independent of the Bureau and the

Treasury, the Board was composed of distinguished personalities from

academe, law, accounting, and business. The Commissioner professed

great faith in and gratitude for the work done by the Advisory Tax Board,

but the circumstances surrounding its elimination were somewhat

suspicious; possibly the Commissioner and the Secretary found a

Congressman George Young (R. N.D.), a senior member of the Ways and

Means Committee who supported the amendment, stated the following:

I want to be perfectly fair, and I think if you will read over the original

draft carefully you will come to the conclusion that it was designed that this

board was to be an independent board, but the Ways and Means Committee

thought it could be strengthened and be made more specific and certain, so

there was some added language.

Id. at 2622.

For a discussion of the Advisory Tax Board, see Part I, notes 213–221 and

accompanying text.

Creation of the Board of Tax Appeals 59

quasi-independent, quasi-judicial body not to their taste. Mellon, of course,

was not in office during the period of existence of the Advisory Tax Board,

but he may well have been influenced by any real or imagined defects from

which it suffered.

Mellon’s proposal to make the Board of Tax Appeals independent from

the Bureau of Internal Revenue but not from the Treasury was defended by

some outside the Department,

but was viewed generally as an incomplete

solution to the problem.

Of principal concern was the plenary power of

the Secretary to appoint and remove members of the Board. Some feared

the Secretary would be heavily influenced in his selection by the advice of

the Income Tax Unit, which would recommend men sympathetic to the

position of the Bureau.

If these men were also former employees of the

Bureau, additional problems might be encountered by their lack of

objectivity due to their training and experience.

Additionally, concern was

expressed that the implied power of the Secretary to remove Board

members at will would lead to pressure on the Board to favor the Treasury

in its decisions. John Nance Garner, ranking Democrat on the Ways and

Means Committee, summed up the problem in his characteristically blunt

fashion.

Mellon’s proposal was supported by the National Industrial Conference

Board and the President of the United States Chamber of Commerce.

Memorandum of National Industrial Conference Board, Dec. 18, 1924, National

Archives Building, Records of the Treasury Dep’t, Record Group 56, Tax – Board of

Tax Appeals 1923–24; Letter from President of U.S. Chamber of Commerce to

Secretary Mellon, May 29, 1924, National Archives Building, Records of the

Treasury Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–24; see also The

New Tax Board, 3 C.P.A. M

AG. 31 (1924).

See generally 65 CONG. REC. 2684 (1924) (remarks of Mr. Chindblom); see also

1924 House Hearings, supra note 26, at 108, 460–62.

See 1924 House Hearings, supra note 26, at 108.

1924 House Hearings, supra note 26, at 462, 468 (remarks of Mr. Garner and

Mr. Gore); Conflict Over Choice of Members for Board of Tax Appeals, 2 N

AT’L INC. TAX

AG. 218 (1924). There were also those who believed that appointment to the

Board by the President was not a completely adequate solution. If the President

was the chief tax collector, a decision by a Board member in favor of the

Government would be a decision in favor of the President. 1924 House Hearings,

supra note 26, at 461. It was also feared that Presidential appointments would be

based on patronage rather than ability. 65 C

ONG. REC. 2614 (1924) (remarks of

Mr. Jeffers); see also id. at 2684 (remarks of Mr. Chindblom).

65 CONG. REC. 3282 (1924). For a less colorful expression of this same

sentiment, see 1924 House Hearings, supra note 26, at 460 (statement of Edward

Gore, American Institute of Accountants).

60 The United States Tax Court – An Historical Analysis

[I]f they did not decide cases to suit . . . he [the Secretary of the

Treasury] could kick them out and get somebody who would.

There were even some cynics who felt that Secretary Mellon had a personal

interest in being able to appoint the members of the Board so they would

be able to pass favorably on questions of great import to the Secretary’s

personal fortune.

In addition to the problem of appointment and removal of Board

members by the Secretary, troublesome questions were raised concerning

conflicts of interest. As long as Treasury employees and, in the case of the

Solicitor of Internal Revenue, representatives of Treasury, continued to

appear both before and behind the bench, many believed that an impartial

hearing would be impossible since these men would feel it their duty to

collect the maximum amount of taxes possible. An appellate board could

only hear both sides objectively if it was completely free of any possible

pressure or loyalty to the collection agency.

The basis for this criticism

The following remarks capture such cynicism:

But the joker in the proposal was that the bill provided that the members of

this tribunal should all be appointed by the Secretary of the Treasury, not to

be confirmed by the Senate or anybody else.

If that had gone through, it would have meant that Mr. Mellon would

have been able to provide soft berths for as many as 28 of his friends at

$10,000 per each annum, and it would have been up to those men to pass

on the income-tax questions concerning and involving Mr. Mellon’s own

great interests. Mr. Mellon and his family are heavily interested in more

than half a hundred great corporations.

Would it have been a fair proposition for a man in his position to have

been able to personally name the members of a board of tax appeals, and

not only name all the members of the board but keep the board within the

Treasury Department where it would have been under his own direct and

personal control and where it would have had to pass on questions coming

up in connection with the many great interests in which the Secretary is

himself heavily interested financially?

It was a monstrous proposal for him to make, and, with all due respect to

Mr. Mellon, I must say that I think he had his nerve when he made it.

While dealing out only a small amount of relief to people of modest

incomes and to the small taxpayers of the country, Mr. Mellon certainly did

propose to hand himself a nice, large, juicy portion.

65 C

ONG. REC. 2614 (1924) (remarks of Mr. Jeffers).

See id. at 3284 (remarks of Mr. Young), 2684, 3285 (remarks of Mr.

Chindblom).

When you appear now before one of these divisions of the committee on

appeals and review you find yourself in the presence of a set of gentlemen

who are, first, as representing the Treasury Department, selected for the

purpose of getting all the taxes they can possibly lay against the taxpayer.

Creation of the Board of Tax Appeals 61

could be found in the experience with the Committee on Appeals and

Review. The Committee as it operated was a negotiation panel rather than

a judicial tribunal. Treasury’s only representative before the Committee

was, in effect, the Committee members themselves.

Although under the

new plan it was anticipated that the proceedings would be adversarial and

the Government would be represented before the Board by the Solicitor of

Internal Revenue, an officer of the Justice Department,

the taint of bias by

Board members was not completely obviated.

Another problem related to the Committee on Appeals and Review was

the widespread belief that the Committee maintained a policy of resolving

all doubts against the taxpayer.

Under the procedure existing prior to the

1924 Act, if the Committee ruled against the Income Tax Unit and in favor

of the taxpayer, the Unit had no recourse to the courts to collect any

additional taxes that it believed were due. On the other hand, if the

decision was in favor of the Government, the taxpayer could pay the tax

and institute an action in the courts for refund. Thus, the only way for the

Bureau to get a day in court on a contested issue was to rule against the

taxpayer in the first instance. Some feared that the policy would continue

with a new Treasury board even though the Mellon plan did provide an

opportunity for judicial review of decisions in favor of taxpayers.

It was

probably their feeling that members of a Treasury dominated Board would

be influenced by a natural reluctance to take another agency of Treasury to

court.

Finally, rumors abounded that a successful career in the Treasury

Department would be aided by the collection of a large amount of tax.

These rumors were officially denied, but they may have been believed by

They are the party in interest; they are the plaintiff and the prosecutor; they

are the court and the jury. When they have rendered their decision, they are

the beneficiaries, the judgment or decree creditor, and they are the sheriff

and the marshal making the execution and enforcing the collection; and

what show has the taxpayer? You might say that the members of the

committee ought to be independent of their relations with the department.

I am sure they are as fair to the taxpayer as they can be, but they know that

their action will determine how much revenue the Government will get.

Id. at 3285 (remarks of Mr. Chindblom).

See id. at 2622, 3284 (remarks of Mr. Young); 1924 House Hearings, supra

note 26, at 468.

65 CONG. REC. 2622 (1924) (remarks of Mr. Young).

For a typical example of such a charge and denial, see 1924 House Hearings,

supra note 26, at 468; see also 65 C

ONG. REC. 3285 (1924) (remarks of Mr.

Chindblom).

See 65 CONG. REC. 3285 (1924) (remarks of Mr. Chindblom); 1924 House

Hearings, supra note 26, at 466–67 (testimony of Edward Gore, American Institute

of Accountants).

62 The United States Tax Court – An Historical Analysis

some, and if the Board was left in the Treasury it would always be subject

to the charge that ambitious members would seek to gain favor for future

promotions by deciding cases against taxpayers.

In the final analysis,

whether all such charges, fears and suspicions were well grounded was not

the issue. The proposal for the Board of Tax Appeals largely was motivated

by popular concerns for adequate pre-assessment review.

To assuage

popular concern and assure that these things could not occur, it was

necessary to put the Board beyond the immediate control of Treasury.

The first congressional body to consider the Mellon plan was the 25-

member Ways and Means Committee of the House of Representatives.

Republicans, numbering 14, were a majority of the Committee, and all but

one were in basic sympathy with the Secretary.

As a result, the bill

reported from Committee bore a great similarity to the Administration

proposal. Representative James W. Collier (Miss.), the second ranking

Democrat on the Committee, later described its executive session

deliberations:

[W]hen it came to any material section of this bill I will never forget

the maddening monotony of “Mr. Chairman, I move that the section

as written in the draft be passed.”

Did it pass, Mr. Chairman? Does the shipwrecked mariner sigh

for a peaceful haven? Does the drooping flower open its petals to

breathe the dew of heaven? [laughter.]

Nevertheless, the rate structure proposed in the bill did arouse

opposition, and no majority of the entire Committee could be found for

any single formula. As a result, Chairman Green decided to exclude

Democrats from Committee sessions and present the bill as a party

measure. Green, who himself was not in complete agreement with the

Mellon plan rates, wanted to secure a bill that had reasonable prospects of

See 1924 House Hearings, supra note 26, at 469 (testimony of Edward Gore,

American Institute of Accountants).

See id. at 466–67.

See 65 CONG. REC. 3285 (1924) (remarks of Mr. Chindblom); 1924 House

Hearings, supra note 26, at 466–67. As proposed and passed, the 1924 Act gave

either party the right to institute court action after an adverse decision. Thus, the

Board could not foreclose the Government from further litigation by virtue of a

decision in favor of the taxpayer. See supra notes 46–48 and accompanying text.

James A. Frear (R. Wis.) was considered a “radical.” For a detailed

description of the legislative history of the Revenue Act of 1924, see R

OY G.

LAKEY & GLADYS C. BLAKEY, THE FEDERAL INCOME TAX 223–50 (1940).

65 CONG. REC. 2495 (1924).

Creation of the Board of Tax Appeals 63

success for passage in the full House and Senate. In both of these bodies

opposition to the Administration proposals was stronger than in the

Committee. But 11 of his Republican colleagues would not budge on the

rate issue, and Chairman Green had to settle for a bill that made only four

changes in the Mellon plan. One of these changes involved making the

Board of Tax Appeals independent of Treasury and, in view of the general

intransigence of the Mellon supporters on the Committee, was indicative of

the widespread distrust of a Treasury dominated Board.

As the bill was reported by the Committee, the Board was to be an

independent body not within the Treasury Department.

Appointments to

the Board were to be made by the President and removal from the Board

could only be for “inefficiency, neglect of duty, or malfeasance in office.”

The Chairman was to be designated biennially by the Board, not by the

Secretary. Finally, procedural rules of the Board and the selection of

divisions and division chiefs were not to require approval of the Secretary.

The amendments made by the Ways and Means Committee bearing on

the independence of the Board were retained in the Act as it finally passed,

and were augmented by two other amendments; one made on the House

floor that required the advice and consent of the Senate to Presidential

appointments to the Board,

and the other made on the Senate floor that

permitted the Board to make its own arrangements for housing, clerical

help, supplies, etc., if not suitably provided by the Secretary.

2. Procedure

The Administration proposal was vague on the subject of Board practice

and procedure, providing only that

The other changes agreed to were: (1) providing a 25% income tax rebate on

1924 taxes; (2) defining earned income (for purposes of the earned income credit)

as being all income below $5,000, but limiting earned income to $20,000; and (3)

elimination of “nuisance” taxes in addition to the repeals suggested by the

Administration.

The bill as reported by Ways and Means did not specifically locate the Board

in a particular branch of government; rather, it simply removed language from the

Administration bill establishing the Board within Treasury. H.R. R

EP. NO 68-179,

at 8 (1924). Statutory language making the Board an agency in the executive

branch was added by a Senate amendment. 65 C

ONG. REC. 7837 (1924).

65 CONG. REC. 3285–86 (1924).

As passed by the House, the bill required the Secretary to provide general

administrative services for the Board. Concerned that the Secretary might use this

power to reduce the independence of the Board, the Senate permitted the Board to

make its own arrangements if the Secretary did not “suitably” provide for these

matters. 65 C

ONG. REC. 7837 (1924).

64 The United States Tax Court – An Historical Analysis

[n]otice and an opportunity to be heard shall be given the taxpayer

and the Commissioner by the Board and a decision shall be made as

quickly as practicable. The proceedings of the Board shall be

informal and in accordance with such rules as the Board, with the

approval of the Secretary, may prescribe. The opinions of the Board

(other than findings of fact) shall not be in writing unless the

chairman so orders. The findings of fact in each case shall be

reported in writing.

The implication was that the proceedings were to be adversary because

notice and an opportunity to be heard were required to be given to the

Commissioner, as well as the taxpayer.

In this sense, the proposal was a

departure from preexisting practice of the Committee on Appeals and

Review. Another departure from preexisting practice was the requirement

that Board’s findings of fact (but not opinions) be rendered in writing. This

was necessary in light of the new provision that factual findings of the

Board were to be considered prima facie evidence in any further judicial

proceedings.

The procedural changes from past practice, however, were

more apparent than real. A central feature of the proposal was that the

proceedings were to be informal, which was characteristic of practice before

the Committee on Appeals and Review. In Mellon’s view and in the view

of his supporters on this question, informality of proceedings was necessary

if the Board was to cope with its large work load in an expeditious

manner—“[a] delay of justice is often a denial of justice, particularly in

disputes involving large sums of money.”

Because proceedings were to be

informal, it probably also was true that they were to be closed to the public,

like those of the Committee on Appeals and Review.

The Ways and Means Committee, the Finance Committee, and the

House were agreed that the need to expedite tax controversies was of

foremost importance and accepted the Treasury proposal for informal

proceedings conducted under rules adopted by the Board.

As the bill

moved through the Senate, however, the virtue of informality was

1924 Administration Bill, supra note 6, § 1000(e).

See H.R. REP. NO. 68-179, at 8 (l924); S. REP. NO. 68-398, at 9 (1924). But see

infra notes 230–232 and accompanying text.

1924 Administration Bill, supra note 6, § 1000(d).

65 CONG. REC. 2684 (1924) (remarks of Mr. Chindblom).

See Revenue Bill of 1924, as reported by Senate Finance Comm. § 900(h).

The Treasury had originally proposed that the rules adopted by the Board should

be subject to the approval of the Secretary. This provision was removed by the

House Ways and Means Committee as part of the revision that removed the Board

from the Treasury Department.

Creation of the Board of Tax Appeals 65

questioned on the ground that “[w]hat the taxpayer now wants from the tax

board of appeals is quality of decision — not quantity.”

In this view the

absence of the requirement for formal procedure and written opinions was

an invitation to arbitrary action.

The Democratic minority of the Senate

Finance Committee agreed with this criticism of the Administration

proposal, and when the bill reached the Senate floor, Senators Jones (D. N.

Mex.) and Walsh (D. Mont.) led a fight to amend the bill to conform Board

proceedings more closely to those of a judicial body.

Among the changes

they proposed were removal of the reference to an informal procedure,

insertion of a provision that the Board should prescribe its own rules of

both procedure and evidence, and introduction of a requirement that all

testimony before the Board be reduced to writing.

Of equal interest to the advocates of judicial procedure was the need for

provisions that would make Board proceedings and reports matters of

public record. The publicity proposals were part and parcel of the general

controversy over tax information disclosure; it was hoped that in this way

suspicions that had been generated concerning the Bureau of Internal

Revenue would not carry forward to the Board.

My contention is that whenever there is a controversy between the

Government and a taxpayer which is being decided, the proceedings

leading up to that decision should be public proceedings . . . .

* * *

To say that all that should be done in secret is obnoxious to every

thing which we have been taught regarding judicial procedure as

American citizens under our great system of jurisprudence . . . .

[Proceedings and records should be] open to public inspections, so

that we may understand the facts upon which decisions are reached,

and the taxpayers in the country may have an opportunity to know

just how it all happens.

It was argued that opinions, as well as findings of fact, should be in writing

and that they should be published so the pressure of public scrutiny could

be enlisted in aid of obtaining decisions based on sound reasoning.

Publication would also aid formation of a body of precedent to guide the

Bureau and taxpayers.

Admittedly, such a procedure might reduce the

1924 Senate Hearings, supra note 1, at 390 (statement of Frank Lowson,

American Institute of Accountants).

See id. at 389.

65 CONG. REC. 8132–34 (1924).

Id. at 8133 (remarks of Senator Jones); see also 1924 House Hearings, supra

note 26, at 108.

65 CONG. REC. 8133 (1924) (remarks of Senator Walsh).

66 The United States Tax Court – An Historical Analysis

quantity of cases that could be decided, but in contrast, it would also reduce

erroneous decisions, which some saw resulting from the Income Tax Unit’s

“rules forcing a quantity production.”

The Senate insurgents won a total

victory, and each of their proposals was incorporated in the bill as it passed

the Senate.

What was the view of the Administration to these changes? In the first

place, it must be recognized that although Secretary Mellon was the

dominant force in tax policy during this period, there were other officials

who did not share his enthusiasm for the original proposal for the Board of

Tax Appeals. In particular, Nelson Hartson, Solicitor of Internal Revenue,

and Charles D. Hamel, Chairman of the Committee on Appeals and

Review, believed the whole concept for a Board of Tax Appeals was

ill-advised.

These officials believed that the replacement of the Committee

on Appeals and Review by the Board would seriously jeopardize the

expeditious handling of the pending 39,000 appeals that had been filed

under § 250(d) of the 1921 Act

and the additional appeals being currently

filed, which numbered more than 150 per week. The reasons for their

foreboding were twofold. In the first place, the Board was to have

somewhat broader jurisdiction than the Committee. The Committee had

no responsibility for cases involving less than $2,500 or for estate tax

controversies, but the Board, under the Administration proposal, was to

have jurisdiction in both these categories. Secondly, and of even greater

significance, was the proposal that the factual findings of the Board be

given prima facie weight in any subsequent judicial proceedings. No such

status was accorded to findings of the Committee. The Board would thus

be additionally burdened by a responsibility to make written factual findings

of sufficient particularity and with a sufficient degree of care that would be

accepted by the courts. Accordingly, the productivity of the Board, even if

a full complement of 28 members was appointed, would be substantially

less than that which could be achieved by the Committee.

The criticisms

1924 Senate Hearings, supra note 1, at 390 (statement of Frank Lowson,

American Institute of Accountants).

65 CONG. REC. 8134 (1924).

Memorandum from Charles D. Hamel to C.R. Nash, Ass’t to the Comm’r,

May 5, 1924, National Archives Building, Records of the Treasury Dep’t, Record

Group 56, Tax – Board of Tax Appeals 1923–24 [hereinafter cited as Hamel

Memorandum]; Memorandum from Nelson Hartson to Garrard B. Winston,

Under Sec’y of the Treasury, April 30, 1924, National Archives Building, Records

of the Treasury Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–24.

Ch. 136, 42 Stat. 265.

The text of Chairman Hamel’s memorandum was as follows:

At the present time the Committee on Appeals and Review has on hand

approximately 1,900 cases. For the week ending April 26 we received 211

Creation of the Board of Tax Appeals 67

by Chairman Hamel and Solicitor Hartson were made before the Senate

took action to make Board proceedings even more cumbersome. With the

adoption of the Senate amendments, they had cause for even more alarm,

and Solicitor Hartson concluded that the “Board as now provided for can

not function satisfactorily,” and the “collection of the revenues will . . . be

seriously interfered with . . . .”

cases, and for the week ending May 3 approximately 277. For the past 10

weeks we have received an average of approximately 165 cases per week.

As you know, there are in protest in the Unit at the present time

approximately 39,000 cases. A large part of those cases will ultimately find

their way either to the Committee on Appeals and Review or to the Board

of Tax Appeals, if created. It should be remembered also that of the cases

which the Committee now has on hand, and which it is receiving, [all]

involve amounts of $2,500 or more. Cases under that amount are being

considered by the Special Committee. We are working at top speed in the

Committee and, for a considerable time, have been disposing of

approximately 100 cases per week on an average. This production is

secured with a Committee of approximately twenty men. The language of

the provision relating to the proposed Board of Tax Appeals clearly

contemplates that cases should be heard by divisions, consisting of three

members. It is also contemplated that the findings of the Board shall be

prima facie evidence of the facts therein stated. The procedure indicated is

bound to slow up the production of cases. The actual hearing of cases, with

the provision here contemplated as to the findings of facts, will take a much

longer time than is now taken and will also require more time on the part of

members in the consideration of the records which may be made in

connection with cases. Taking into account only the income tax cases

which may be before the Board, it is very likely that not more than eight of

its divisions can hear and dispose of such cases. If it may be assumed that

each division may hear and dispose of ten cases a week, it would be able to

dispose of only eighty cases a week. As a practical matter when one

contemplates the large amount of time that is bound to be taken in

connection with some cases, I very seriously doubt whether the Board can

dispose of more than fifty cases per week.

However, it must be borne in mind that the cases are now coming up at

the rate of 160 cases per week or more and it is my opinion that the number

of cases per week will, for some time, increase rather than diminish. The

very creation of a Board, such as is contemplated, will tend to encourage

appeals and thereby increase the number of cases to be heard.

Hamel Memorandum, supra note 89.

Memorandum from Nelson Hartson to Garrard B. Winston, Under Sec’y of

the Treasury, May 21, 1924, National Archives Building, Records of the Treasury

Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–24. The memorandum

is quoted below:

I believe as a practical matter the Board as now provided for can not

function satisfactorily. As now drawn the Bill provides that all appeals filed

68 The United States Tax Court – An Historical Analysis

Messrs. Hamel and Hartson were not, however, the only officials

displeased with the emerging legislation. Secretary Mellon himself was irate

at congressional tinkering with his proposal, and on May 5, 1924, he wrote

Chairman Reed Smoot of the Senate Finance Committee.

The Board of Tax Appeals is to take over the work of the

twenty-one members of the Committee on Appeals and Review.

The Board will have more cases to pass on and a less informal

practice, and, therefore, greater delay upon each case than at present

. . . . The amendments made to the bill ignore practical

administration. Responsibility for the failure of the Board of Tax

Appeals to meet the needs of the public and to protect the rights of

the taxpayer and the Government must rest with Congress. I am of

the opinion that unless the Board is restored to somewhat its original

form, the entire provision should be stricken out and the present

practice, unsatisfactory as it may be, permitted to continue.

under Sections 274, 313 and 317 shall be heard before this Board. This

jurisdiction is so broad as to permit of a case being taken to the Board on

practically every controverted question pending in the Bureau. Twenty-eight

men sitting in groups of three can not possibly decide cases with sufficient

speed to permit of the satisfactory working out of the plan. Substantial

delays must occur when the Board is required to hold public hearings; to

observe rules of evidence; to reduce the testimony to writing; and to report

its findings of fact and decision in writing. The collection of the revenues

will, I believe, be seriously interfered with because of the necessity for the

Bureau of Internal Revenue to pass its cases through the long process of

procedure on appeal before additional assessments can be made. It seems

apparent that if an appeal is to be allowed a taxpayer, the production of the

appellate body must be substantially equal to that of the auditing branches

of the Bureau. Unless the Board can keep up with the Bureau there will

occur a vast accumulation of cases which will work seriously to the

detriment of the Government and prompt and efficient administration of

the law will be utterly impossible. Considering that the present Committee

on Appeals and Review, with a more restricted jurisdiction than that of the

proposed Board of Appeals and with an informal procedure permitting of

greater speed in the determination of cases, I fail to see how the proposed

Board can begin to meet the task imposed upon it. Under the proposed

plan, findings of fact in each case are required to be in writing and are made

prima facie evidence in court proceedings. Bearing in mind the advantages

afforded by the evidentiary presumption granted to the findings of the

Board, both the taxpayer and the Commissioner would undoubtedly present

the evidence in any case in great detail and insist upon voluminous findings

of fact, thus greatly delaying final disposition of the case.

National Archives Building, Records of the Treasury Dep’t, Record Group

56, Tax – Board of Tax Appeals 1923–24 [hereinafter cited as Mellon].

Creation of the Board of Tax Appeals 69

Reference in the Secretary’s letter to “less informal practice” and “greater

delay” is somewhat obscure because it was not until three days after the

date of his letter to Chairman Smoot that the Senate made the first

substantial modification in the practice and procedure provisions of the

bill.

Perhaps Secretary Mellon was aware of the intended Jones-Walsh

amendment and was attempting to forestall it. Alternatively, he may have

been displeased with the separation of the Board from the control of the

Secretary of the Treasury and was using practice and procedure as a make-

weight argument to kill the provision entirely. Despite the opposition

fueled by the Jones-Walsh amendment, the House-Senate conference on

the 1924 bill generally adopted the Jones-Walsh approach that Board

proceedings be judicial in nature and subject to public inspection. The only

retrenchment was the limitation that in cases in which the amount in

controversy was not more than $10,000, no written opinion would be

required and testimony need not be reduced to writing.

The conference

recommendation was adopted by the House and Senate.

President Coolidge signed the Revenue Act of 1924 into law on June 2,

1924. However, he shared the views of those officers of the Treasury

65 CONG. REC. 8132–34 (May 8, 1924).

H.R. REP. NO. 68-844, at 30 (1924).

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337, provided:

Notice and an opportunity to be heard shall be given to the taxpayer and

the Commissioner and a decision shall be made as quickly as practicable.

Hearings before the Board and its divisions shall be open to the public.

The proceedings of the Board and its divisions shall be conducted in

accordance with such rules of evidence and procedure as the Board may

prescribe. It shall be the duty of the Board and of each division to make a

report in writing of its findings of fact and decision in each case, and a copy

of its report shall be entered of record and a copy furnished the taxpayer. If

the amount of tax in controversy is more than $10,000 the oral testimony

taken at the hearing shall be reduced to writing and the report shall contain

an opinion in writing in addition to the findings of fact and decision. All

reports of the Board and its divisions and all evidence received by the Board

and its divisions (including, in cases where the oral testimony is reduced to

writing, the transcript thereof) shall be public records open to the

inspection of the public. The Board shall provide for the publication of its

reports at the Government Printing Office in such form and manner as may

be best adapted for public information and use, and such authorized

publication shall be competent evidence of the reports of the Board therein

contained in all courts of the United States and of the several States without

any further proof or authentication thereof. Such reports shall be subject to

sale in the same manner and upon the same terms as other public

documents.

70 The United States Tax Court – An Historical Analysis

Department who felt that Congress had destroyed a good idea. In a

message delivered by the President at the time of signing, he stated:

Criticism of the income tax and a large part of the dissatisfaction

with it is the result of delay and uncertainty in the final determination

of a taxpayer’s liability. Taxes can usually be paid within a short time

after the receipt of the income on which the tax is based without

serious embarrassment. The payment, however, of a large additional

tax on income received several years previous and which may have

since its receipt either been wiped out by subsequent losses or

invested in nonliquid assets may force a taxpayer into bankruptcy

and often causes financial sacrifice and hardship. Provision should

be made for the prompt and final determination of a taxpayer’s

liability and such was the purpose in the suggestion for a Board of

Tax Appeals.

The provisions of the bill, however, with reference to the Board,

make it in its essentials practically a court of record. The Board is to

be bound by formal rules of evidence and procedure. In each case a

formal record must be prepared and all oral testimony in cases

involving more than $10,000 must be reduced to writing and an

opinion in addition to the findings of fact and a decision must be

written. A taxpayer is entitled to appeal to the Board before any

assessment can be made. . . . This Board of Appeals, . . . burdened

with rules of procedure and evidence and forced to prepare a record,

a finding of fact, and a decision in practically every case, will be

unable to handle the business which will come to it. The result will

be greater delay in the final settlement of tax cases, and may

ultimately result in the complete breakdown of the administrative

machinery for the collection of taxes.

With the benefit of hindsight, it can safely be said that the President’s

gloomy prognosis for the Board was unjustified.

3. Personnel

A considerable amount of controversy attended those provisions of the

Mellon plan dealing with the membership of the Board. The

Administration proposal specified a Board of between seven and 28

National Archives Building, Records of the Treasury Dep’t, Record Group

56, Tax – Board of Tax Appeals 1923–24 [hereinafter cited as Statement of President

Coolidge].

Creation of the Board of Tax Appeals 71

members, serving for ten year terms at salaries of $10,000 per year.

stagger members’ terms of office, the bill provided the Secretary to

designate two, four, six, eight or ten-year terms for the initial appointees.

Appointments were to be made by the Secretary solely on the grounds of

fitness for office, but no restrictions were placed on the Secretary in

removing members from office.

As part of the amendments making the Board an independent body, the

Ways and Means Committee modified the bill to specify that members be

appointed by the President rather than the Secretary,

100

and that removal

from office could only be for inefficiency, neglect of duty, or malfeasance in

office.

101

Some felt that additional assurance of an independent Board

would be furnished by a requirement that Board appointments be subject to

the advice and consent of the Senate. The Ways and Means Committee had

considered and rejected such an amendment “with almost complete

unanimity,” fearing that the Board would become a “political football.”

102

Nevertheless, a majority of the House sided with the view that Senate

consideration would prevent the appointment of individuals “subject to

ulterior influences,”

103

and the requirement of Senate approval was added

on the House floor.

104

All these amendments were retained in the final Act.

In addition to the amendments bearing on the independence of the

Board, amendments dealing with the number of Board members, their

terms of office, their compensation, and the question of whether former

members would be permitted to engage in a tax practice upon the

expiration of their service, were the subject of some controversy.

The Ways and Means Committee and the full House accepted the

recommendation of the Administration with respect to the number of

Board members and their terms of office.

105

The House agreed that

fluctuating membership between seven and 28 was desirable to take

account of varying workloads that the Board would have. It was felt that

initially, because of the backlog of wartime taxes, especially the profits

taxes, a large Board would be required, but as the backlog was discharged a

smaller number of members would suffice.

106

1924 Administration Bill, supra note 6, § 1000(a).

Id.

100

See H.R. REP. NO. 68-179, at 8 (1924).

101

Section 900(a), 1924 Revenue Bill as reported by the Committee on Ways

and Means to the House of Representatives, 65 C

ONG. REC. 3280–81 (1924).

102

65 CONG. REC. 3285 (1924).

103

Id. at 3286 (remarks of Mr. Larsen).

104

Id. at 3285–86.

105

H.R. REP. NO. 68-179, at 8 (1924).

106

See 1924 Senate Hearings, supra note 1, at 24 (testimony of A.W. Gregg);

H.R. R

EP. NO. 68-179, at 45 (1924).

72 The United States Tax Court – An Historical Analysis

Some House members unsuccessfully objected to large Board

membership on the ground that the upper limit would soon be reached and,

in the nature of bureaucracies everywhere, would never be diminished. The

result would be an unnecessarily costly and cumbersome body perpetuated

indefinitely.

107

It was also argued that if the Supreme Court could function

with nine members, no inferior judicial body should require more.

108

These

views had a more persuasive impact in the Senate Finance Committee, and

the bill reported by it provided for a permanent Board of only seven

members. However, under the Committee bill, for the first two years the

Board was to be composed of 28 members, a number believed sufficient to

deal with the backlog.

109

The terms of all 28 members were to expire two

years after enactment of the 1924 legislation, and the seven members

thereafter designated were to have staggered terms, with their successors

having ten year terms.

110

These provisions were adopted by the full Senate

and became part of the Revenue Act of 1924.

111

The modifications reflected various attitudes toward both the Board and

the federal income taxes. Chairman Green was later to observe that

Congress initially viewed the Board as something of an experiment;

112

the

limited tenure of the first members and the fairly small “permanent” size of

the Board demonstrate this view. Additionally, in a nation that recently

emerged from a costly war, there were many who believed the large and

complex wartime taxes were merely an unpleasant, but temporary, necessity,

and once the disputes arising from the measures were settled, income and

profits taxes would become just a painful memory. Evidence of this

attitude could be found in the direction of Mellon policy, which was toward

lower and lower taxes. However, just as the Board came to be viewed as a

successful experiment, future events established the income tax as an

important and permanent part of the fiscal affairs of the nation. The tax

was not to become a truly mass tax until World War II, but the fact that its

burden was mostly felt by persons of higher income did not result in the

elimination of disputes arising under it.

113

107

65 CONG. REC. 3283 (1924) (remarks of Mr. Blanton).

108

Id. at 3288 (remarks of Mr. McKeown).

109

S. REP. NO. 68-398, at 42 (1924).

110

Id. at 42; H.R. 6715, 68th Cong., 1st Sess. § 1000(b) (1924) as reported by

the Senate Comm. on Finance.

111

Ch. 234, § 900(b), 43 Stat. 336.

112

67 CONG. REC. 524 (1926).

113

See Part I, note 196 (indicating a steady increase in civil tax litigation in the

federal courts). As reflected in Appendix A, the volume of litigation in the Board

dropped significantly after 1928; thereafter until the late 1970s, litigation levels

before the Board and Tax Court remained relative stable. Even with the advent of

the mass income tax in World War II there was no startling increase in the number

Creation of the Board of Tax Appeals 73

A recurring problem of personnel management which drew attention

during the consideration of the 1924 legislation involved the use by

Government employees of their special knowledge and expertise for private

gain. As previously discussed, during and after World War I, the

administration of federal taxes was in a state of considerable disarray. The

income and profits taxes were in their infancy, and the public at large had

little reliable information on the policies and procedures of the Bureau of

Internal Revenue. For this reason, former employees of the Bureau were

able to command substantial fees for using their special information to aid

clients involved in tax controversies before the Bureau. With Bureau

salaries and morale comparatively low, the opportunities of private practice

encouraged a disruptively high turnover of personnel, and occasionally

resulted in frauds being perpetrated.

114

Congressional reaction to these problems found expression in an

amendment, offered by Congressman LaGuardia and adopted by the

House, that barred former members of the Board, for a two-year period

following the termination of their membership, from practicing before the

Board, before any official of the Treasury, or with any firm of lawyers,

accountants, or agents practicing before the Board or the Treasury.

115

the Senate, the provision was narrowed somewhat to only forbid practice

by former Board members before the Board and the Bureau of Internal

Revenue.

116

Secretary Mellon was very much opposed to the limitation on practice,

on the ground that a two-year term, when combined with the practice

limitations, would make it difficult to attract able individuals to the

Board.

117

This criticism had some impact; the conference committee and

of tax cases, although there has been a general upward trend. The Tax Court’s

caseload increased significantly in the late 1970s and throughout the 1980s, largely

as a result of a spike in tax shelter litigation. Case filings tapered off in the late

1990s and hit historic lows at the turn of the century. Thereafter, the volume of

annual filings gradually returned the 30,000 range, where they currently remain.

114

See generally Sully, Those Refunded Millions, SATURDAY EVENING POST, June

21, 1924, at 36, 156.

115

65 CONG. REC. 3286–87 (1924). An effort was made by Representative

Blanton to broaden the amendment to cover not only former Board members but

also all former employees and officials of the Treasury Department. Impetus for

the broadened amendment came from disclosure that former Secretary of the

Treasury McAdoo accepted a retainer of more than $100,000 with respect to a

matter pending before Treasury when he was Secretary. Although there was

substantial support for the Blanton amendment, it was stricken as not germane. Id.

116

S. REP. NO. 68-398, at 42–43 (1924).

117

See Mellon, supra note 93.

74 The United States Tax Court – An Historical Analysis

Congress modified the restriction to apply only to members appointed

following the terms of the original two-year members.

118

One of the most controversial aspects of the Administration bill was the

annual salary of $10,000. The Secretary and his supporters justified this

relatively large amount ($2,000 more than circuit court judges and $2,500

more than district court judges)

119

on the ground that a substantial salary

was necessary to attract and retain members of sufficient expertise and

experience to creditably discharge the functions of the Board. Government

personnel problems had been particularly acute among the more skilled

workers who could procure much higher compensation working for private

interests. The Committee on Appeals and Review was a case in point, and

its members averaged just one year of service.

120

The generous proposed

salary was largely a response to this experience.

On the other hand, there was substantial congressional opposition to

the $10,000 figure. Some outspoken opponents of the Administration held

the view that the proposal envisioned a well-padded sinecure for friends of

Secretary Mellon on an agency which would do little work to justify the

expense.

121

But even more moderate congressmen were disturbed by the

prospect of paying Board members vastly more money than was currently

paid to employees of the Bureau for substantially the same work. For

example, members of the Committee on Appeals and Review were

receiving between $5,000 and $6,000, and other Bureau employees eligible

for appointment to the Board were making as little as $2,000. Salary

increases of from 100 percent to 500 percent were felt by many to be

unjustified.

122

The fact that the Mellon plan called for higher salaries than

those paid to most federal judges (including those sitting on appellate

courts), to most state governors, and to all congressmen did little to help

the Administration’s cause.

123

Although some federal officials were

receiving equivalent or larger salaries than that proposed for the Board

(I.C.C. commissioners – $12,000; F.T.C. members – $10,000; Federal Farm

Loan Board members – $10,000),

124

the disparity between the proposed

salary and that being paid to federal appellate judges was termed

“inexcusable,” “contrary to the entire system,” and “perfectly ridiculous.”

125

118

H.R. REP. NO. 68-844, at 30 (1924); Revenue Act of 1924, ch. 234, § 900(c),

43 Stat. 337.

119

See 65 CONG. REC. 3283, 7694 (1924).

120

Id. at 3285 (remarks of Mr. Chindblom).

121

Id. at 3283 (remarks of Mr. Blanton).

122

Id. at 3281–82, 7694.

123

Id. at 3281, 3283, 7694.

124

Id. at 3281.

125

Id. at 3282, 7694.

Creation of the Board of Tax Appeals 75

Finally, some questioned the Administration’s premise that the

compensation was justified in light of the expertise required of Board

members. It was noted that membership on the Board did not even require

legal training or experience. Senator Norris, for one, was of the opinion

that a Board member required less skill than a judge of a court with more

general jurisdiction.

A district judge receives $7,500 a year and has to pass upon all kinds

of litigation that comes before him . . . . He has to be versed in all

branches of jurisprudence and of law. The members of the

proposed tax court are going to become, after they have been

educated by serving for a while, experts in tax matters only; they will

have nothing else to do.

The man who has the qualifications of a district judge possesses

qualifications much superior to the qualifications necessary to fill one

of these places, and the judge of a court of appeals more yet, so there

is not anything involved in this work that requires a salary superior to

that of our judges.

126

The progress of the salary provision through Congress was erratic. The

Ways and Means Committee reported the bill with a $10,000 salary.

127

Chairman Green strongly supported the provision on the House floor,

contending that he would rather the Board be entirely eliminated from the

bill than have a limitation on members’ salaries that would prevent its

achieving the desired objective.

128

Additional support for the $10,000 salary

was voiced by Congressman Chindblom, who had been an outspoken

opponent of tying the Board to the Treasury. He argued that although no

federal employee was being adequately compensated, that fact should not

defeat equitable salaries for members of the new Board.

129

Nevertheless, the

full House was not sufficiently impressed with the necessity of the $10,000

figure, especially when the Administration was taking a generally

conservative position with respect to federal spending,

130

and lowered the

salary to $7,500.

131

The Senate Finance Committee restored the $10,000

salary,

132

but Senator Norris led a floor fight to again reduce it to $7,500.

133

Chairman Smoot and Senator Jones, unlikely allies, combined forces to

126

Id. at 7695 (remarks of Senator Norris).

127

H.R. REP. NO. 68-179, at 8 (1924).

128

65 CONG. REC. 3281–82 (1924).

129

Id. at 3285.

130

Id. at 3282–83 (remarks of Messrs. Garner and Blanton).

131

Id. at 3285.

132

S. REP. NO. 68-398, at 42 (1924).

133

65 CONG. REC. 7694–95 (1924).

76 The United States Tax Court – An Historical Analysis

oppose the Norris amendment,

134

but those favoring the lower salary

prevailed.

135

Congressional amendments with respect to salary and limitations on

practice by Board members disturbed Secretary Mellon as much as any of

the other amendments and, along with the procedural changes, led him to

request withdrawal of the whole Board idea.

As the bill now stands in the Senate, the pay has been reduced to

$7500, the term of office to two years, and there has been inserted a

provision that no member of the Board may practice before the

Board or the Treasury Department within two years after cessation

of his employment as a member of the Board. Under these

conditions no capable lawyer would be willing to accept a position

on the Board. He would have only a short term, at moderate pay,

and be deprived for two years after his term ceased from a profitable

branch of practice in which he was particularly expert. True, the

Board could be filled, but only with indifferent or inexperienced

members. With such members the Board could not perform the

work assigned to it.

136

4. Jurisdiction

In light of the importance of jurisdiction, it is somewhat surprising that

little controversy was stirred by the rather restricted jurisdiction accorded

the Board under the Administration proposal. The Mellon plan provided

for Board review only with respect to income, estate, and excess profits

taxes, and only for such taxes imposed under the Revenue Acts of 1916–

24.

137

There existed in 1924 a myriad of other internal revenue taxes,

138

but

134

Id.

135

Id. at 7695. The Administration bill had also been generous with respect to

per diem travelling expenses for Board members and employees. It had provided a

$10 allowance for members and an $8 allowance for other employees. 1924

Administration Bill, supra note 6, § 1000(h). The usual per diem in other

government agencies was $4, and Congress ultimately lowered the Administration

provision to $7 for Board members and $4 for employees. 65 C

ONG. REC. 331,

7837 (1924).

136

Mellon, supra note 93.

137

1924 Administration Bill, supra note 6, §§ 274, 279, 280, 308, 312, 316,

1000(c). The language of the statute was not clear that the Board was to have

jurisdiction over deficiencies asserted under prior acts, providing only that taxes

under such acts should be “assessed, collected, and paid in the same manner and

subject to the same provisions and limitations . . . as in the case of the taxes

imposed by this title.” Id. § 280. The Board soon held that this provision was

Creation of the Board of Tax Appeals 77

since they raised comparatively little revenue and aroused practically no

public interest, the Administration apparently felt that any questions

concerning them were too insignificant to warrant pre-assessment review.

139

Congress agreed, and the only modification made with respect to

reviewable taxes was the addition of gift tax controversies.

140

That the

Mellon bill did not provide for such review was perfectly understandable—

no gift tax was included in the Mellon plan, it was wholly a congressional

creation in the Revenue Act of 1924 and was passed over the strenuous

opposition of the Administration.

141

The jurisdiction of the Board under the Administration proposal and the

ensuing legislation was further limited by the procedural requirements for

obtaining Board review. The Board was restricted to cases arising in one of

two ways. First and most important, the Board could hear taxpayer appeals

filed in response to deficiency notices mailed by the Commissioner.

142

“Deficiency” was a term of art meaning generally, then as now, the excess

of tax due over the amount conceded as due by the taxpayer.

143

Second, the

Board was given jurisdiction to hear appeals from decisions of the

Commissioner with respect to jeopardy assessments for which claims in

abatement were filed by the taxpayer.

144

sufficient to give it jurisdiction over such deficiencies when they were asserted after

passage of the 1924 Act. Gutterman Strauss Co., 1 B.T.A. 243 (1924).

138

Although the Revenue Act repealed many of the excise taxes that had been

imposed by prior legislation, there remained a great many of these provisions,

including taxes on tobacco, admissions, dues, automobiles, tires, cameras, coin

operated machines, mahjong sets, artistic works, jewelry, corporate stock, boats,

narcotics, and many other items and occupations. Revenue Act of 1924, ch. 234,

Tit. IV–VII, 43 Stat. 316.

139

See Dana Latham, Jurisdiction of the United States Board of Tax Appeals Under the

Revenue Act of 1926, 15 C

AL. L. REV. 199, 202 (1927) [hereinafter cited as Latham].

140

Revenue Act of 1924, ch. 234, § 324, 43 Stat. 316.

141

See statement of President Coolidge, supra note 97, at 1; 65 CONG. REC.

3173 (1924).

142

1924 Administration Bill, supra note 6, § 274(a). Under the bill, the time for

appeal was thirty days from the date the deficiency notice was mailed. This period

was extended to sixty days as the result of an amendment adopted on the House

floor. 65 C

ONG. REC. 2969–70 (1924).

143

1924 Administration Bill, supra note 6, § 273. Then (as now) the definition

of deficiency was somewhat more complex than is indicated above because account

must be taken of situations in which prior deficiencies for the same year were

assessed on the one hand, and taxes were rebated on the other. Revenue Act of

1924, ch. 234, §§ 273, 307, 43 Stat. 296, 308 (now codified at I.R.C. § 6211).

144

1924 Administration Bill, supra note 6, §§ 279, 312, as enacted, Revenue Act

of 1924, ch. 234, §§ 279, 312, 43 Stat. 300, 310.

78 The United States Tax Court – An Historical Analysis

Authorization for jeopardy assessments, which formed a part of the

Revenue Act of 1921,

145

was continued in the 1924 Act as a means of

immediately assessing a tax if collection would be jeopardized by delay.

Under the 1924 Act, a jeopardy assessment could be made, either before or

after the mailing of the deficiency notice and at any time before a final

decision of the Board.

146

If the taxpayer paid the assessment, the Board

would lose jurisdiction to determine the correctness of the deficiency

determination since the deficiency, if any, ceased to exist after payment.

147

However, the taxpayer could, in lieu of paying the assessment and pursuing

his relief by way of refund litigation, file a claim in abatement which, if

accompanied by a bond approved by the collector and in an amount not

exceeding double the amount of the claim in abatement, would stay

collection of the tax pending disposition of the claim. If the Commissioner

denied the claim, the taxpayer could, within 60 days of the mailing of the

notice of denial of the claim, file an appeal with the Board contesting the

denial.

148

Congress accepted virtually all aspects of the Administration proposal as

to the jurisdiction of the Board. The most significant change was a House

floor amendment extending from 30 to 60 days the time within which a

taxpayer could appeal a deficiency determination or the denial of a claim in

abatement.

149

The limited jurisdiction of the Board stirred a small amount of

Congressional debate. Some felt that the proposal was unduly restrictive in

limiting Board review to deficiencies and claims in abatement. In the

House, Congressman Jeffers argued for a Board of much broader

jurisdiction than that proposed by the Administration. According to Mr.

Jeffers, the Board should be a watchdog agency over the Bureau with an

obligation to investigate, even on its own initiative, “anything like fraud,

favoritism, gross error . . . and the board should have power to redetermine

the tax in any such case. . . .”

150

If adopted, the Jeffers proposal would have

substantially broadened Board powers from adjudication to include

investigation and prosecution of a wide range of abuses. Had his

suggestions been adopted, it is probable the Board would not have been

able to carry on, as efficiently as it did, the determination of tax

145

Ch. 136, § 250(d), 42 Stat. 265.

146

Revenue Act of 1924, ch. 234, §§ 274(d), 308(d), 43 Stat. 297, 309.

147

Cf. Everett Knitting Co., 1 B.T.A. 5 (1924). But see California Associated

Raisin Co., 1 B.T.A. 1251 (1925); Northwestern Mut. Life Ins. Co., 1 B.T.A. 767

(1925); California Associated Raisin Co., 1 B.T.A. 314 (1925).

148

Revenue Act of 1924, ch. 234, §§ 279, 312, 43 Stat. 300, 310.

149

65 CONG. REC. 2969–70 (1924).

150

Id. at 2614.

Creation of the Board of Tax Appeals 79

controversies. This proposal did not attract any significant support, even

though substantial anti-Bureau sentiment prevailed in Congress.

In the Senate some support was marshaled for a different sort of

broadening of the proposed jurisdiction. In hearings before the Finance

Committee and on the floor of the Senate, proposals were made to grant

Board jurisdiction in proceedings involving refund claims as well as

deficiencies. Thus, taxpayers who had already paid a disputed tax could

seek refund in the Board as well as in district court and the Court of

Claims.

151

The arguments in favor of providing refund jurisdiction to the

Board were not insubstantial. A principal objective of the Board was to

provide a more expeditious and less costly remedy than was available in the

other courts, and some saw little reason why Board review should be

granted to taxpayers who had not yet paid a disputed tax and withheld from

those who had.

152

Senator McKellar proposed an amendment that would

have extended refund jurisdiction to the Board in cases involving more than

$10,000, and had it been adopted, the structure of tax litigation might have

developed very differently. Under the proposal, claims for refund of more

than $10,000 were to be referred to the Board automatically, and the

Board’s finding would be binding on Treasury.

153

The amendment was

strongly opposed by Senator Smoot, chairman of the Finance Committee,

on the ground that it would increase the Board’s caseload by 5,000,000

cases. Senator McKellar was more than a little incredulous about this figure

because there were only 4,300,000 taxpayers in the country, the vast

majority of whom did not earn $10,000 a year, much less pay disputed tax

of that amount. Senator Smoot’s figure indicated that refund claims had

been filed totaling more than $50 billion. Yet, between 1913 and 1924

internal tax revenues totaled only $29 billion. Nevertheless, Senator Smoot

was adamant about the figure, and the amendment was withdrawn.

154

The

exchange between Senators Smoot and McKellar is an instructive example

of one type of debating technique:

Mr. S

MOOT. I do not think that even the Senator will ask that . . .

[expansion of Board jurisdiction] be agreed to when he knows what

it means.

151

Under the Administration proposal, the Board did not have jurisdiction

over a tax that had been paid. Even if Board jurisdiction had been properly

invoked upon the mailing of a deficiency letter, any payment of the disputed tax

prior to a decision of the Board would strip it of power to decide the case. This

aspect of the proposal was continued in the final Act. See Northwestern Mut. Life

Ins. Co., 1 B.T.A. 767 (1925).

152

See 1924 Senate Hearings, supra note 1, at 343, 389.

153

65 CONG. REC. 7696 (1924).

154

Id. at 7696–97.

80 The United States Tax Court – An Historical Analysis

Mr. M

CKELLAR. I think I do know what it means.

Mr. S

MOOT. This is what it means: It means that instead of

having 28 judges we will have over 300 judges. We have over

5,000,000 claims pending now, and if they are all to go —

Mr. M

CKELLAR. Mr. President, it relates only to claims of over

$10,000.

Mr. S

MOOT. I know that it relates to claims of over $10,000.

Could 400 judges handle it? I am sure we would have to have at least

300 before the expiration of the time fixed in the amendment. I

know the Senator has not studied the question. In fact, when I

looked at it myself first I did not know how many claims there were.

Mr. M

CKELLAR. How many claims did the Senator say there

were?

Mr. S

MOOT. Over 5,000,000.

Mr. M

CKELLAR. Of over $10,000 each?

Mr. S

MOOT. Of over $10,000.

Mr. M

CKELLAR. In taxes?

Mr. S

MOOT. These claims

Mr. M

CKELLAR. I asked the Senator’s assistant, the gentleman

from the Treasury Department, to give me the facts and he said he

could not do it, that it would take him some time to find them.

Mr. S

MOOT. That was as to claims and abatements. That is quite

different from this amendment. This amendment relates to any

claim, refund, or abatement.

Mr. M

CKELLAR. There are how many?

Mr. S

MOOT. Over 5,000,000.

Mr. M

CKELLAR. Above $10,000?

Mr. S

MOOT. Above $10,000.

Mr. M

CKELLAR. That involves quite a large amount of money.

Mr. S

MOOT. It certainly does.

Mr. M

CKELLAR. Five million claims of over $10,000 each? I am

sure the Senator can not be accurate in his statement.

Mr. S

MOOT. All I know is that I have been informed by the

department, since reading the amendment, that that is the fact. I

asked for the information, and that is what they told me.

Mr. M

CKELLAR. Has the Senator any information he can put in

the RECORD from the department that there are over — did the

Senator say 10,000,000?

Mr. S

MOOT. Five million.

Mr. M

CKELLAR. That there are more than 5,000,000 claims of

over $10,000 each?

Mr. SMOOT. We can get the information for the Senator by

tomorrow.

Creation of the Board of Tax Appeals 81

Mr. M

CKELLAR. I ask to be allowed to have the amendment go

over until we can get the facts.

Mr. S

MOOT. There is no necessity of that. If there were half that

number, we have not enough judges. We are not going to provide

200 judges.

Mr. O

VERMAN. The Senator certainly did not mean 5,000,000

claims?

Mr. M

CKELLAR. That would mean $50,000,000,000 —

Mr. S

MOOT. I do not mean that.

Mr. M

CKELLAR. I am sure the Senator could not mean that.

Mr. S

MOOT. I do not mean in dollars at all; I mean in claims.

* * * * *

Mr. M

CKELLAR. If there were 5,000,000 claims of $10,000 each

in taxes, it would be something so stupendous that the mind of man

could hardly conceive it. I am sure the Senator from Utah [Mr.

MOOT], who is generally accurate and who accused me of not

knowing what my amendment meant, has his facts sadly mixed on

this proposition. I challenge him to bring the facts from the

Treasury Department. The Treasury Department can give them.

Mr. S

MOOT. I have already stated to the Senator that I have not

made a personal examination into those claims, and no one else has

done so outside of the Treasury Department; but the Treasury

Department officials tell me that there are over 5,000,000 claims

which would be affected by this amendment. It is impossible to

have enough judges to handle those claims. Of course, there is

nothing to many of the claims. There probably is nothing to 98 per

cent of them. But the taxpayers have a right to file claims. They

make the claims, and I refer to claims to abatement as well.

For the reasons I have given, I hope the amendment will not be

agreed to.

5. Effect of Board Decision

A key feature of the Administration proposal provided that Board

decisions were only final on the issue of summary assessment, and not with

respect to the question of liability. Thus, the Government, if it lost before

the Board, could not summarily assess additional tax; however, the

Government could, within one year, commence a court action for

collection of any amount disallowed as a deficiency by the Board.

155

Conversely, if the Government prevailed before the Board, the deficiency

155

1924 Administration Bill, supra note 6, § 274(b), as enacted, Revenue Act of

1924, ch. 234, § 274(b), 43 Stat. 297.

82 The United States Tax Court – An Historical Analysis

would be immediately assessed and collected.

156

Although the taxpayer

could not directly appeal the Board decision to a higher court, he could file

a claim for refund. If the claim was either denied or was not acted on

within six months, the taxpayer could then commence a refund action in a

district court or the Court of Claims.

157

In any further court proceedings,

the Board’s decisions were to be taken as prima facie evidence of the facts

found by the Board.

158

Since Mellon envisioned a Board that would conduct informal hearings,

it was entirely appropriate that its decisions should not be appealable but

rather should be subject to collateral review. However, in light of the

congressional amendments, particularly those with respect to practice and

procedure, it is somewhat surprising that serious consideration was not

given to making Board decisions final with a right of appeal. Nevertheless,

no such modification was advanced, and the Mellon proposal on this point

was adopted by Congress virtually without change.

A Senate amendment was added to the bill that, if retained in the final

Act, would have substantially changed the effect of Board decisions that

were adverse to the taxpayer. The amendment, introduced by Senator Reed

of Missouri, put the initiative with the Government to collect disputed

deficiencies. If the Board determined a deficiency, the tax would be

assessed and the taxpayer notified thereof. Within 30 days of the mailing of

the notice, the taxpayer could file a statement admitting so much of the

deficiency as he felt was due. If the deficiency determined by the Board

exceeded this amount, the Government could collect the excess only by

commencing a district court action that the taxpayer could defend on

substantive grounds. Interest of six percent would be added by the court to

any judgment affirming a deficiency, and a penalty of 25% could be added if

the court found the taxpayer’s defense to be frivolous. The Government

could apply to the district court for security to be given by the taxpayer if

reasonable grounds existed for believing that collection of any judgment

rendered for the Government would be jeopardized by the fraudulent or

wrongful act of the taxpayer.

159

Senator Reed of Missouri, who introduced the amendment, admitted

that he had drawn it before he knew of the proposal for a Board of Tax

Appeals.

160

Nevertheless, the Senate adopted it to enable the House-Senate

156

Id.

157

See Revenue Act of 1924, ch. 234, § 1014, 43 Stat. 343; H.R. REP. NO. 68-

179, at 8 (1924); S. R

EP. NO. 68-398, at 42 (1924).

158

1924 Administration Bill, supra note 6, § 1000(d), as enacted, Revenue Act of

1924, ch. 234, § 900(g), 43 Stat. 337.

159

65 CONG. REC. 8108–09 (1924).

160

Id. at 8114.

Creation of the Board of Tax Appeals 83

conference to study the proposal and consult Treasury.

161

In fact, the only

true advocate of the proposal was Senator Reed. The provision was excised

by the conference,

162

so the amendment itself was not of great importance.

The debates, however, illustrated congressional suspicion of the Board.

The proposal was intended to cure what Senator Reed saw as the

existing evil of the power of Treasury to make an ex parte assessment of

additional tax, long after the close of the taxable period. This assessment

could force an individual or a business, unprepared for the additional tax,

into bankruptcy or subject it to distraint on its property without a chance to

have a court hearing on the issue. The amendment was to give the taxpayer

his day in court.

163

The principal argument against the Reed amendment

was that the Board of Tax Appeals would solve the problem. Senator Reed,

however, did not see the Board’s hearing as the equivalent of a day in court

and apparently did not believe that the Board would be truly independent.

If the board works as perfectly as my friend from Utah (Senator

Smoot) hopes it will, the taxpayer would in very few instances be

obliged to go to court; but if it does not work perfectly, and if the

taxpayer is really aggrieved, he will have his day in court according to

the rules of law and evidence; otherwise he is remitted merely to the

decision of a subdivision of a board created in the Treasury

Department out of such material as they may be able to get, and that

board is quite as likely to err as the boards that were voluntarily set

up without any particular law or any law whatever to warrant their

creation.

164

The provision was also seen as having a certain salutary effect on the

Board’s deliberations. Knowing that the case would go to court if they

decided against the taxpayer, Board members might be more likely to be

fair and just, rather than assuming an arbitrary position toward the

taxpayer.

165

Although Senator Reed alone defended the amendment, it is apparent

that others shared some of his views on the Board.

166

This attitude was

understandable since the Board was an untried body that in its initial

conception was merely a successor to the Committee on Appeals and

Review. This same skepticism led to the more constructive amendments

that secured the Board’s independence from the Treasury (an amendment

161

Id. (remarks of Senator Jones of N. Mex.).

162

H.R. REP. NO. 68-844, at 23 (1924).

163

65 CONG. REC. 8108–10 (1924).

164

Id. at 8111.

165

Id.

166

See 67 CONG. REC. 524 (1925) (remarks of Chairman Green).

84 The United States Tax Court – An Historical Analysis

of which Senator Reed was apparently unaware) and provided a more

formalized procedure.

167

D. The Board from 1924–1926

When its first members assembled to be sworn in on July 16, 1924, there

was considerable uncertainty as to both the Board’s prospects for success

and the support it would receive from the Administration and Congress.

President Coolidge had signed the Revenue Act of 1924 into law on June 2,

1924, but he did so with serious reservations. In the view of his

Administration, the Board was to be created for the purpose of moving the

review function from the Bureau to the Treasury Department. Congress, of

course, went much further than this and, in the words of President

Coolidge, made the Board “in its essentials practically a court of record.”

168

The President felt that these changes would so burden the Board with

procedural, evidentiary, and other formalistic rules that it would be unable

to cope expeditiously with its expected caseload. “The result will be greater

delay in the final settlement of tax cases, and may ultimately result in the

complete breakdown of the administrative machinery for the collection of

taxes.”

169

Not surprisingly, the President’s views were shared not only by

Secretary Mellon

170

and A.W. Gregg, special assistant to Secretary Mellon,

171

but also by Administration supporters on the Hill.

172

The same view was

reiterated more moderately by Under Secretary of the Treasury, Garrard B.

Winston, at the organizational meeting at the Board on July 16, 1924. He

warned that “there is great danger that . . . [the] Board may be

overwhelmed” because of its formalistic procedure and therefore urged the

new members to organize quickly under rules that would permit the speedy

settlement of cases.

173

167

See supra notes 55–97 and accompanying text.

168

See Statement of President Coolidge, supra note 97.

169

Id.

170

Mellon, supra note 93.

171

Undated statement of A.W. Gregg, c. 1924, National Archives Building,

Records of the Treasury Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–

24.

172

65 CONG. REC. 9540 (1924) (remarks of Mr. Mills); see also id. at 9545

(remarks of Mr. Tilson).

173

Treasury Department, press release, July 16, 1924, National Archives

Building, Records of the Treasury Dep’t, Record Group 56, Tax – Board of Tax

Appeals 1923–24 [hereinafter cited as Winston Press Release].

Creation of the Board of Tax Appeals 85

Of course, many people disagreed with these appraisals and felt that the

Board had been strengthened by the amendments.

174

Indeed, some even

believed that Congress had not gone far enough and that the Board should

have been made, in all respects, a court.

175

Oddly enough, within a little

more than a year, the very same Administration that had excoriated

Congress for legislation that might lead to the breakdown of tax

administration was to admit the error of its ways and to urge Congress to

take additional steps to make the Board a court.

176

There were also those who believed that creation of the Board of Tax

Appeals, no matter how constituted, would do little to relieve the

fundamental problems of tax administration. In the view of these

observers, only improved performance by the Bureau could solve the

problem, and such improvement would obviate the need for the Board.

177

They perceived the complexity of the law and the inefficiency and

arbitrariness created by the personnel policies of the Bureau as the real

culprits in the tax administration crisis. Unless these problems were solved,

creation of the Board would achieve little good. Thus, Chairman Green of

the Ways and Means Committee supported the Board only because he felt

the proposed $10,000 salary would be sufficient to attract and hold

competent personnel. He did not regard the other aspects of the proposal

as likely to relieve the problem and took the position that if the

recommended salary for Board members was reduced he would favor

eliminating the Board entirely.

178

To a large extent, these critics failed to appreciate the limited objective

of the Board. It was not intended by itself to solve all the problems

associated with tax administration. A more realistic appraisal of the Board’s

function was given by its first Chairman, Charles D. Hamel.

It must not be expected that the Board can in itself reduce or remove

the complexities that are inseparable from the administration of any

tax law similar to the laws which have been enacted since the

adoption of the 16th Amendment. It will afford an independent

tribunal for the consideration of questions which grow out of a valid

difference of opinion as to the correctness of the findings of the

174

See, e.g., 65 CONG. REC. 3284 (1924) (remarks of Mr. Young); id. at 9544

(remarks of Mr. Treadway); id. at 9546 (remarks of Mr. Hawley).

175

1924 House Hearings, supra note 26, at 112 (testimony of Mr. Ely

Goldsmith).

176

Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and Means,

69th Cong., 1st Sess. 932 (1925) [hereinafter cited as 1925 House Hearings].

177

1924 House Hearings, supra note 26, at 409; 65 CONG. REC. 3282 (1924)

(remarks of Mr. Garner); id. at 3283–84 (remarks of Mr. Blanton).

178

65 CONG. REC. 3282 (1924).

86 The United States Tax Court – An Historical Analysis

Bureau of Internal Revenue in any given case, and to that degree it

will assist in the equitable and just collection of the tax and ensure

that the rights of the taxpayer are duly protected and observed.

179

In the first hectic months following its creation, the Board moved toward

fulfilling this objective.

1. Selection of Members

The first step in organizing the Board was the selection of its members.

The Revenue Act of 1924 did not specify the qualifications for Board

membership; it merely directed that selection be based “solely on the

grounds of fitness to perform the duties of the office.”

180

On July 2, 1924,

President Coolidge selected the first 12 members of the Board.

181

Seven

were “from the public” and five were “from the Bureau of Internal

Revenue.”

182

From the Public:

Adolphus E. Graupner (R)

J.S.Y. Ivins (R)

John M. Sternhagen (R)

Sumner L. Trussell (R)

John D. Marquette (D)

W.C. Lansdon

A.E. James (R)

From the Bureau:

Charles D. Hamel (R)

Jules Gilmer Korner, Jr. (R)

Benjamin H. Littleton (D)

Charles P. Smith (R)

Charles M. Trammell (D)

California

New York

Illinois

Minnesota

Washington, D.C.

Kansas

New York

North Dakota

North Carolina

Tennessee

Massachusetts

Florida

The Board members met for the first time on July 16, 1924, in the office

of Under Secretary Winston, where they took the oath and officially

assumed office.

183

Congress was not then in session, so the Senate could

179

Letter from Charles D. Hamel to Carlyle S. Baer, dated December 29, 1924,

pp. 22–23, filed at the U.S. Tax Court in “Revenue Act of 1924: Memoranda and

Correspondence.”

180

Revenue Act of 1924, ch. 234, § 900(b), 43 Stat. 336.

181

N.Y. Times, July 3, 1924, at 8, col. 3.

182

See Winston Press Release, supra note 173.

183

B.T.A. Conference Minutes, July 16, 1924.

Creation of the Board of Tax Appeals 87

not confirm the nominations, but pursuant to a concurrent resolution of

the House and Senate approved June 3, the new appointees could be

compensated for services rendered prior to Senate approval.

184

The political affiliation of the first members is noted parenthetically in

the same manner used by Secretary Mellon when he recommended the

appointment of these individuals to President Coolidge.

185

Of course, party

affiliation was not a statutory criterion of appointment, but it should not be

surprising that Presidents have tended to select appointees for the Board

and the Tax Court from the ranks of their own parties.

Occasionally political and professional considerations merged in the

selection (or non-selection) of members. In 1929, Mr. Walter S. Hallanan,

then a member of the Republican National Committee, wrote Secretary

Mellon concerning a prospective appointee.

I have learned that Mr. L.S. Echols of Charleston, W. Va., is

endeavoring to secure appointment as a member of the Board of Tax

Appeals.

Mr. Echols has only recently been deposed here as postmaster of

the City of Charleston upon the recommendations of Senator Goff,

Senator Hatfield and myself. He has consistently opposed the

Republican ticket and I feel that it would be most unfortunate for

him to have any recognition from the administration at Washington.

Mr. Echols was formerly employed in my office during my term

as State Tax Commissioner of West Virginia. He has no particular

capacity for this work and, aside from this fact, is indolent and

entirely lacking in any elements of aggressiveness.

I am writing this letter with a view to calling your attention to the

matter and protesting against any favorable consideration being

given to the application which I understand has been filed by Mr.

Echols. I am sure that both United States Senators from West

Virginia feel the same way concerning him. Any appointment given

him would operate to place a premium on party infidelity.

186

184

N.Y. TIMES, June 4, 1924, at 2, col. 4.

185

Letter, July 2, 1924, National Archives Building, Records of the Treasury

Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–24.

186

May 2, 1929, National Archives Building, Records of the Treasury Dep’t,

Record Group 56, Tax – Board of Tax Appeals 1928–32.

88 The United States Tax Court – An Historical Analysis

On March 18, 1925, an additional four members were appointed:

187

William R. Green, Jr.

Percy W. Phillips

Logan Morris

William D. Love

Iowa

New York

Utah

Texas

A mild flurry of protest accompanied the naming of these members.

Mr. Green was the son of Chairman Green of the Ways and Means

Committee; Mr. Love was a former law partner of Representative Garner,

ranking Democrat on Ways and Means; Mr. Morris was a former secretary

to Senator Smoot, chairman of the Senate Finance Committee; and Mr.

Phillips was recommended by Senator Wadsworth, a member of the

Finance Committee. Some smelled a political deal in the appointments, but

because no one disputed the qualifications of the new appointees and

because Chairman Green and Representative Garner frequently disagreed

with the Administration over tax policy, the controversy quickly subsided

and the nominations were confirmed by the Senate on the same day they

were announced.

188

The additional four appointments brought the total membership of the

Board to 16, but almost immediately, Chairman Hamel resigned

189

for

reasons of health and inadequate compensation.

190

In August, 1925, C.R.

Arundell of Oregon was appointed, but Mr. Ivins resigned one month

thereafter and Board membership remained at 15 until 1926.

191

The 1924 Act authorized a membership of up to 28 for two years, and it

seems clear that initially it was contemplated the Board would be at full

authorized membership.

192

That this did not come to pass seems to have

been the result of two factors. First, the short two-year term of office for

the initial members, combined with a relatively low rate of compensation,

made it difficult to recruit qualified personnel. Second, it quickly became

apparent that although a Board of 28 members could hear more cases than

a smaller body, a large number of members would make the work of the

Board unwieldy. Until July of 1926, the entire Board reviewed all decisions

187

N.Y. TIMES, March 19, 1925, at 4, col. 6.

188

Id.

189

1925 House Hearings, supra note 176, at 864 (testimony of Chairman

Korner).

190

Id. at 922 (testimony of Mr. Hamel).

191

2 B.T.A. iii.

192

N.Y. TIMES, July 17, 1924, at 18, col. 1.

Creation of the Board of Tax Appeals 89

before their promulgation.

193

The purpose of this practice was to assure a

high degree of uniformity to Board precedents.

194

This was considered a

very important feature of the Board, and it was felt that a body considerably

larger than 15 or 16 could not practicably review all cases decided by the

members.

195

The questions of the appropriate qualifications of members,

the composition of the Board, and the selection procedure were the subject

of considerable interest in 1924 and later years.

196

It will be recalled that a

central issue in the legislative evolution of the 1924 Act was the selection

procedure. The Administration proposed that members be selected by the

Secretary of the Treasury. As part of the congressional amendments

designed to assure an independent Board, this authority was given instead

to the President. Nevertheless, the Treasury Department played a major

role in the selection of the first Board members. Solicitations and

recommendations for appointment were referred to Secretary Mellon and

his subordinates.

197

On July 2, 1924, the date on which the President

announced the first appointments, Secretary Mellon sent a letter to the

President listing twelve individuals “whom you may desire to appoint.”

198

These twelve individuals in fact comprised the original appointments.

Additionally, evidence exists that the Bureau of Internal Revenue itself had

some influence in the selection of members.

199

193

1925 House Hearings, supra note 176, at 861 (testimony of Chairman

Korner). After June 1926, the Board became more selective in the cases it would

review. See B.T.A. Conference Minutes, June 23, 1926.

194

J. Gilmer Korner, The United States Board of Tax Appeals, 11 A.B.A. J. 642,

643 (1925) [hereinafter cited as Korner].

195

J.S.Y. Ivins, What Should Congress do with the Board of Tax Appeals, 3 NAT’L

INC. TAX MAG. 391 (1925) [hereinafter cited as Ivins].

196

Board of Tax Appeals Prepares for Early Hearings, 2 NAT’L INC. TAX MAG. 247–

48 (1924).

197

See generally letters dated 1924–29, National Archives Building, Records of

the Treasury Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–32.

198

National Archives Building, Records of the Treasury Dep’t, Record Group

56, Tax – Board of Tax Appeals 1923–24.

199

See, e.g., Memorandum from Under Secretary of the Treasury Winston to

Commissioner Blair, August 1, 1924, National Archives Building, Records of the

Treasury Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–24.

Robert S. Lovett, at present one of the Assistant Attorney Generals, wants

to be a member of the Board of Tax Appeals. I attach a statement of his

qualifications. I think he would make an ideal type of man . . . . Will you

remember to bring his name up, particularly when we are considering the

balance of the members?

90 The United States Tax Court – An Historical Analysis

The part played by the Treasury in the selection process was widely

known

200

and, in some circles, disapproved. Accountants were particularly

distressed, and Edward Gore, president of the American Institute of

Accountants, wrote President Coolidge in September, 1924, arguing that the

legislative history of the 1924 Act indicated that Treasury should have no

influence in the selection of Board members. He warned that the public

would lose confidence in the new agency if such influence persisted.

201

Treasury’s answer to this criticism was that the Board was an independent

agency and its members, in discharging their duties, would not be affected

by the selection procedure.

202

Treasury might have added that although Congress removed the direct

authority of the Secretary to appoint Board members, it did not prohibit the

President from consulting the Secretary and giving whatever weight he

desired to the Secretary’s recommendations. Moreover, because Treasury

was virtually the only government agency having direct contact with tax

experts, that Department was the most obvious source of information on

the competence of proposed members.

It is likely that most of those who objected to Treasury’s influence in the

selection of members were really concerned about the experience and

professional background of the persons selected rather than the selection

process. Soon after the enactment of the 1924 legislation, a controversy

erupted over whether persons who had served at Treasury or the Bureau

should be eligible for appointment. Some felt that such experience would

give an anti-taxpayer bias that would be inconsistent with the duties of the

Board; others felt that a Treasury background was virtually a sine qua non

for having the degree of expertise necessary for Board membership.

203

The

controversy reached the White House, and the President attempted a

compromise by appointing five members from the Bureau and seven from

the public. The compromise, however, did little to appease those who did

200

“I do not think there is any doubt that the personnel was largely selected in

the first instance by the Treasury Department and recommended to the President,

who made the appointments.” Albert L. Hopkins, The United States Board of Tax

Appeals, 12 A.B.A. J. 466, 471 (1926) [hereinafter cited as Hopkins].

201

September 8, 1924, National Archives Building, Records of the Treasury

Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–24. Not all accountants

believed that Treasury should have no influence in the selection of members. The

New Tax Board, 3 C.P.A. M

AG. 31 (1924).

202

Letter from Secretary Mellon to C.B. Slemp, Sec’y to President Coolidge,

National Archives Building, Records of the Treasury Dep’t, Record Group 56, Tax

– Board of Tax Appeals 1923–24.

203

Conflict Over Choice of Members for Board of Tax Appeals, 2 NAT’L INC. TAX

MAG. 218 (1924); N.Y. Times, June 17, 1924, at 31, col. 1; see also The New Tax

Board, 3 C.P.A. M

AG. 31 (1924).

Creation of the Board of Tax Appeals 91

not want former Treasury people on the Board.

204

While it was true that

only five appointees came to the Board directly from service with the

Bureau, of the remaining seven, three had been Bureau employees before

entering the private sector,

205

and two others had been employed by State

taxing agencies.

206

Adding salt to the wound, the first chairman of the

Board, Charles D. Hamel, had up to the time of his appointment been

chairman of the Bureau’s Committee on Appeals and Review. At the

organization meeting of the Board on July 16, Under Secretary Winston

suggested Hamel’s election as chairman.

207

No other nominations were

made and Hamel was unanimously elected.

208

It was rumored that the

appointees had to give assurances that they would support Hamel for

chairman in order to gain appointment.

Because the Board was conceived to protect taxpayers from arbitrary

Bureau action, domination of the Board by former employees of the

“oppressor” was particularly irksome. The Treasury and the Board strove

to dispel the notion that the Board was “pro-Government,” but the idea

persisted. The New York Times editorialized in favor of selecting for

membership “those who have to obey the law rather than . . . those who

administer it.”

209

The same sentiment was expressed more colorfully by a

Toledo attorney in a letter to C. Bascom Slemp, Secretary to President

Coolidge.

[I]t is not possible to cure a sheep killing dog by tying a ribbon

around his neck nor . . . is [it] possible to reform a tax hound by

giving him a position of apparent independence of the Bureau.

210

Another source of dissatisfaction stemmed from the fact that, with one

exception (Lansdon), all the Board appointees were lawyers. Today it is

taken for granted that a necessary qualification for appointment to the Tax

Court is a legal background, but the situation in 1924 was considerably

different. In the first place, throughout the early years of the income and

204

See, e.g., Letter from Roy P. Logan, Retail Merchants Assoc., to President

Coolidge, July 25, 1924, filed at the U.S. Tax Court in “Personnel: Memoranda &

Correspondence.”

205

Sternhagen, Trussell, and Marquette.

206

Ivins and Graupner.

207

Winston Press Release, supra note 173.

208

B.T.A. Conference Minutes, July 16, 1924.

209

August 2, 1924, at 8, col. 3.

210

Letter from Edwin Marshall, Sept. 17, 1924, National Archives Building.

Records of the Treasury Dep’t, Record Group 56, Tax – Board of Tax Appeals 1923–

24. In 1926, the Senate passed a resolution that future appointees should not have

served at Treasury within two years of their appointment.

92 The United States Tax Court – An Historical Analysis

profits taxes, accountants had dominated tax practice.

211

Second, the

members of the Committee on Appeals and Review were in large part

accountants and engineers. The Board was perceived by many as a

successor to the Committee, and it was not understood why the

membership of the Board was almost exclusively drawn from the bar.

During this period, accounting organizations actively petitioned for the

selection of accountants and engineers to the Board.

212

Lawyers were

criticized as being both overly technical and insufficiently grounded in

practical experience with commercial transactions and practices.

213

That

these petitions went unheeded probably should not be attributed to

anti-accountant sentiment at Treasury. The presence of several non-lawyers

on the Committee on Appeals and Review until its dissolution in 1924

indicates that no such bias existed. As a matter of fact, had Congress

adhered to the Administration proposal in creating the Board, it is likely

that lawyer dominance would not have developed. As much was said by

Secretary Mellon when he wrote that

the original recommendations for a Board of Tax Appeals

contemplated an administrative body somewhat of the character of

the board of referees which handles British income tax matters.

Such a board properly would be made up of lawyers, accountants,

and business men and would adjust tax questions with the taxpayers

in a commonsense way around the table. Congress, however,

modified the proposal by creating a court in which taxes are to be

litigated. The requirements for membership on a court are

knowledge of the law, experience in litigation, and appreciation of

the value of evidence. The training of a member of the court,

therefore, should be essentially legal.

214

It is unlikely that these words did much to soothe the outraged sensibilities

of the accountants.

211

See infra note 234 and accompanying text.

212

See, e.g., Letter from Frank Lowson, Chairman, Comm. on Fed. Legislation,

American Inst. of Accountants, to Calvin Coolidge, Sept. 20, 1924, containing

resolutions of State accounting societies of Delaware, Indiana, Kentucky and Ohio,

National Archives Building, Records of the Treasury Dep’t, Record Group 56, Tax

– Board of Tax Appeals 1923–24.

213

See George O. May, Accounting and the Accountant in the Administration of Income

Taxation, 47 C

OLUM. L. REV. 377 (1947).

214

Letter from Secretary Mellon to C. Bascom Slemp, Sept. 22, 1924, National

Archives Building, Records of the Treasury Dep’t, Record Group 56, Tax – Board of

Tax Appeals 1923–24.

Creation of the Board of Tax Appeals 93

The prognosis for the Board in the summer and fall of 1924 was

gloomy. In addition to the dissatisfaction of the Administration with the

type of body Congress had created, large segments of the accounting

profession, and to a lesser extent, the legal profession, were displeased by

the close connection of the first Board members with Treasury, the

influence of Treasury in their selection, and the absence of accountants,

engineers, and businessmen from the Board. Undoubtedly the first

members of the new agency were well aware that if they fell behind with

their caseload, Treasury could argue that it was correct all along in urging

the creation of an informal hearing agency rather than a quasi-judicial body.

The probable result would be a drastic change in the character of the Board.

Moreover, if the Board permitted the appearance of Treasury bias in its

proceedings or decisions, taxpayer representatives would be up in arms and

the Board’s continued existence would be jeopardized. In short, the Board

was confronted with a situation in which it had to prove itself to a disgusted

Treasury and a suspicious public.

2. Rules of Practice and Procedure

Describing the status of the Board on the date its first 12 members were

sworn in, Chairman Korner stated:

At that time there was nothing in the way of a board except the

members who were just sworn in. We had no quarters, no furniture,

no cases, and no business. We had nothing, and the first thing to do

was to get quarters. Tentative arrangements had been made for that

purpose and soon after organization a lease was signed and we went

into quarters in the Investment Building at Fifteen and K Streets. I

might say that under the act the commissioner began sending out the

so-called statutory deficiency letters very soon after the passage of

the act. The board was not organized, as you will note, until about

six weeks after the passage of the act. We realized that there were a

great many taxpayers who did not know where to send their appeals

and that they would be denied relief and the right of appeal unless

they were forthwith instructed and given information as to how and

where such appeals should be prepared and sent.

Accordingly, the most urgent thing for us was the question of

procedure, more particularly with reference to the style and manner

of bringing appeals. Therefore, we went to work and organized

94 The United States Tax Court – An Historical Analysis

ourselves into committees at once and started to work out our

procedure.

215

The Board set to work formulating its procedural rules on July 17,

1924,

216

and after only ten days of “almost continuous session”

217

its first

rules of practice and procedure were released.

218

The new rules, numbering

26, covered nine printed pages and dealt with the essential subjects:

eligibility to practice, pleadings, briefs, motions, hearings, subpoenas,

testimonial and documentary evidence, depositions, written interrogatories,

and stipulations. Included in the rules were forms suggested by the Board

for petitions, applications for admission to practice, subpoenas, and orders

to take depositions.

In formulating the rules, the most important policy question that the

Board had to consider was whether practice should be formal or informal.

The statute was specific as to certain matters: notice and an opportunity for

a hearing had to be afforded taxpayers and the Commissioner; hearings

were required to be open to the public, and reports of the Board and

evidence received by the Board were to be public records; findings of fact

had to be in writing in all cases; in cases involving more than $10,000, a

written opinion was required and oral testimony had to be reduced to

writing; and the Board was to provide for publication of its reports “in such

form and manner as may be best adapted for public information and

use.”

219

Beyond this the statute only stated that “proceedings of the Board

and its divisions shall be conducted in accordance with such rules of

evidence and procedure as the Board may prescribe.”

220

Thus, such matters

as the requirement for and the nature of pleadings and briefs, the conduct

of Board hearings, and the evidentiary rules to be applied were, on the face

215

1925 House Hearings, supra note 176, at 856. The committees and their

composition were:

Preliminary Procedure

Trial Procedure

Ivins

Marquette

Littleton

Graupner

Korner

Trussell

Pleadings

Evidence

Sternhagen

James

Trammell

Smith

Trammell

Lansdon

B.T.A. Conference Minutes, July 17, 1924.

216

B.T.A. Conference Minutes, July 17, 1924.

217

Hamel, The U.S. Board of Tax Appeals, 3 C.P.A. MAG. 273, 275 (1924).

218

N.Y. TIMES, July 28, 1924, at 20, col. 4.

219

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

220

Id.

Creation of the Board of Tax Appeals 95

of the statute, left to Board discretion. Several considerations, however,

compelled the Board to conclude that its practice rules should generally

conform to the formal requirements of judicial procedure.

In the first place, the legislative history of the 1924 Act strongly

supported this conclusion. The Administration proposal had specified that

Board proceedings were to be informal, and the House retained this

prescription. However, the bill was amended on the Senate floor to remove

the reference to informal procedure and to add requirements of publicity,

written opinions, and recorded testimony.

221

Debate in the Senate indicated

that it was the intent of these amendments to provide a judicial

procedure.

222

The Senate changes were retained in the final Act and were

interpreted by virtually all, including President Coolidge, to require the

formality associated with a court of record.

223

Although the legislative history of the Act alone sufficiently

demonstrated the need for a judicial procedure, there were other equally

persuasive considerations in support of that conclusion. Of these, the most

important was the fact that the Board was established as an independent

agency.

224

An independent Board would have no access to Treasury files;

thus, it could not peruse them privately, listen to the taxpayer’s version of

the controversy, and render a decision. Instead, it could only make a

judgment on the basis of what the parties themselves presented on the

record. Such a record could best be compiled in a judicial format.

225

Additionally, the Board’s function was inherently judicial—deciding cases.

Based on “the experience of all courts since the beginning of

civilization,”

226

it was determined that although formal procedure might

slow up an individual trial, generally it accelerated the handling of large

numbers of cases and preserved uniformity.

227

Because the findings of the

Board would be prima facie evidence in a future trial of the same issues,

those findings had to be made in accordance with a legal record and be

supported by legal evidence.

228

In sum, the Board concluded that stricter

rules than those of the Committee on Appeals and Review would best

accommodate the conflicting demands of speed, accuracy, and justice.

229

221

See supra notes 81–88 and accompanying text.

222

65 CONG. REC. 8133 (1924) (remarks of Senator Jones of N. Mex.).

223

See supra note 97 and accompanying text.

224

Revenue Act of 1924, ch. 234, § 900(k), 43 Stat. 338.

225

See Charles D. Hamel, The United States Board of Tax Appeals, 2 NAT’L INC.

TAX MAG. 293, 295 (1924) [hereinafter cited as Hamel].

226

Ivins, supra note 195, at 392.

227

Id.

228

See Hamel, supra note 225, at 295–96.

229

Kingman Brewster, Some Observations Relating to the Board of Tax Appeals, 3

AT’L INC. TAX MAG. 251 (1925) [hereinafter cited as Brewster].

96 The United States Tax Court – An Historical Analysis

At the same time that the Board was pondering the question of whether

a formal or informal procedure should be adopted, Treasury was

considering a parallel problem under the new law. The statute required that

the Board provide an opportunity for a hearing to the Commissioner,

230

but

did not require that the Commissioner take advantage of the opportunity.

The question then was whether the Commissioner should appear in every

case before the Board. Under the original Administration proposal for the

creation of the Board, it was contemplated that the Commissioner would

not be required to appear in every case and that he would not be prejudiced

by his inaction.

231

Rather, the Board would consider these cases on the

basis of Bureau files. Since under the proposal the Board was to be a part

of Treasury, there was no impediment to access by the Board to Bureau

files. The Treasury evidently gave serious consideration to following the

same plan as originally contemplated even though the Board, as created,

was independent of Treasury and was to follow a formal judicial procedure.

Ultimately, however, it was decided that the Commissioner should appear

in every case lest the Board decide that his failure to appear should be

treated as tantamount to a default.

232

The fact that proceedings were to be essentially judicial raised a novel

question concerning requirements for practice before the Board. In

proceedings within the Bureau, taxpayers were permitted to be represented

by persons of good moral character who were either attorneys or certified

public accountants, or could otherwise “. . . show satisfactory educational

qualifications and evidence of an ability to understand tax questions . . . .”

233

One of the first questions the Board had to decide was whether to adopt

this liberal rule. Tax practice had historically been open, and for that reason

many tax agents appearing before the Committee on Appeals and Review

were either certified public accountants or persons who were not formally

qualified in any profession. Indeed, in the early years tax practice was

dominated by non-attorneys.

234

Because the Board in some sense was an

extension of the Committee on Appeals and Review, the expectations of

many would be disappointed if the practice requirements were tightened.

On the other hand, unlike the Committee on Appeals and Review, the

Board was to operate under rules of judicial procedure. If Congress had

230

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

231

Nelson Hartson, The Board of Tax Appeals in its Relation to the Bureau of Internal

Revenue, 3 N

AT’L INC. TAX MAG. 215, 216 (1925) [hereinafter cited as Hartson]. It

is not clear that Congress understood that the Commissioner would not appear in

every case. See H.R. R

EP. NO. 68-179, at 8 (1924); S. REP. NO. 68-398, at 9 (1924).

232

Hartson, supra note 231.

233

Circular 230, II-2 CUM. BULL. 372, 373 (1923).

234

See Korner, in 7 ASS’N OF THE BAR OF THE CITY OF N.Y., LECTURES ON

LEGAL TOPICS 3, 5–7 (1929).

Creation of the Board of Tax Appeals 97

indeed created a court, albeit naming the tribunal a “Board,” cogent reasons

supported limiting practice to attorneys. Practice before courts traditionally

had been limited to lawyers whose specialized training was necessary to

enable them to deal with highly technical questions of evidence and judicial

procedure. Moreover, if the Board adhered to the Bureau position, it

would have to prescribe and administer detailed standards for admission to

practice before the Board. A practice limited to attorneys could more

simply be geared to whether an applicant was licensed by a recognized

licensing authority.

The problem was a knotty one. Its resolution could not be deferred,

however, because the Board would be unable to hear appeals until it had

determined who would be eligible to prosecute the appeals. Accordingly,

one of the first rules of practice announced by the Board dealt with

admission to practice.

235

In a spirit of compromise, the Board provided

that attorneys and certified public accountants were eligible to practice.

236

The rule had the benefit of continuing the Treasury practice of relying on

the relatively simple criteria of prior professional licensing. However, as

with any compromise, approval was not universal; some took the position

that practice should be open to all “qualified” members of the public and

others believed practice should be restricted to lawyers.

237

Aside from the question of whether the Board would adopt formal or

informal procedural rules, the most important question faced in the new

235

N.Y. TIMES, July 21, 1924, at 14, col. 6.

236

B.T.A. RULE 2 (July, 1924 ed.). Of course a taxpayer was permitted to

represent himself. Similarly, a partner could represent his partnership, and a

corporate officer could represent his corporation.

237

Should the Board of Tax Appeals Modify its Rules of Practice?, 2 NAT’L INC. TAX

MAG. 270 (1924). Initially, many certified public accountants took advantage of

their privilege to practice, and the Board experienced a certain degree of difficulty

because of their unfamiliarity with the rules of judicial procedure. Nevertheless, the

rule with respect to eligibility to practice remained basically unchanged until 1942

when by congressional decree, the Board (at that time renamed the Tax Court of

the United States) was required to admit any “qualified person” to practice.

Revenue Act of 1942, ch. 619, § 504(b), 56 Stat. 798 (now codified at IRC § 7452).

Curiously, the effect of this amendment was, as a practical matter, to restrict Tax

Court practice to attorneys because the court quickly adopted a rule requiring all

non-lawyers, including certified public accountants, to pass an examination to

qualify for admission. T

AX CT. R. 2 (December 15, 1942 ed.) (now TAX CT. R.

200). Thus, in 1942, 230 certified public accountants were admitted to practice

under the old rule. In 1943, after adoption of the new rule, only two non-lawyers

gained admittance. In modern times, representation of clients before the Tax

Court is largely undertaken by attorneys. From 2004 to 2012, only 37 non-attorney

practitioners were admitted to practice before the Tax Court. During that same

period, the Tax Court admitted 9,738 attorneys.

98 The United States Tax Court – An Historical Analysis

rules was the burden of proof. In refund actions in the courts, taxpayers

generally had the burden of proving that they had overpaid their taxes and

were entitled to a refund.

238

The Board adopted the same rule in its

proceedings

239

for two reasons. First, the taxpayer as the petitioner was

alleging that the Commissioner had erred in asserting a deficiency in tax.

Because he was challenging action of the Commissioner, the taxpayer under

traditional evidentiary concepts would have the burden of proving the

error.

240

Second, the rule was seen as particularly appropriate in tax cases

because the evidence necessary to determine the accuracy of the deficiency

was almost always in the possession of the taxpayer. Therefore, the

taxpayer more easily than the Commissioner could adduce the evidence

before the Board.

241

In this regard, James Ivins, an original member of the

Board and the draftsman of the burden of proof rules, contended that more

than 24 of 25 cases decided for the Commissioner would have been decided

differently if the taxpayer did not have the burden of proof.

242

If you are going to . . . [shift the burden of proof onto the

Commissioner] you might as well repeal the income tax law and pass

the hat, because you will practically be saying to the taxpayer, “How

much do you want to contribute toward the support of the

Government?” and in that case they would have to decide for

themselves.

243

Despite efforts by the Board to make its procedural rules as simple as

possible, these rules were criticized in some quarters as being overly

technical.

244

Although there are few today who would support this charge,

it was nevertheless true that the Board encountered early difficulties with

adherence to its rules, primarily as a result of the early practitioners’

unfamiliarity with the new procedures.

245

This was particularly true in the

case of pleadings and evidence.

Pleadings, originally fashioned to expedite business, paradoxically were

the greatest cause of delay until taxpayer representatives became familiar

with Board rules. Although the function of the Board was a mixture of

238

See, e.g., Germantown Trust Co. v. Lederer, 263 F. 672, 673 (3d Cir. 1920).

239

B.T.A. RULE 20 (July, 1924 ed.).

240

See 1925 House Hearings, supra note 176, at 907–08 (testimony of former

member Ivins).

241

Id. at 908.

242

Id.

243

Id. at 907.

244

See id. at 938.

245

Ruslander, Practice Before the United States Board of Tax Appeals, 3 C.P.A. MAG.

248 (1924).

Creation of the Board of Tax Appeals 99

appellate and nisi prius courts, the Board believed that if the practice of

either type of court were wholeheartedly adopted, proceedings could be

subject to delay before issue was joined and the case made ready for

hearing.

246

Thus, a hybrid form of initial pleading, to be filed by the

taxpayer, was prescribed that combined the functions of summons or

notice of appeal, of complaint, and of an opening argument.

247

This

pleading, the petition, required concise assignments of error in the

Commissioner’s deficiency determination and statements of fact and law to

substantiate them.

248

The petition was to be “complete in itself, so as fully

but briefly to inform the Board of the issues to be presented.”

249

A unique

aspect of Board practice was that all papers, including pleadings, were not

served by parties but rather by the Board itself through its docket office.

This was felt to simplify and expedite procedure.

250

Difficulties arose principally because many petitioners were unaware of

the independence of the Board from the Treasury and the Bureau. Many

petitioners apparently assumed the Board was privy to Bureau files and thus

familiar with the details of their case. This resulted in the filing of many

insufficient petitions and led the Board to publicly urge compliance with the

rules in hopes of stemming the tide of defective petitions.

251

Typical

incomplete filings were mere notices of appeals or conclusions that the tax

was erroneous. It was reported by a former member of the Board that

“between 30 and 40 percent of the petitions filed are highly defective.”

252

In its statements, the Board emphasized its judicial character and affirmed

that “[t]he statute clearly contemplates a trial before the Board and each

case must be decided upon the record made before it by the parties.”

253

Probably as a result of difficulties with pleading, the first amendment to the

Board’s procedural rules provided for motions in respect of the petition.

Such motions, which included the motion to make more definite and

certain, to strike out, and to dismiss, were intended to take the place of the

demurrer, which was losing favor.

254

246

Hamel, supra note 225, at 296.

247

Id.; see also A.E. Graupner, The Operation of the Board of Tax Appeals, 3 NAT’L

INC. TAX MAG. 295 (1925) [hereinafter cited as Graupner].

248

B.T.A. Rule 5 (July, 1924 ed.).

249

Id.

250

See B.T.A. RULES 7, 10, 25 (July, 1924 ed.); Graupner, supra note 247, at 296.

251

Rules Ignored Halt Tax Appeals, Washington Evening Star, Aug. 20, 1924, at 2,

col. 4.

252

1925 House Hearings, supra note 176, at 916 (testimony of former member

Ivins).

253

Appeals to the Board of Tax Appeals Must Comply With the Rules, 2 NAT’L INC.

TAX MAG. 285 (1924).

254

Hamel, supra note 225, at 296.

100 The United States Tax Court – An Historical Analysis

A further difficulty, also related to widespread ignorance of the Board’s

independent status, stemmed from the improper addressing of mail

intended for the Board. The problem became so acute that the Board felt

impelled to issue a press release urging taxpayers not to address mail

intended for the Board to “any other Department or Bureau.” In the case

of the petition, this could be disastrous. Unless the Board received the

petition within 60 days from the date on which the notice of deficiency was

mailed, jurisdiction was irretrievably lost.

255

The responsive pleading to the petition, required to be filed in behalf of

the Commissioner, was the answer. The required specificity of the answer

has been a bone of contention since the earliest days of the Board’s

existence.

256

The first rules prescribed that the answer should be drawn to

admit or deny each material allegation of fact in the petition, and to set

forth any new matters of fact and propositions of law on which the

Commissioner relied.

257

The Commissioner initially took the position that

he needed to enter only a general denial to raise any issue supporting the

deficiency determination.

258

Basing his argument on a theory of

presumptive weight for the Bureau’s findings, he denied responsibility to

take any position or to give any reason as a basis for his determination.

259

The Board did not completely agree with this position, and it soon

amended its rules to require the answer to “fully and completely . . . advise

the taxpayer and the board of the nature of the defense.”

260

In these early days, the situation with respect to evidentiary rules was

also troublesome. The Revenue Act of 1924 empowered the Board to

prescribe its own rules of evidence,

261

but the Board chose not to publish a

comprehensive statement of such rules to be followed in tax appeals.

Rather, it chose to adopt judicial rules of evidence and began applying these

rules in its earliest cases.

262

The decision to require formal rules for the

presentation and acceptance of evidence was grounded on the statutory

provisions that defined the Board and its work.

255

Press Release, January 23, 1925, filed at the U.S. Tax Court in “Organizing

the Board: Memoranda and Correspondence.”

256

Homer Sullivan, Procedure Before the United States Board of Tax Appeals, 2

AT’L INC. TAX MAG. 325, 326 (1924) [hereinafter cited as Sullivan]; cf. Caldwell,

Tax Court Procedure: Problems but not Pitfalls, 27 N.Y.U. I

NST. ON FED. TAX’N 1435,

1439–40 (1969).

257

B.T.A. RULE 9 (July, 1924 ed.).

258

Sullivan, supra note 256, at 326.

259

Id. at 361–62.

260

B.T.A. RULE 9 (as amended, Sept. 3, 1924).

261

Ch. 234, § 900(h), 43 Stat. 337.

262

E.g., Bruce & Human Drug Co., 1 B.T.A. 342 (1925); Lee Sturgess, 2 B.T.A.

69 (1925); Harlan A. Allen, 2 B.T.A. 794 (1925).

Creation of the Board of Tax Appeals 101

Because the Board was statutorily established as independent, its record

had to be independently compiled. Thus, the Board stressed that “[w]hat

has been submitted to or considered by the Bureau of Internal Revenue is

beyond the ken of this Board . . . . [E]vidence that has been presented

before any other department of the Government must be reintroduced

before this Board before we can consider it.”

263

The Board was also

compelled by statute to prepare findings of fact that would be given prima

facie weight on appeal before appellate courts.

264

To justify such respect

for its findings and to cut down on the number of appeals that might ensue

from a belief that different evidence could produce a different result, the

Board felt the need to require evidence that would be competent before a

court. Because of the absence of a jury, the strictest rules were felt to be an

unnecessary impediment to full presentation of facts,

265

but it nevertheless

remained true that the general equity rules of evidence were applicable.

266

Despite the Board’s best efforts to clarify the difference between its

formal procedures and those applicable before the Bureau, practitioners,

both lawyers and non-lawyers alike, were often lax about proving the facts

they had alleged in their petitions and about proving them with competent

evidence. The contrast between practice before the Board and before the

Treasury was clearly demonstrated in the case of a taxpayer who attempted

to “negotiate” a $400 expense deduction without any records on the

grounds that for someone in his financial and social bracket such a

deduction was reasonable and fair. This was an approach that was

unacceptable to the Board because it was a request for a finding without

proof. “We can not indulge in conjecture,” concluded the Board, and

refused relief to the taxpayer.

267

The Board was troubled over the early insufficiencies of pleading and

proof that it encountered, and attempted, through its decisions and through

articles and speeches by members, to educate the public about its rules. An

example of the Board’s attempt to proselytize the tax bar was a lengthy

explanation of the fine art of pleading and preparing a case given to the

American Institute of Accountants by Chairman Korner.

268

He urged the

parties to stipulate or admit facts that were uncontested, but failing such an

agreement, he cautioned that it was the petitioner, the party with the burden

of proof, who was required to present evidence. Among the items offered

by taxpayers that could not be considered as evidence were petitions, briefs,

263

J.M. Lyon, 1 B.T.A. 378, 379 (1925).

264

Revenue Act of 1924, ch. 234, §§ 900(g), (h), 43 Stat. 337, 338.

265

Korner, supra note 194, at 643.

266

See Part X, notes 43–55 and accompanying text.

267

J.M. Lyon, 1 B.T.A. 379, 380 (1925).

268

J.G. Korner, Jr., Practice Before the United States Board of Tax Appeals, 3 NAT’L

INC. TAX MAG. 220 (1925).

102 The United States Tax Court – An Historical Analysis

Bureau rulings, unauthenticated documents and letters, arguments of

counsel, mathematical computations, and unsupported valuation

appraisals.

269

When limited to such data, the Board was unable to make any

findings of fact and could only consider the issues on the basis of the

petition, resolving all issues against the taxpayer.

270

3. The Board in Operation

With the adoption of its procedural rules, the Board got down to the

business of hearing and deciding appeals. The general procedure that the

Board followed was succinctly described by Chairman Korner in several

speeches and articles he authored in an attempt to familiarize the public

with the operations of the new agency.

Upon the receipt of an appeal from a taxpayer it is given a

number and then docketed.

271

A copy of the petition is forthwith

served upon the Solicitor of Internal Revenue, who is the law officer

of the Commissioner. The Solicitor is given 20 days in which to

answer or move in respect to the petition. When the Solicitor has

thus answered or filed a motion in respect to the petition, a copy

thereof is forwarded to the taxpayer by registered mail, and

thereupon the case is considered at issue in the board. When issue is

thus joined, the appeal is transferred to a Day Calendar for hearing,

and set at a day not less than fifteen days hence. The Commissioner

is notified of this date, and the taxpayer is also notified by registered

mail.

269

Findlay Dairy Co., 2 B.T.A. 917 (1925); M. Fischman, 2 B.T.A. 717 (1925);

Lee Sturgess, 2 B.T.A. 69 (1925); Emily Wood, 1 B.T.A. 957 (1925); Elmer E.

Scott, 1 B.T.A. 445 (1925).

270

In response to continued evidentiary difficulties, the Board revised Rule 18

to provide specifically that:

Where there is a joinder of issue on questions of fact the provisions of this

rule relative to submission without argument shall not relieve the party

upon whom rests the burden of proof, of adducing at the hearing proper

evidence in support of his contention. Pleadings do not constitute evidence

and where issues of fact are joined, failure to adduce supporting evidence

will be taken as ground for dismissal.

B.T.A.

RULE 18 (Sept. 27, 1924 ed.).

271

Initially, the docket office of the Board rejected petitions that on their face

showed that they were filed more than sixty days after the mailing of the notice of

deficiency, but this practice was soon discontinued, and it was left to the Solicitor

to move the dismissal of such petitions. See B.T.A. Conference Minutes, March 13,

1925.

Creation of the Board of Tax Appeals 103

At 9:30 A.M. on each hearing day the parties litigant, with their

counsel and witnesses, assemble in one of the hearing rooms of the

board. At that time the Chairman calls the calendar for that day, and

notes the appearances and readiness of the parties to go forward

with the appeals set for that day. The appeals in which issue is

joined on motions of one kind or another are separated from those

appeals in which issue is joined on the merits.

The appeals involving motions are all assigned to one division for

disposition.

272

This is done in the interest of expedition and

economy of time. The cases which are for hearing on the merits are

then assigned for hearing to the divisions, in the order of their

appearance on the Day Calendar. One appeal is assigned to each

division sitting. The remaining appeals which have been announced

as ready are held in abeyance, and are thereafter assigned to divisions

in the order in which they appear on the Day Calendar and as the

divisions become vacant. That is to say, as soon as a division has

completed the first hearing assigned to it, the chairman is notified

and the next appeal on the list is assigned to that division. In this

manner the divisions are kept busy throughout the day, or until the

hearings for that day are completed.

In the division the hearings are conducted substantially as in the

courts, except that there is no jury. Because there is no jury, the

strict rules of evidence obtaining in law courts are relaxed, and the

rules of evidence observed are more nearly those obtaining in courts

of equity. The taxpayer has the opening and closing of the case,

both as to evidence and as to argument. Counsel for both parties

make opening statements in which are outlined the nature of the

272

The 1924 Act authorized the chairman to divide the Board into divisions

and appoint division chiefs. Revenue Act of 1924, ch. 234, § 900(f), 43 Stat. 337.

The Board heard its first few cases en banc (John H. Parrott, 1 B.T.A. 1 (1924),

Everett Knitting Works, 1 B.T.A. 5 (1924)) but soon concluded that its work would

be expedited if the statutory authority were utilized. On September 3, 1924,

Chairman Hamel created three divisions, excluding himself from membership on

each. Memorandum, Sept. 3, 1924, filed at the U.S. Tax Court in “Organizing the

Board: Memoranda & Correspondence.”

Division No. 1

Mr. Ivins, Chief

Mr. Korner

Mr. Marquette

Division No. 2

Mr. James, Chief

Mr. Sternhagen

Mr. Trammell

Mr. Trussell

Division No. 3

Mr. Graupner, Chief

Mr. Lansdon

Mr. Littleton

Mr. Smith

104 The United States Tax Court – An Historical Analysis

appeal, the points in controversy, and the respective contentions of

the parties. The taxpayer then proceeds with the introduction of his

evidence. This may be by witnesses who are sworn and placed on

the witness stand, or by competent and authenticated documents.

The testimony of witnesses is reported by a court reporter, and

transcribed and made a part of the record.

273

Documents and other

exhibits which are admitted as evidence are identified, marked, and

received into the record. The rules of the board provide for the

taking of evidence by deposition on either oral or written

interrogatories. The practice in this respect is similar to that

obtaining in court. An order for the taking of depositions issues

from the board upon application therefor made in accordance with

the rules.

At the close of the evidence, argument is heard on behalf of both

parties and the case is then taken as submitted. In cases in which

either or both parties desire to file written briefs, the time for such

filing is granted, and the case is deemed submitted at the expiration

of the time allowed for that purpose.

When a case has been submitted, the division which has heard it

takes the case under advisement and reaches an agreement as to the

proper decision. Thereupon the division prepares a report, which

consists of the findings of fact, the decision and an opinion, if an

opinion is required or is deemed necessary. This report is

mimeographed, and a copy sent to each member of the board for

consideration and study.

The statute provides that a division decision shall become the

decision of the board at the expiration of thirty days unless within

that time the chairman shall refer the decision for consideration by

the whole board. Up to the present time the practice has been

followed by the chairman of referring every case to the whole board

for adoption. This is to preserve uniformity of decisions, and at the

same time to allow each appeal to have the benefit of consideration

by every board member. As stated before, the division decision is

sent to each member, who studies it, and if he is in disagreement he

prepares a statement of his views relative thereto.

On Friday and Saturday of each week the board meets and

discusses the proposed opinions submitted by divisions during the

273

The statute only required the recording of testimony in cases in which the

amount in controversy exceeded $10,000. Revenue Act of 1924, ch. 234, § 900(h),

43 Stat. 337. The Board, however, soon concluded that disputes as to evidence

could be minimized if the testimony in all cases was reduced to writing. 1925

House Hearings, supra note 176, at 912 (testimony of former member Ivins).

Creation of the Board of Tax Appeals 105

preceding week. At these meetings the fullest discussion of each

case is gone into, and thereafter a vote is taken on a motion to adopt.

To this date every decision and opinion which has been adopted has

had this consideration and discussion by the board.

When the board has reached a decision in an appeal, a certified

copy thereof is forwarded to the taxpayer, and likewise one to the

Commissioner of Internal Revenue.

274

An important purpose in creating the Board was to offer taxpayers

located outside Washington, D.C., the opportunity to dispute adverse tax

determinations prior to assessment. In its later years, the Committee on

Appeals and Review attempted to fill this need and did, in fact, dispatch

members to Western and Midwestern cities.

275

Apparently, however,

Congress felt this policy could be further advanced by the Board,

276

and the

statute specifically provided that

the Board or any of its divisions may sit at any place within the

United States. The times and places of the meetings of the Board,

and of its divisions, shall be prescribed by the chairman with a view

to securing reasonable opportunity to taxpayers to appear before the

Board or any of its divisions, with as little inconvenience and

expense to taxpayers as is practicable.

277

The Board was well aware of the importance ascribed to field hearings

and sent letters to all petitioners informing them of their right to a hearing

at as convenient a location as was practicable and soliciting their wishes in

the matter.

278

Nevertheless, the requests for hearings outside Washington

accumulated slowly, and it was not until May, 1925, almost a year after the

Board’s creation, that the first division was sent forth from Washington.

279

The first field session was a lengthy one. The division sat for a week in

Milwaukee, ten days in St. Paul, a week in Seattle, a week in Portland, a

274

Speeches before the American Bar Association, Sept. 1925, the U.S.

Chamber of Commerce, May, 1925, Bar Assoc. of N.Y.C., October, 1925, and the

American Assoc. of Ice and Refrigeration, June, 1925; see also J. Gilmer Korner, The

United States Board of Tax Appeals, 11 A.B.A. J. 642, 643 (1925); J.G. Korner, Jr., The

Responsibility of the Bar in Income Tax Practice, 3 N

AT’L INC. TAX MAG. 359, 361

(1925).

275

See 1924 COMM’R OF INT. REV. REP. 11–12.

276

See S. REP. NO. 68-398, at 9 (1924).

277

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

278

1925 House Hearings, supra note 176, at 864.

279

Id.

106 The United States Tax Court – An Historical Analysis

month in San Francisco, and a month in Los Angeles.

280

In October, 1925,

a second division went to St. Louis for a month and then to Kansas City for

another month.

281

Although these may seem lengthy sessions, it was

nonetheless true that the vast bulk of cases were being heard in

Washington, where trials were conducted virtually on a daily basis.

282

Apparently, there were several reasons contributing to the relatively small

demand for field hearings. First, the original 12 members of the Board,

expecting 16 additional members to be appointed, at first indicated that no

plans for field hearings would be finalized until the anticipated

appointments were made.

283

Second, the Board itself may have discouraged

requests for hearings outside Washington by announcing that cases heard in

the field, “[d]ue to loss of time in travelling and difficulties of

administration,” would not be heard and decided as expeditiously as cases

heard in Washington.

284

Third, the bulk of the tax bar was concentrated in

Washington and other Eastern cities. These attorneys and accountants

undoubtedly preferred to try their cases closer to their homes than to the

homes of their clients. Finally, the number of field hearing requests was

affected by the location of the Board’s petitioners. For example,

one-quarter of the Board’s petitions came from taxpayers in New York and

Pennsylvania, yet these States had only approximately 16 percent of the

Nation’s population.

285

Despite the fact that field sessions were less numerous than originally

anticipated, it soon became apparent that there would be plenty of work to

keep the Board busy. Petitions came in slowly at first—only three were

docketed in July 1924, and 120 in the following month—but soon

increased. In the two-year period commencing in July 1924, 18,087

petitions were docketed, an average of 753 per month.

286

In one month,

April 1925, a total of 2,371 petitions were docketed as the result of a mass

mailing of deficiency notices by the Bureau to forestall the anticipated

expiration of the period of limitations.

287

As with the number of petitions, the number of hearings increased

rapidly. The Board heard three cases in August 1924, 18 cases in

280

Id. at 864–55.

281

Id. at 865.

282

See supra note 273 and accompanying text.

283

See 2 NAT’L INC. TAX MAG. 304 (1924).

284

2 NAT’L INC. TAX MAG. 331 (1924).

285

Id. at 863; 1 BUREAU OF CENSUS REP., Fourteenth Decennial Census, 13, 15

(1920).

286

Statistical data with respect to Board of Tax Appeals furnished by United

States Tax Court, Statistics and Reports Section.

287

See The Congestion of Tax Cases Before the Board of Tax Appeals, 4 NAT’L INC.

TAX MAG. 303, 304–05 (1926).

Creation of the Board of Tax Appeals 107

September, 80 cases in October, 93 cases in November, and 123 cases in

December.

288

Because there were only three divisions during this period,

each division heard an average of 41 cases in December, almost two for

each working day in the month. Chairman Korner was not guilty of

exaggeration in asserting that by December 1924, the Board was “running

under fairly full sails.”

289

In October 1925, the House Ways and Means Committee conducted

hearings on legislation that was to become the Revenue Act of 1926. At

that time the Board was able to report that 8,417 petitions had been filed

since July 1924 and that dispositions had been made in 3,627 of these

appeals.

290

In almost one-half of the remaining 5,000 docketed cases, issue

had not yet been joined; the remaining cases were listed on either the field

or day calendars.

291

The Board had thus accomplished an enormous amount of work in its

first 16 months of existence. In addition to promulgating rules of practice,

thousands of cases had been docketed and were being expeditiously

handled. One interesting statistic was that the number of cases docketed

with the Board closely approached the total number of civil cases filed in 25

U.S. district courts, having 54 judges, during the same period.

292

Additionally, members of the Board, and especially the chairmen, were

regularly speaking and writing articles to familiarize the public with the new

agency. On one occasion Chairman Hamel even delivered a speech on radio

concerning the operations of the Board.

The Board accomplished its work only by dint of the most extraordinary

efforts of its members. Hearings were regularly held late into the evenings;

one even ran to 1 a.m. The Board devoted virtually every Friday and

Saturday, and frequent evenings, to meetings at which the members would

review the decisions of the three divisions. The actual decisions were

written up by members on evenings that the Board was not meeting and on

Sundays.

293

This frantic pace took its toll. Chairman Hamel resigned in the

spring of 1925, and Mr. Ivins resigned in the summer of that year, partly

because they feared that their health would be permanently impaired if they

continued working under these conditions.

294

288

1925 House Hearings, supra note 176, at 859.

289

Id.

290

Id. at 862.

291

Id.

292

67 CONG. REC. 1129 (1925) (remarks of Mr. Beedy).

293

Id. at 861.

294

Id. at 922.

108 The United States Tax Court – An Historical Analysis

4. Success of the Board

The extraordinary efforts made by the Board did not go

unrecognized.

295

It will be recalled that the legislation creating the Board

was initially criticized by the Administration; also, members of the

accounting profession were less than enthusiastic about the first

appointments. For these reasons and because of the importance of its

work, there was intense interest in how the Board went about its

business.

296

The record of the Board bore this scrutiny well. By the fall of

1925, commentary was appearing that was virtually unanimous in its praise

of the independence and accomplishments of the new agency. These

endorsements came not only from those expected to be well disposed

toward the Board, such as former Chairman Hamel

297

and former member

Ivins,

298

but also from sources not connected with the Board, such as the

Committee on Federal Taxation of the American Bar Association.

We want . . . [the Ways and Means Committee] to know that . . . [the

Board] is probably the most popular tribunal that has been created

by Congress for some time. It functions speedily. It functions

definitely and openly. It is untrammeled by any questions of

administrative expediency, and its decisions have been uniformly

independent, regardless of whether they are for the taxpayer or for

the Commissioner.

299

Even more to the credit of the Board, many of its chief critics in 1924

became its fervent supporters in 1925. Chairman Green, who had serious

295

In its report on the Revenue Bill of 1926, the Ways and Means Committee

observed that

[t]he work of the Board has been uniformly praised by taxpayers, tax

attorneys, and the Treasury Department. Representatives of the American

Bar Association informed the committee that the Board functions speedily

and definitely, is untrammeled by questions of administrative expedience,

and renders decisions that are uniformly independent.

H.R. R

EP. NO. 69-1, at 17 (1925); see also S. REP. NO. 69-52, at 34 (1926).

296

Brewster, supra note 229.

297

1925 House Hearings, supra note 176, at 922.

298

Ivins, supra note 195, at 392.

299

1925 House Hearings, supra note 176, at 882 (testimony of George M.

Morris); see also id. at 66 (testimony of James A. Emery, National Association of

Manufacturers); Lyle T. Alverson, Has the Board of Tax Appeals Failed?, 4 N

AT’L INC.

TAX MAG. 337, 359, 362 (1926); Brewster, supra note 229, at 251, 273; Hopkins,

supra note 200, at 468; Latham, supra note 139, at 200–01; Willis W. Ritter, Pitfalls in

Practice Before the Board of Tax Appeals, 3 N

AT’L INC. TAX MAG. 297 (1925).

Creation of the Board of Tax Appeals 109

reservations concerning the Board when the 1924 Act was passed,

300

later

observed that creation of the Board “was the first time I had ever known

one act of Congress that seemed to meet with general approval.”

301

Representative Ogden Mills of New York, the President’s chief spokesman

on the Ways and Means Committee, had argued in 1924 that the

congressional amendments had “wrecked” the Board.

302

In 1925, his

opinion changed and he called the Board “an unqualified success.”

303

Accountants and accounting organizations had been openly hostile to the

Board when they learned that Treasury was playing a central role in the

selection of members, and had become even more outraged when the

members appointed were virtually all lawyers, most of whom had been

trained at the Bureau.

304

Edward Gore, president of the American Institute

of Accountants, had been deeply troubled that a Treasury-selected Board

would lack independence and public confidence.

305

However, within 13

months, he said that the Board “was the outstanding achievement of the

1924 Act” and was “composed of men who are intent upon doing their full

duty by the Government and by the taxpayer.”

306

Plaudits were not, however, limited to congressional and private sector

sources. Secretary Mellon, Solicitor Hartson, and Special Assistant Gregg

all opposed the congressional amendments to the original Administration

proposal.

307

In 1925, they were all to recant.

308

300

See supra note 178 and accompanying text.

301

67 CONG. REC. 524 (1925); see also Proceedings of Dinner Given in Honor of Board

of Tax Appeals, 4 N

AT’L INC. TAX MAG. 233, 240 (1926) (remarks of Mr. Green)

[hereinafter cited as Honorary Dinner Proceedings].

302

65 CONG. REC. 9540.

303

67 CONG. REC. 558.

304

See supra notes 201–214 and accompanying text.

305

See supra note 201 and accompanying text.

306

1925 House Hearings, supra note 176, at 877. Another distinguished

accountant, Dr. Joseph Klein, an adviser to the Treasury, taking another tack,

admitted that although he initially believed that the Board should have been made a

part of Treasury, he later saw “the light.” Id. at 851. Addressing the Ways and

Means Committee, he stated that “you have builded [sic] a wonderful body and that

body ought to be preserved.” Id.; see also Honorary Dinner Proceedings, supra note

300, at 238–40 (remarks of Dr. Klein).

307

See supra notes 89–96 and accompanying text.

308

Andrew Mellon, as befitted a Secretary of Treasury, took his crow in a

moderate dose.

The Board of Tax Appeals was intended to be a short cut to an impartial

determination of tax liability. In the 1924 revenue act it was made an

independent establishment, with quite formal rules of procedure. This was

a complete departure from the original idea. The board has, however, been

110 The United States Tax Court – An Historical Analysis

The high praise lavished on the Board in 1925 was due to several

factors. First, despite being bound to formal judicial procedure, it had

managed through dint of extraordinary efforts to keep current with its

caseload. Not only the members, but the clerical and professional staff of

the Board regularly worked overtime in order to achieve this objective. The

extremely valuable in the establishment of precedents which have aided the

bureau in the determination of similar cases of other taxpayers.

1925 House Hearings, supra note 176, at 10.

Solicitor Hartson had been unable to comprehend how the Board, as created by

Congress, could possibly cope with its workload, yet he was later to write:

[t]he prompt way in which the Board was organized and the rapidity with

which it began to hear appeals and dispose of them are matters of record

and constitute a splendid tribute to the industry and ability of the

membership of that organization.

Hartson, supra note 231, at 215.

Possibly the greatest tribute to the Board was paid by A.W. Gregg, who had

played a central role in drafting the 1924 Administration bill as Special Assistant to

Secretary Mellon, and who was later made Solicitor of Internal Revenue.

When the act was first passed the President expressed some doubt — I

know the Treasury Department felt considerable doubt — as to whether

any body could take over and properly perform the task which Congress

had placed upon the board. The reduction of salary and the reduction of

the term of office, we thought, would make it very difficult to get men, and

I want to say right here that I do not think it would ever have been possible

to get the type of men who were secured for the board had it not been for

the fact that there was pioneer work to be done, a great work to be done,

and men of ability were willing, for inadequate salaries and for short terms

of office, to take over that task as a matter, really, of pride.

The board immediately after the passage of the act had no organization.

Of course the personnel had not been selected. Appeals began coming in

immediately. It was then that everyone doubted whether the board could

perform the task which was placed on it.

I think I am in a position where I can praise the work of the board —

having been, at least theoretically, representing one side of every case before

it — better than almost anyone else. They have handled the work before

them in such a way that they have received the very sincere admiration of

attorneys and taxpayers who have seen the work of the board and its

opinions, as well as of the Treasury Department. I think that what they

have done deserves the appreciation of Congress. They have really done a

wonderful piece of work in getting started, producing, and establishing the

precedents that they have. It seems to me that in order to be able to carry

out what they have begun so well, they should be made a court in name as

well as in fact, and that provision should be made which will enable the

board to secure the services of competent men; and that provision, it seems

to me, should be for a long term of office with adequate salary.

1925 House Hearings, supra note 176, at 932–33.

Creation of the Board of Tax Appeals 111

Board’s staff was largely drawn from the ranks of Treasury and there is

every indication that they were selected carefully.

309

Several observers

noted a certain special spirit among the earliest Board members and staff,

310

probably in large part due to a combination of the Board’s newness and the

fact that the mighty and supposedly knowledgeable had predicted an early

and ignominious end for the infant agency. Perhaps there was some

significance in the fact that two of the earliest appointments to the Board

staff were Misses Ruff and Ready.

311

The second element in the success of the Board was that it was able to

demonstrate to a doubting public that, although its membership was largely

composed of former Bureau employees, it could successfully maintain its

independence from Treasury. The Board consciously refrained from

compiling statistics as to the number of cases won by taxpayers and the

number won by the Government.

312

The Board believed that its job was to

decide cases on the merits, not to award a certain percentage of decisions to

the Government or taxpayers. Had statistics of this nature been kept, this

objective might have been blurred. Moreover, a substantial number of

cases, if not a majority, were not won completely by either the Government

or the taxpayer. In these decisions the tax would be computed somewhere

between the opposing positions. For this reason, statistics would be

difficult to compile and unreliable. Despite the absence of detailed case by

case statistics, it was apparent that a substantial number of Board decisions

favored taxpayers. In the three-year period between July 1924 and July

1927, for example, the Board decided 11,000 cases; the total deficiencies

claimed by the Commissioner in these cases were $209 million. The Board

determined deficiencies of only $87 million. A good deal of reduction in

deficiencies probably resulted from concessions by the Commissioner

rather than from decisions by the Board, but there could be no doubt that

the Board was deciding a substantial number of cases for taxpayers.

Edward Gore of the American Institute of Accountants observed that

[a]s I understand it, the proportion of findings in favor of the

taxpayer has been sufficiently high to thoroughly justify all the

representations that were made on behalf of the taxpayer, and it has

been proven that nearly half the time the commissioner has been

wrong in his conclusions.

313

309

1925 House Hearings, supra note 176, at 922.

310

Id. at 852, 922, 932–33.

311

Letters from Robert C. Tracy, Sec’y to the Board, to Commissioner Blair,

August 30, 1924, November 12, 1924, filed at the U.S. Tax Court in “Personnel:

Memoranda & Correspondence.”

312

1925 House Hearings, supra note 176, at 862–63.

313

Id. at 877.

112 The United States Tax Court – An Historical Analysis

The final factor that assured the Board’s success was its contribution

toward the formation of a body of precedent for the interpretation of the

tax laws.

314

The problem of tax precedent had been troubling. Much of the

precedent relied on by the Bureau was contained in unpublished rulings.

The existence and use of these rulings was a source of controversy

315

and

undoubtedly led to the congressional insistence that Board proceedings be

public and its opinions be open to inspection.

316

But Bureau rulings were

criticized on more grounds than their secrecy. By 1925, published and

unpublished rulings numbered in the thousands,

317

and it was conceded by

former Solicitor Hartson, under whose reign many of these rulings had

been amassed, that a large number of the rulings were poorly considered

because of the time pressure under which they were issued, that in many

cases inconsistent rulings existed on the same point, and that even

employees of the Bureau had difficulty applying the vast number of the

rulings because they could not be located.

318

For these reasons, Mr.

Hartson concluded that

[i]t may be high time to wipe the slate clean and start over

again . . . [I]t is very desirable that a new line of precedent be created

which is likewise binding upon the Bureau and the taxpaying public

— a line of authority which all may see and follow whether within or

without the Bureau. The service being performed by the Board of

Tax Appeals in this regard can be made most important.

319

Mr. Hartson might have added that the Board could not well have

fulfilled its precedent-making role without the modifications that Congress

had made to the original Administration proposal. The fact that Board

proceedings were public and that its rulings were disseminated helped

create respectability for its precedents. Additionally, the Board’s

rule-making function undoubtedly would have been impeded if it had been

located in the Treasury Department. In such a case, there would have been

a serious question whether the Board could effectively overrule Bureau

rulings with which it disagreed. Moreover, even if a Treasury-located Board

could overrule Bureau rulings, there would be considerable doubt as to its

powers with respect to Treasury Decisions, which were the weightiest

314

Id. at 10 (testimony of Secretary Mellon); Hartson, supra note 231, at 217,

238.

315

See Part I, notes 123–132 and accompanying text.

316

See supra notes 81–88 and accompanying text.

317

Hartson, supra note 231, at 217.

318

Id. at 217, 238.

319

Id. at 238.

Creation of the Board of Tax Appeals 113

authority that Treasury could issue. In one of its earliest decisions,

320

the

Board chose to disregard a Treasury Decision denying depreciation

deductions for leaseholds.

321

Had the Board been a branch of Treasury, it

probably could not have taken this action.

322

To fulfill its precedent-setting function, it was important that Board

decisions successfully stand public and Treasury scrutiny. There was

general agreement that the early rulings of the new agency bore this scrutiny

very well;

323

by October 1925, the Bureau had filed nonacquiescences in

only 13 Board decisions.

324

The widespread approval that greeted the first months of the Board’s

operation did not signify a general belief that the 1924 legislation had

created either a perfect Board or a perfect system for adjudicating tax

disputes prior to assessment. There were varied and conflicting proposals

for improvements, and the Revenue Act of 1926 made fundamental

changes in the Board. These proposals and changes will be described in the

succeeding chapter. Nevertheless, the Board was an experiment that

seemed to be working.

320

Grosvenor Atterbury, 1 B.T.A. 169 (1924).

321

T.D. 3414, I-2 CUM. BULL. 90 (1922).

322

Letter from Charles Hamel to Thomas C. Lavery, Jan. 3, 1925, p. 3, filed at

the U.S. Tax Court in “Revenue Act of 1924: Memoranda and Correspondence.”

323

1925 House Hearings, supra note 176, at 831 (testimony of Dr. Joseph

Klein, New York Society of Certified Public Accountants), 877 (testimony of

Edward Gore, American Institute of Accountants), 882 (testimony of George

Morris, Special Comm. on Tax’n of the American Bar Association), 932–33

(testimony of A.W. Gregg, Solicitor of Internal Revenue), 937–38 (testimony of Dr.

T. S. Adams, Yale University); Brewster, supra note 229, at 252; Hopkins, supra note

200, at 297; Honorary Dinner Proceedings, supra note 300.

324

1925 House Hearings, supra note 176, at 931.

114 The United States Tax Court – An Historical Analysis

Improving the Board of Tax Appeals 115

ART III

THE REVENUE ACT OF 1926:

IMPROVING THE BOARD OF TAX APPEALS

The Board of Tax Appeals, which had been created by the Revenue Act

of 1924, was the object of close attention during its first few months of

operation.

Inevitably, comment began to appear with respect to how the

new agency might be improved. These suggestions found expression in the

legislative process culminating in the enactment of the Revenue Act of

1926.

A. The Revenue Act of 1926

President Coolidge and Secretary Mellon were not completely satisfied

with the Revenue Act of 1924. Income tax rates had not been sufficiently

reduced, the estate tax had been increased, a gift tax had been imposed over

their opposition, and Congress had provided for publicity of persons filing

income tax returns and the amount of tax they paid. However, the

Administration was by no means resigned to accepting indefinitely these

legislative defeats, and the years 1925 and 1926 provided them with an

opportunity to correct the shortcomings of the 1924 legislation.

Coolidge had won an impressive victory over the Democrats in the 1924

elections, a victory which to some extent was undoubtedly attributable to

public approval of the Administration’s economic and tax policies. Further,

the death of Robert LaFollette Sr. in 1925, removed an articulate critic of

the Administration and left the Republican progressives without their most

influential leader. As a result, the new version of the Mellon plan, which

was presented in the fall of 1925 to the Ways and Means Committee,

encountered little opposition.

The principal components of the plan were: (1) reduction in the normal

and surtax rates of the individual income tax;

(2) repeal of the estate tax;

(3) repeal of the gift tax;

and (4) repeal of the provision requiring the

publication of the income tax paid by every taxpayer.

Kingman Brewster, Some Observations Relating to the Board of Tax Appeals, 3

AT’L INC. TAX MAG. 251 (1925).

Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and Means,

69th Cong., 1st Sess. 5–6 (1925) [hereinafter cited as 1925 House Hearings].

Id. at 6–7.

Id. at 7–8.

Id. at 8–9.

116 The United States Tax Court – An Historical Analysis

These proposals were accompanied by a vigorous propaganda

campaign.

Particularly notable were the activities of an organization

initially known as the American Bankers’ League and later called the

American Taxpayers’ League, which formed “tax clubs” in every state to

advocate the Coolidge position that taxes must be “scientifically revised

downward.”

Significantly, two of the most active tax clubs were located in

Iowa and Texas, the home states of William Green, Republican Chairman

of the Ways and Means Committee, and John Garner, the Committee’s

ranking Democratic member. Both men had objected to several aspects of

the Mellon plan and were particularly opposed to repeal of the estate tax.

A majority of the press, the public and the Congress favored the

Administration proposals, and the Revenue Act of 1926, enacted on

February 26, 1926,

differed little from Secretary Mellon’s

recommendations. Income tax rates were reduced, especially at the higher

income levels, to provide a maximum tax of 25% as opposed to the

maximum rate of 46% under the 1924 Act;

the gift tax was repealed;

and

publication of the income tax paid by taxpayers was eliminated.

The only

significant setback suffered by the Administration was the failure of

Congress to repeal the estate tax. Congressmen Green and Garner managed

to keep the tax alive by agreeing to lower rates and an increased credit for

state death taxes.

Quite obviously, the Board of Tax Appeals, which directly affected a

limited number of people, did not arouse the same degree of public interest

as the issues discussed above. Nevertheless, in light of the Board’s newness

and the controversy that attended its creation in 1924, it attracted some

attention.

The Administration had proposed in 1923 that the Board be created as

an informal hearing body within Treasury. However, Congress changed

this plan to make the Board an independent agency in the executive branch

that was generally required to follow formal judicial procedures.

Initially, the Administration view was that these changes would hinder

the Board in the discharge of its duties and might even result in the total

RANDOLPH E. PAUL, TAXATION IN THE UNITED STATES 137 (1954).

SIDNEY RATNER, AMERICAN TAXATION 424 (1942).

ROY G. BLAKEY & GLADYS C. BLAKEY, THE FEDERAL INCOME TAX 253–

54 (1940) [hereinafter cited as B

LAKEY & BLAKEY].

Ch. 27, 44 Stat. 9.

Compare Revenue Act of 1926, ch. 27, §§ 210–211, 44 Stat. 21–23, with

Revenue Act of 1924, ch. 234, §§ 210–211, 43 Stat. 264–67.

Revenue Act of 1926, ch. 27, § 1200(a), 44 Stat. 125.

Id.

See BLAKEY & BLAKEY, supra note 8, at 251–54, 257, 269–70; H.R. REP. NO.

69-1, at 14–15 (1925); H.R. R

EP. NO. 69-356, at 49–50 (1926).

See Part II, notes 55–97 and accompanying text.

Improving the Board of Tax Appeals 117

breakdown of tax administration. Nevertheless, when the Board began

operation, it soon won general approval from the public, and the

Administration’s early criticism of the Board changed to support. In

connection with the 1926 legislation, Secretary Mellon made no detailed

recommendation on the subject of the Board. “It is in the interests of the

Treasury only to see that there is in existence a board of capable men with

the ability to decide tax questions fairly and promptly.”

His only two

specific proposals were that the number of Board members be continued at

no less than 16 (under the 1924 Act, the authorized membership was to be

automatically reduced to seven as of June 2, 1926

) and that Congress resist

suggestions to increase the scope of Board jurisdiction. These were

considered necessary to permit the Board to expeditiously handle its

workload.

Both these matters were considered in connection with the 1926

legislation. Additionally, certain other issues arose that many believed

deserved legislative attention. These included the questions of court status

for the Board, finality of Board decisions, and several matters relating to the

membership of the Board and Board procedures. These issues too were

addressed in the 1926 Act, and the basic structure of the Board that

emerged has changed little over the years.

B. Status of the Board

Against the advice of the Administration, Congress had created the

Board in 1924 as an “independent agency in the executive branch”

rather

than as a division of Treasury. After the Board began operation, it

immediately became clear that President Coolidge was correct in

characterizing the Board as virtually indistinguishable from a court. Yet the

body was called a “board,” not a “court,” and was located in the executive

branch of Government, not the judicial.

In general, courts of the United States are bodies either created by, or

pursuant to, article III of the Constitution. Such courts are frequently

referred to as constitutional or article III courts. Their judges are protected

by life tenure during good behavior and a guarantee of no diminution of

compensation while in office.

Jurisdiction of these courts is limited to

cases and controversies.

1925 House Hearings, supra note 2, at 10 (testimony of Secretary Mellon).

Revenue Act of 1924, ch. 234, § 900(a), 43 Stat. 336.

1925 House Hearings, supra note 2, at 10.

Revenue Act of 1924, ch. 234, § 900(k), 43 Stat. 338.

U.S. CONST. art. III provides in part:

Section 1. The judicial Power of the United States, shall be vested in one

supreme Court, and in such inferior Courts as the Congress may from time

to time ordain and establish. The Judges, both of the supreme and inferior

118 The United States Tax Court – An Historical Analysis

Although these courts have historically been the most important federal

judicial agencies, as early as 1828, the Supreme Court recognized the

existence of other bodies that adjudicated controversies in a manner similar

to constitutional courts but were not created pursuant to article III.

These

bodies, referred to as legislative or article I courts, are created in furtherance

of the powers reserved to Congress by the Constitution.

The judges are

not protected by tenure and compensation guarantees. Further, the

jurisdiction of these bodies is not limited to cases and controversies.

In 1924, Congress clearly did not desire to accord the Board

constitutional court status; the statute specifically placed the Board in the

executive branch of Government and denied its members life tenure. More

difficult was the question of whether the Board was a legislative court.

Apparently, Congress did not consider the issue. Undoubtedly, this was

due to the fact that until 1929, the only legislative courts expressly

recognized by the Supreme Court were courts created in furtherance of the

congressional powers to administer the territories and the District of

Columbia.

Thus, in creating the Board as an agency in the executive

branch, Congress may have believed that it was employing the only

alternative available to constitutional court status. Whether the Board

should be considered to have been created as a legislative court, in light of

subsequent developments in the decisional law, is impossible to answer

definitively. Even today, when considerable literature exists on the

distinction between article I and article III courts, virtually no attention has

been paid to the distinction, if any, between an article I court and an

independent agency in the executive branch performing purely judicial

functions.

Courts, shall hold their Offices during good Behavior, and shall, at stated

Times, receive for their Services, a Compensation, which shall not be

diminished during their Continuance in Office.

Section 2. The judicial Power shall extend to all Cases, in Law and Equity,

arising under this Constitution, the Laws of the United States, and Treaties

made, or which shall be made, upon their Authority; . . . to Controversies to

which the United States shall be a party; . . . .

Id. § 2.

American Ins. Co. v. Canter, 26 U.S. (1 Pet.) 511 (1828).

Id. at 546.

U.S. CONST. art. I, § 8, cl. 17, art. IV, § 3. American Ins. Co. v. Canter, 26

U.S. (1 Pet.) 511 (1828); Keller v. Potomac Elec. Power Co., 261 U.S. 428 (1923).

In 1929, the Supreme Court recognized the Court of Customs Appeals as a

legislative court. Ex parte Bakelite Corp., 279 U.S. 438 (1929).

At least one commentator has suggested that no meaningful distinction exists

between administrative agencies that exercise adjudication powers and non-article

III courts. See Martin H. Redish, Legislative Courts, Administrative Agencies, and the

Northern Pipeline Decision, 1983 D

UKE L.J. 197, 201 (1983) (“Despite several

Improving the Board of Tax Appeals 119

Although the question of judicial status for the Board was ignored in

1924, by the time Congress began consideration of the Revenue Bill of

1926, certain officials, notably A.W. Gregg, Solicitor of Internal Revenue,

were contending that the Board should be transformed from an

independent agency in the executive branch into a court.

Those

supporting court status relied for the most part on the practical benefits

that would be derived from the change. First, they argued that the existing

status of the Board was misleading the public, many of whom believed that

the Board was part of the Bureau of Internal Revenue. In addition to

fostering doubts in the minds of the uninformed with respect to the

Board’s impartiality, this misapprehension undoubtedly encouraged the

erroneous assumption that the Board’s procedures were, like those within

the Bureau, informal. By changing the Board to a court, confusion would

be reduced with a concomitant improvement in public confidence in tax

administration and a decrease in the number of procedural errors by

practitioners.

Second, judicial status for the Board might help attract and retain

capable members. The term of office of the original members under the

1924 Act lasted only until June 2, 1926,

and some believed that such an

abbreviated tenure served to discourage interest in appointment to the

Board.

The 1924 Act provided that members appointed after June 2,

1926, would serve for terms of up to ten years, but there were some who

believed even this would be inadequate.

Life tenure during good behavior

would be automatically guaranteed if the Board was made an article III

court; a provision for life tenure without court status would raise

constitutional questions.

Third, the question of finality of Board decisions was related to its

status. Under the 1924 Act, Board decisions were subject to collateral

attack by either the Government or taxpayers. The Board had

differences in both appearance and operation, their work cannot be functionally or

theoretically distinguished.” (citations omitted)).

1925 House Hearings, supra note 2, at 933; see also id. at 914 (testimony of

former member Ivins).

1925 House Hearings, supra note 2, at 916 (testimony of former member

Ivins). Of course, this shortcoming could be remedied by simply renaming the

Board a court without otherwise changing its character as an independent agency in

the executive branch. This approach was taken in 1942, ch. 619, § 504, 56 Stat.

957. However, there were other objections to the nonjudicial status of the Board

that could not be so easily satisfied.

Revenue Act of 1924, ch. 234, § 900(a), 43 Stat. 336.

1925 House Hearings, supra note 2, at 884 (testimony of George Morris, Am.

Bar Ass’n), 938–39 (testimony of Dr. T. S. Adams).

Cf. 1925 House Hearings, supra note 2, at 939 (testimony of Dr. T. S. Adams).

See infra notes 189–191 and accompanying text.

120 The United States Tax Court – An Historical Analysis

demonstrated its competence and independence, and many believed that

permitting de novo review of Board cases in the federal courts wasted the

time and money of both taxpayers and the Government.

By making the

Board a court, its decisions would be assured of the finality reserved for

judicial action.

Fourth, if the Board were made a court, it would be invested with

certain judicial powers that would ease its problems of administration and

expedite its proceedings. An example of this problem involved the power

of the Board to subpoena witnesses and evidence and to order depositions.

Although the 1924 Act authorized such action by the Board,

it did not

provide any direct means by which the Board could enforce its own

process. Thus, if a witness refused to appear in response to a subpoena,

enforcement would require recourse to a federal court for an order

compelling attendance. Only if this order were disobeyed could the

non-appearance be punished by contempt in a further federal court

proceeding.

On this basis former Board member James S.Y. Ivins argued

the Board’s powers to subpoena were too cumbersome to be enforced

against an unwilling witness.

If the Board were made a court, it could

itself punish contempt of its process.

Fifth, some observers believed that the federal courts were not properly

acknowledging the precedents established by the Board.

Indeed, many

federal judges in these early days may not even have known of the existence

of the Board. Making the Board a court would result in greater recognition

of its decisions and would further the important congressional purpose of

developing a uniform body of precedents interpreting the tax laws.

Finally, the argument was made that the Board functioned like a court

and this fact should be recognized by according it full judicial status.

Its

jurisdiction was limited to disputes that qualified as cases or controversies

1925 House Hearings, supra note 2, at 935 (testimony of A.W. Gregg,

Solicitor of Internal Revenue).

Revenue Act of 1924, ch. 234, § 900(i), 43 Stat. 338.

James S.Y. Ivins, What Should Congress Do With the Board of Tax Appeals?, 3

AT’L INC. TAX MAG. 391, 410 (1925) [hereinafter cited as Ivins].

Id.

Memorandum as to reasons for conversion of Board of Tax Appeals into a

court, c. 1925, filed at the U.S. Tax Court in “Revenue Act of 1926: Memoranda

and Correspondence.”

1925 House Hearings, supra note 2, at 928 (testimony of former Chairman

Hamel), 933 (testimony of A. W. Gregg, Solicitor of Internal Revenue); Ivins, supra

note 33, at 393. The literature is replete with statements that the Board of Tax

Appeals was a court in everything but name. E.g., Dana Latham, Jurisdiction of the

United States Board of Tax Appeals Under the Revenue Act of 1926, 15 C

AL. L. REV. 199,

201, 203 (1927) [hereinafter cited as Latham].

Improving the Board of Tax Appeals 121

under article III of the Constitution,

its practice and procedure conformed

to judicial forms, and its members comported themselves with the

independence and in the style customary to courts. Possibly, only an

accident of history resulted in the Board being made an agency in the

executive branch instead of a court in 1924. Because of the Administration

proposal that the Board be made a part of Treasury, legislative attention

was focused on the question of independence from Treasury. Had the

broader aspects of the independence question been as carefully considered,

Congress might have concluded that an agency engaged in adjudicating tax

disputes should not be located in the executive branch of Government.

Substantial sentiment existed among Board members in favor of

obtaining full federal court status, and in the late summer of 1925, several

Board members drafted a proposal along these lines for submission to

Congress.

Apparently, the proposal had the support of Treasury officials,

including Secretary Mellon.

However, it soon became clear to friends of

the Board that Congress, traditionally hostile to creating judicial offices, was

not amenable to such a change.

Additional opposition came from

accountants who feared that their privilege to practice before the Board

would be withdrawn if it were made a court.

As a result of this

opposition, neither the Ways and Means Committee nor the Finance

Committee, both generally favorably inclined toward the Board,

recommended any change in the Board’s name or its status,

and no

serious proposal along these lines was advanced in either the House or

Senate. Not until 1942 would the Board’s name be changed to the Tax

Court,

and almost one-half century elapsed before Congress recognized

the inadvisability of having “one executive agency . . . sitting in judgment on

the determinations of another executive agency.”

With this recognition

the Tax Court was established as a legislative court.

See Revenue Act of 1924, ch. 234, § 900(e), 43 Stat. 337; General Equipment

Co., 2 B.T.A. 804 (1925).

Letter from A.E. Graupner to J.G. Korner, Aug. 28, 1925, filed at the U.S.

Tax Court in “Revenue Act of 1926: Memoranda & Correspondence” [hereinafter

cited as Graupner].

Id.; see also 1925 House Hearings, supra note 2, at 932 (testimony of A.W.

Gregg, Solicitor of Internal Revenue).

1925 House Hearings, supra note 2, at 935 (remarks of Mr. Garner).

Letter from H.E. Lumsford, President of American Society of Certified

Public Accountants, to certified public accountants, November 9, 1925, filed at the

U.S. Tax Court in “Revenue Act of 1926: Memoranda & Correspondence.”

H.R. REP. NO. 69-1, at 17–21 (1925); S. REP. NO. 69-52, at 34–38 (1926).

Revenue Act of 1942, ch. 619, § 504, 56 Stat. 957.

S. REP. NO. 91-552, at 302 (1969).

Tax Reform Act of 1969, Pub. L. No. 91–172, § 951, 83 Stat. 730 (amending

IRC § 7441).

122 The United States Tax Court – An Historical Analysis

Although Congress was unwilling to transform the Board into a court,

an effort was made in the 1926 Act to accord the Board more judicial

attributes. The compromises thus affected made the agency considerably

more court-like.

C. Appeals and Finality

Under the 1924 Act, Board decisions were only final with respect to the

question of summary assessment; they were not final on the question of

liability.

Thus, if the taxpayer prevailed in the Board, the Government

could not summarily assess the tax but could commence a new action in

federal court for a readjudication of whether a deficiency existed. If it

obtained a favorable judgment, the deficiency could then be assessed. If

the Government prevailed in the Board, the tax would be immediately

assessed, but the taxpayer could sue for refund of tax paid pursuant to the

assessment. Any action commenced after the Board proceeding would be

de novo, although the Board’s factual findings would be prima facie correct.

In other words, no appeal was possible from a decision by the Board, but

such a decision could be reviewed collaterally.

Several congressional concerns might explain this cumbersome statutory

scheme. The first of these was related to the question of the Board’s

independence from Treasury. The congressional committees studying the

legislation stated that by permitting the Commissioner to obtain de novo

review of an unfavorable decision, the Act would relieve “the board from

the responsibility of finally passing upon questions involving large amounts

and removes the necessity for a decision in favor of the Government in

order to force the issues into court.”

An obvious connection existed

between this rationale and one of the basic considerations that originally led

to the proposal to create the Board: the belief that the Committee on

Appeals and Review and other agents of the Bureau of Internal Revenue

took unjustifiably pro-Government positions because of their knowledge

that an administrative decision in favor of the taxpayer could not be

reviewed independently whereas a decision in favor of the Government

could be challenged by the taxpayer in court by way of a refund action.

Even though the 1924 legislation established the Board as an independent

executive agency, its historical roots in the Committee on Appeals and

Review evidently caused concern that the Board might be no more

independent than its predecessor.

Because this concern would have been equally satisfied by permitting

direct appeal of Board decisions, an alternative, and perhaps more realistic,

See Part II, notes 155–159 and accompanying text.

H.R. REP. NO. 68-179, at 8 (1924); S. REP. NO. 68-398, at 9 (1924).

H.R. REP. NO. 68-179, at 8 (1924); S. REP. NO. 68-398, at 8–9 (1924).

Improving the Board of Tax Appeals 123

explanation of the provision for a trial de novo was that it constituted a

vestigial trace of the original Administration proposal to make the Board an

informal hearing division within the Treasury Department.

Naturally,

appellate court review of the determinations of such an agency would have

been inappropriate.

The provision requiring that Board proceedings be

judicial in nature was not added until the 1924 Revenue Bill reached the

Senate floor, and at that late date few may have realized the desirability of

making a corresponding change in the appeal procedure.

Finally, the Board, as conceived by the 1924 Act, was regarded by many

as either an experiment or as a temporary expedient necessary to deal with

the administrative difficulties created by the wartime taxes.

Undoubtedly,

these feelings concerning an untried body played some part in molding the

provision for de novo review of Board decisions. If the Board proved

unsuccessful, taxpayers would not be unduly prejudiced by utilizing the

Board procedure because they would retain their rights to a complete

judicial remedy by way of a refund action.

After only a year of operation, the Board was recognized as filling an

important need that was likely to continue indefinitely, and attention was

directed to the inefficiency of the collateral review procedure in the 1924

Act. Under that Act, each tax case could be litigated in two trial tribunals

(first in the Board, then on a retrial in district court) and in two appellate

courts (first in a court of appeals on appeal from a district court decision,

and then in the Supreme Court).

Under these circumstances, a Board

proceeding was characterized as “little more than a preliminary skirmish, a

run for luck.”

Even granting the fact that few tax cases reached the

Supreme Court, a taxpayer, who because of inclination or necessity desired

to defer paying a disputed tax as long as possible and therefore chose to

See Part II, notes 25–54 and accompanying text.

See KENNETH CULP DAVIS, ADMINISTRATIVE LAW TEXT, § 16.03 (3d ed.

1972) [hereinafter cited as D

AVIS].

See 67 CONG. REC. 524 (1925) (remarks of Mr. Green). Under the 1924 Act,

the authorized membership of the Board for the first two years was 28, but after

this initial period it was to decline to seven. Revenue Act of 1924, ch. 234,

§ 900(a), 43 Stat. 336. A.W. Gregg, representing Treasury at the Senate Finance

Committee hearings on the 1924 Act, indicated that the business of the Board

would be significantly reduced after it disposed of the excess profits tax cases

growing out of the World War I period. Hearings on H.R. 6715 Before the Comm. on

Finance, 68th Cong., 1st Sess. 24 (1924).

If the collateral proceeding had been commenced in the Court of Claims,

there would have been no appeal to a court of appeals. Rather, at that time,

decisions of the Court of Claims were appealable only to the Supreme Court.

[Currently, decisions of the United States Court of Federal Claims are appealable to

the United States Court of Appeals for the Federal Circuit. See Part I, note 172 and

accompanying text.]

Blair v. Curran, 24 F.2d 390, 392 (lst Cir. 1928).

124 The United States Tax Court – An Historical Analysis

petition the Board, could be required to plead his case in three separate

tribunals before receiving a final adjudication. Virtually all who considered

the problem believed this to be unduly burdensome.

Additionally, since

members of the Board were selected, at least in part, on the basis of their

special expertise in taxation and financial matters, full-blown relitigation of

their decisions was inappropriate and unnecessary.

Finally, the system

under the 1924 Act was seen as contrary to sound judicial procedure

because collateral attack permitted cases to be moved from a specialized

court to a generalized court; “we go from an informed tribunal to an

uninformed tribunal.”

For these reasons, the 1926 Act provided for direct appellate review of

Board decisions in the Courts of Appeals,

the particular court in which the

appeal would lie being prescribed by statutory venue rules.

Further appeal

67 CONG. REC. 525 (1925) (remarks of Chairman Green); id. at 3755 (1926)

(remarks of Senator David Reed of Pennsylvania); 1925 House Hearings, supra note

2, at 917 (testimony of former member Ivins). But see infra note 57.

See H.R. REP. NO. 69-1, at 19–20 (1925); S. REP. NO. 69-52, at 36–37 (1926).

1925 House Hearings, supra note 2, at 894–95 (testimony of George Morris);

see also H.R. R

EP. NO. 69-1, at 19 (1925); S. REP. NO. 69-52, at 36 (1926); 67

ONG. REC. 558 (1925) (remarks of Mr. Mills).

Revenue Act of 1926, ch. 27, §§ 1001, 1003(a), 44 Stat. 109. The procedure

ultimately enacted followed the recommendation of the tax committees of both

Houses. H.R. R

EP. NO. 69-1, at 19–20 (1925); S. REP. NO. 69-52, at 36–37 (1926).

As a result of a floor amendment, the bill as passed by the Senate provided for

appeals from Board decisions to district courts, thence to courts of appeals, and

thence, possibly, to the Supreme Court. 67 C

ONG. REC. 3754–58 (1926). The

sponsor of the amendment, Senator James Reed of Missouri, believed it was

desirable because it permitted taxpayers to take appeals of Board decisions in

courts closer to their homes. Id. at 3755 (1926). The amendment was opposed on

the ground that it would increase litigation. Id. (remarks of Senator David Reed of

Pa.). The House-Senate conference removed the James Reed amendment. H.R.

EP. NO. 69-356, at 26, 54 (1926).

Revenue Act of 1926, ch. 27, § 1002, 44 Stat. 110. These rules could have

substantive importance because the position of the various courts of appeals might

differ with respect to the same issue, and the success of the taxpayer or the

Government in a case might well then depend on appellate venue. Moreover, the

rules could have procedural significance if an appeal was filed with the wrong

appellate court and by the time the error was discovered it was too late to perfect

an appeal to the proper court. Thus, to avoid many disputes and errors, it was

important that the venue rules be unambiguous and easily understood.

The 1926 Act provided, in effect, four separate venue rules depending mainly

on the nature of the taxpayer. First, in the case of an individual, proper venue was

in the court of appeals for the circuit of which the individual was an inhabitant, or

if the individual was not an inhabitant of any circuit, in the Court of Appeals of the

District of Columbia. Id. § 1002(a). Second, in the case of a person other than an

individual or a corporation, i.e., a trust or estate, proper venue was in the circuit

Improving the Board of Tax Appeals 125

could be obtained in the Supreme Court either upon certiorari issued upon

the petition of a party or upon certificate of question by a court of

appeals.

The appellate proceedings provided by the Act were the

court for the circuit in which the collector of the tax to whom such person made

the return was located, or, if no return was made, in the Court of Appeals of the

District of Columbia. Id. § 1002(b). Third, in the case of a corporation, venue was

determined under a three-tier rule: if the corporation had no principal place of

business or principal office or agency in the United States, venue was in the Court

of Appeals of the District of Columbia; if the corporation had such a place of

business, office, or agency, venue was in the circuit court for the circuit in which

was located the collector of tax to whom such corporation made the return, or, if

no return was made, in the Court of Appeals of the District of Columbia. Id.

§ 1002(b), (c). Finally, the statute provided that “in the case of an agreement

between the Commissioner and the taxpayer, [proper venue would be in] . . . the

Circuit Court of Appeals for the circuit, or the Court of Appeals of the District of

Columbia, as stipulated in such agreement.” Id. § 1002(d).

These rules may seem both comprehensive and comprehensible; they aroused

no controversy at the time they were enacted. Nevertheless, problems soon

emerged in their interpretation and they were revised in 1934. Revenue Act of

1934, ch. 277, § 519, 48 Stat. 760.

The statutory provision could have been more clearly drafted:

The Circuit Courts of Appeals and the Court of Appeals of the District of

Columbia shall have exclusive jurisdiction to review the decisions of the

Board (except as provided in section 239 of the Judicial Code, as amended); and the

judgment of any such court shall be final, except that it shall be subject to

review by the Supreme Court of the United States upon certiorari, in the

manner provided in section 240 of the Judicial Code, as amended.

Revenue Act of 1926, ch. 27, § 1003(a), 44 Stat. 110 (emphasis supplied).

A cursory reading of this provision might indicate that Supreme Court review

could only be by way of certiorari. However, § 239 of the Judicial Code provided

for certification of questions to the Court by the courts of appeals, and § 240

provided for review by certiorari. Act of Feb. 13, 1925, ch. 229, § 1, 43 Stat. 938.

Clearly, the implication was that both types of review could be had. In fact, one

leading appeal from an early Board decision was reviewed by the Supreme Court as

a certified question. See Old Colony Trust Co. v. Commissioner, 279 U.S. 716

(1929); see also Commissioner v. Independent Life Ins. Co., 288 U.S. 592 (1933).

Regrettably, the current codification perpetuates, and perhaps even increases, the

ambiguity:

The United States Courts of Appeals (other than the United States Court of

Appeals for the Federal Circuit) shall have exclusive jurisdiction to review

the decisions of the Tax Court, except as provided in section 1254 of Title 28 of the

United States Code, in the same manner and to the same extent as decisions of

the district courts in civil actions tried without a jury; and the judgment of

any such court shall be final, except that it shall be subject to review by the

Supreme Court of the United States upon certiorari, in the manner provided in

section 1254 of Title 28 of the United States Code.

126 The United States Tax Court – An Historical Analysis

exclusive means of review. Decisions of the Board became final six months

after decision if no petition for review was filed.

Thereafter no other

court could restrain collection of the tax or order that it be refunded.

any further litigation, such as for collection of the tax, a final decision of the

Board would be res judicata.

With respect to the scope of appellate review, the statute specified that

the Courts of Appeals and the Supreme Court

shall have power to affirm or, if the decision of the Board is not in

accordance with law, to modify or to reverse the decision of the

Board, with or without remanding the case for a rehearing, as justice

may require.

The reports of the Ways and Means and Finance Committees indicated that

this language was intended to limit judicial review to questions of law,

limitation comparable to that provided in appeals from determinations of

the Federal Trade Commission.

The committees identified “questions of

law” as including

questions as to the constitutionality of the substantive law applied,

the constitutionality of the procedure used, failure to observe the

procedure required by law, the proper interpretation and application

of the statute or any regulation having the force of law, the existence

of at least some evidence to support the findings of fact, and the

validity of any ruling upon the admissibility of evidence. . . .

The American Bar Association recommended that factual findings of

the Board be accorded only prima facie weight;

Congress rejected this

I.R.C. § 7482(a) (emphasis supplied). Section 1254 of title 28 includes the

successor of both §§ 239 and 240 of the old Judicial Code. It is thus even less clear

now whether the reference to review by certiorari is meant to be exclusive.

Revenue Act of 1926, ch. 27, §§ 1001, 1003(a), 1005(a)(1), 44 Stat. 109, 110.

Rev. Stat. § 3224 (1873); Revenue Act of 1926, ch. 27, § 284(d), 44 Stat. 67

(now codified at I.R.C. § 6512(a)); see also, e.g., Baglivo v. Commissioner, 235 F.

Supp. 493 (E.D. Pa. 1964).

See, e.g., United States v. Bottenfield, 442 F.2d 1007 (3d Cir. 1971).

Revenue Act of 1926, ch. 27, § 1003(b), 44 Stat. 110.

H.R. REP. NO. 69-1, at 19–20 (1925); S. REP. NO. 69-52, at 36–37 (1926).

1925 House Hearings, supra note 2, at 894.

H.R. REP. NO. 69-1, at 19–20 (1925); S. REP. NO. 69-52, at 36 (1926).

The ABA made the following proposal:

The findings of the board shall be prima facie evidence of the facts therein

stated. If either party shall apply to the court for leave to adduce additional

evidence, and shall show to the satisfaction of the court that such additional

evidence is material, and that there were reasonable grounds for the failure

Improving the Board of Tax Appeals 127

position on the ground that “the complicated and technical facts governing

tax liability require a determination by a body of experts,”

a determination

which should not be disturbed if supported by “at least some evidence.”

Except for the ABA proposal, the scope of review question attracted little

attention in 1926. Some two decades later, however, a serious controversy

on this matter surfaced as the result of the Supreme Court decision in

Dobson v. Commissioner.

An important question that had to be confronted in connection with the

new appellate procedure was the extent to which it would be permitted to

be used by taxpayers simply as a means of delaying the payment of tax.

Even under the 1924 Act, which did not provide appeal rights, many cases

were being filed with the Board solely to delay collection of the tax.

With

the granting of appeal rights, the danger of abuse was enhanced.

Although the delay problem was a serious one, the 1926 Act did not

eliminate the ban on assessment or collection prior to Board

determination.

However, if the decision of the Board was adverse to the

taxpayer, an appeal of the adverse decision would not bar assessment or

collection unless the taxpayer filed a bond with the Board on or before the

date of filing of the appeal. The bond was to secure the payment of any tax

to adduce such evidence in the proceedings before the board, the court may

order such additional evidence to be taken before the board and to be

adduced upon the hearing in such manner and upon such terms and

conditions as to the court may seem proper. The board may modify its

findings as to the facts or make new findings by reason of the additional

evidence so taken, and it shall file such modified or new findings, which, if

supported by the testimony, shall be conclusive, and its recommendation, if

any, for the modification or setting aside of its original decision with the

return of such additional evidence.

1925 House Hearings, supra note 2, at 893–94.

H.R. REP. NO. 69-1, at 19 (1925); S. REP. NO. 69-52, at 36 (1926).

H.R. REP. NO. 69-1, at 20 (1925); S. REP. NO. 69-52, at 36 (1926).

320 U.S. 489 (1943), rehearing denied, 321 U.S. 231 (1944). See Part XI.H.8.

1925 House Hearings, supra note 2, at 912 (testimony of former member

Ivins), 937 (testimony of A. W. Gregg, Solicitor of Internal Revenue). In the case

of tax years prior to 1921, these delay tactics were even more advantageous to

taxpayers, since the 1924 Act did not provide interest charges for late payment. Id.

at 937; S. R

EP. NO. 69-52, at 33 (1926). This, of course, was a great inducement to

use the Board procedure to increase the term of what amounted to an interest free

loan. The 1926 Act eliminated this problem by providing that thenceforth interest

was to be paid on all deficiencies regardless of the year to which they related.

Revenue Act of 1926, ch. 27, § 283(d), 44 Stat. 64.

Revenue Act of 1926, ch. 27, §§ 274(a), (b), 44 Stat. 55. An exception to this

bar was made for so-called jeopardy assessments if the Commissioner believed

collection of the tax would be jeopardized by delay in assessment. Id. § 279, 44

Stat. 59.

128 The United States Tax Court – An Historical Analysis

and interest thereon ultimately determined to be due.

The statute required

Board approval of the surety for the bond and permitted the Board to fix

the amount of the bond up to twice the deficiency on appeal.

The dual

policies of the statute were to require payment or assurance of payment of

any deficiency ultimately found due, and to discourage appeals from Board

decisions simply to defer the day on which accounts had to be settled.

Another provision of the 1926 Act aimed at preventing the abuse of Board

proceedings authorized the Board to impose a $10 fee for filing petitions.

Additionally, the Board, the Courts of Appeals, and the Supreme Court

were provided with power to impose penalties or damages in appeals

instituted merely for delay.

The committee reports and congressional debates on the 1926 Act

evidenced a particular concern with respect to the constitutionality of the

new appellate procedure.

This concern probably stemmed from the 1923

decision in Keller v. Potomac Electric Co.

In Keller, the Supreme Court had

refused jurisdiction granted it by statute to review a finding of the Public

Utility Commission of the District of Columbia in a rate-making case. The

Court found that its duties under the statute required review of the entire

record below and, in effect, substitution of its discretion for that of the

agency. The Court concluded that these duties, which permitted it “to

Id. § 1001(c), 44 Stat. 109. As originally reported to the House, the bill

provided that no assessment was permitted until all rights of appeal were

exhausted. H.R. R

EP. NO. 69-1, at 10 (1925). A committee amendment on the

House floor eliminated this generous provision in order to conform the treatment

of the taxpayer who had lost before the Board and was appealing, with the

treatment of the taxpayer against whom a jeopardy assessment had been made. 67

ONG. REC. 896–97, 1136 (1925).

Moreover, the Act also permitted the appellate court to require security in

addition to the specific bond requirements. Revenue Act of 1926, ch. 27, § 1001(e),

44 Stat. 110.

This policy has remained in effect up to the present. See I.R.C. §§ 7482(c),

7485.

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924, § 904,

44 Stat. 106 (now codified at I.R.C. § 7451). The maximum fee that may be

imposed by the Tax Court currently stands at $60.

Revenue Act of 1926, ch. 27, §§ 1000 (amending Revenue Act of 1924, § 911),

1004, 44 Stat. 109, 110 (now codified at I.R.C. §§ 6673, 7482(c)(4)).

H.R. REP. NO. 69-1, at 20 (1925); S. REP. NO. 69-52, at 37 (1926); 67 CONG.

EC. 3756–57 (1926) (exchange between Senator David Reed of Pennsylvania and

Senator Cummins of Iowa).

261 U.S. 428. That the Keller case was a matter of concern is indicated by

commentary which appeared after the enactment of the 1926 legislation. Joseph

Kahn, The Status of the United States Board of Tax Appeals as a Judicial Body, 7 N

AT’L

INC. TAX MAG. 135, 137–38 (1929); Joseph Kahn, The Judicial Status of the Board of

Tax Appeals, 7 N

AT’L INC. TAX MAG. 175, 177 (1929).

Improving the Board of Tax Appeals 129

change present conditions and to guide future action,”

were essentially

legislative or administrative, and did not involve a “case or controversy”

within the meaning of article III of the Constitution.

The Board of Tax Appeals was technically an independent agency in the

executive branch, and there was apparently some question whether its

actions were reviewable by article III courts. During the Senate’s

consideration of the 1926 Act, Senator Albert B. Cummins expressed the

“very gravest doubts” whether an article III court could directly review the

decisions of an adjudicative body, the members of which were not afforded

the protections of article III.

Theretofore, orders of the Interstate

Commerce Commission and the Federal Trade Commission were

reviewable in the federal courts, but so far as the Senator was concerned

such review was not in the nature of a direct appeal as was being provided

in the case of the Board.

The committee reports on the 1926 Act revealed that Senator Cummins

was not alone in his concern for the constitutionality of the appellate review

procedure. These reports read very much like briefs in favor of sustaining

the validity of the statute. Of particular interest was the implied distinction

of Keller on the ground that the administrative action to be reviewed in tax

matters was mandatory and not discretionary.

In the view of the committee the decisions of the board are

judicial and not legislative or administrative determinations. Review

of judicial decisions may be had by direct appeal to the courts (which

is the method provided in this bill), and such appeal may be (and is

by this bill) made exclusive of other methods, such as by petitions to

the courts for the enforcement of an administrative order, or by

extraordinary remedy such as injunction, or by suits for refunds.

Further, the review of the decision of the board may be limited to

the record made before the board. The imposition upon the court

of the duty of reviewing judicial decisions, such as those of the

board, can not properly be urged as the imposition of a nonjudicial

duty, by reason of the fact that execution of the decision is

dependent upon the administrative action of the commissioner in

assessing and collecting the tax in accordance with the decision. The

duty imposed upon the commissioner in respect of the deficiency

261 U.S. at 440.

67 CONG. REC. 3756 (1926).

Id. This same observation was made in James Craig Peacock, An Anomalous

and Topsy-Turvy Appellate System, 19 A.B.A. J. 11 (1933). No such distinction was

made by the Supreme Court when it, in 1929, approved the constitutionality of the

appellate procedure; in fact, the Court cited the experience with the Interstate

Commerce Commission and the Federal Trade Commission as support for its

holding. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 722–23 (1929).

130 The United States Tax Court – An Historical Analysis

decided is not discretionary but nondiscretionary, but its

performance in accordance with law is mandatory. Such review of a

judicial as distinguished from a legislative or administrative

determination may be had as to either question of law or fact. The

proposed procedure, however, for reasons of policy and not of law,

limits court review solely to questions of law as heretofore described.

The principles discussed in the preceding paragraph are of

general application and are not limited merely to matters over which

Congress has peculiar control by reason of a proprietary interest, as

in public lands or pensions, or by reason of an exclusive regulatory

power, as in the importation of merchandise and the admission of

aliens. In adhering to such principles the committee is of the

opinion that it is establishing an appellate procedure that is

unquestionably constitutional.

One senses in this excerpt a desire to clarify the view that, at least as far

as Congress was concerned, the Keller decision was not to be interpreted as

precluding appellate review of administrative fact finding. Although

appellate review was limited under the statute to questions of law, that

limitation was made for policy reasons and not on constitutional grounds.

Three years later the constitutionality of these provisions was upheld by

the Supreme Court in Old Colony Trust v. Commissioner.

Without citing the

Keller decision, the Court concluded that review of Board decisions had all

the necessary requisites of a constitutional case or controversy. Although in

the view of the Court, the Board was not a “court” but was rather an

“executive or administrative board,”

appeals from its decisions involved

S. REP. NO. 69-52, at 37 (1926); see also H.R. REP. NO. 69-1, at 20 (1925).

History has vindicated the judgment of the tax committees. In 1948,

Congress expressly provided for the same review of factual determinations of the

Tax Court as is accorded to findings of a district court sitting without a jury. Act of

June 25, 1948, ch. 646, § 36, 62 Stat. 991. No challenge to this provision has ever

been sustained. Although the area is not completely settled, it would seem that

Congress, or, in appropriate cases, the courts, may undertake broad factual review

of administrative fact finding. See D

AVIS, supra note 50, at §§ 29.01, 29.07, 29.09; see

also Administrative Procedure Act, ch. 324, § 10(e), 60 Stat. 243 (1946) (now

codified at 5 U.S.C. § 706(2)(E)), providing that a reviewing court must set aside

administrative findings if “unsupported by substantial evidence.”

279 U.S. 716 (1929).

Id. at 725. This view of the Board did not, in Old Colony, result in treating the

Board’s decisions differently from those of a “court.” Occasionally, however, there

has been a different result. Blair v. Oesterlein Mach. Co., 274 U.S. 220 (1927)

(Supreme Court refused to pass on issue not raised below, partly because the

proceeding originated in an administrative agency rather than a court); Lasky v.

Commissioner, 235 F.2d 97 (9th Cir. 1946), aff’d per curiam, 352 U.S. 1027 (1957)

Improving the Board of Tax Appeals 131

adverse parties disputing substantive claims based on federal law, and it was

not constitutionally significant whether the federal courts had jurisdiction to

review de novo the decisions of the Board or only could exercise appellate

jurisdiction based on a record made before the Board.

D. Jurisdiction

1. Exclusivity of Board Jurisdiction

Under the 1924 Act, the taxpayer had several alternative forums to

contest tax liability. If a deficiency was asserted, he could either petition the

Board for redetermination

or pay the tax and sue for refund in a district

court or the Court of Claims.

If no deficiency was asserted but the

taxpayer concluded that he had overpaid his tax voluntarily, he could claim

a refund, and if it was not allowed he could sue for refund in either district

court or the Court of Claims, but not in the Board.

Early versions of the

Revenue Bill of 1926 proposed drastic changes in this system of review by

limiting the availability of refund actions and expanding the areas of

exclusive Board jurisdiction.

In hearings before the Ways and Means Committee, taxpayer

representatives urged that Board jurisdiction be expanded to include refund

claims. Board procedures were cheaper, quicker, and less complicated than

those applicable in other courts, and taxpayers who had paid a disputed tax

should be entitled to these benefits.

Chairman Green was inclined to

agree with this position.

Secretary Mellon and Solicitor Gregg, however,

opposed such a change on the ground that the Board was not equipped to

handle the increased workload that would result—some 78,000 active

claims for refund were pending within the Bureau, and theoretically all

(since Tax Court was an administrative agency and not a court, it had no equitable

powers to vacate a decision after it became final).

279 U.S. at 724–25. Old Colony involved a case in which the taxpayer was

appealing from an unfavorable decision of the Board, and was, at the same time,

questioning the constitutionality of the procedure. The procedure involved when

the Government is the appealing party has also been sustained against the

contention that no case or controversy exists when the dispute is between two

agencies of the Government (the Board of Tax Appeals and the Bureau of Internal

Revenue), as when the Board’s decision was favorable to the taxpayer.

Commissioner v. Liberty Bank and Trust Co., 59 F.2d 320 (6th Cir. 1932).

Revenue Act of 1924, ch. 234, § 274, 43 Stat. 297.

See Part I, notes 142–197 and accompanying text.

Id.; Part II, notes 142–144 and accompanying text.

1925 House Hearings, supra note 2, at 849 (testimony of D.A. Smith,

American Paper and Pulp Assoc.), 854 (testimony of Dr. Joseph J. Klein).

Id. at 849. But see 67 CONG. REC. 524 (1925) (remarks of Chairman Green).

132 The United States Tax Court – An Historical Analysis

these claims could end up before the Board if its jurisdiction were

expanded.

Moreover, the Board had been established principally to afford

a day in court to the taxpayer before he was required to pay his tax; in

refund cases, the tax had already been paid, and the reason for a hearing

before the Board was eliminated.

Apparently, the Ways and Means Committee and the House saw merit

in both positions, and the bill as reported to and passed by the House

attempted to find a middle ground. The Board would not be given

jurisdiction of refund claims then before the Bureau. However, with

limited exceptions, in the case of future deficiency determinations, a

taxpayer’s only remedy would be to use the Board procedure.

Thus,

taxpayers would not be permitted the option of paying a deficiency and

then suing for refund in district court or the Court of Claims. Moreover,

once the Commissioner had asserted a deficiency for a tax year, all

questions of tax liability for that year could only be litigated before the

Board. If a taxpayer against whom a deficiency was asserted believed that

not only was no deficiency due but that he had overpaid his tax for the year,

he would be required to submit the questions of the deficiency and the

overpayment to the Board.

Although the refund action in district court and the Court of Claims was

not completely abolished by the House bill (it would continue to be

available in cases in which no deficiency notice was issued),

the Senate

Finance Committee concluded that the House provision barring recourse to

traditional forums in refund cases was “too drastic.”

Accordingly, it

restored the prior practice of permitting the taxpayer who had received a

deficiency notice the option of either filing a petition with the Board, or

1925 House Hearings, supra note 2, at 10, 934; see also id. at 923–24 (testimony

of former Chairman Hamel).

Id. at 934.

As passed by the House, § 281(d) of the bill provided:

If the Commissioner has notified the taxpayer of a deficiency, or has made

. . . [a jeopardy assessment], the right of the taxpayer to file a petition with

the Board of Tax Appeals and to appeal from the decision of the Board to

the courts shall constitute his sole right to contest the amount of the tax for

the taxable year in respect of which the Commissioner has determined the

deficiency, and, whether or not he files a petition with the Board, no credit

or refund in respect of such tax shall be made and no suit for the recovery

of any part of such tax shall be maintained in any court . . .

The principal exceptions to the bar on refunds were: (1) if the Board, having

obtained jurisdiction as the result of the mailing of a deficiency notice, determined

an overpayment, or (2) if the taxpayer could prove the notice of deficiency was not

received by him within 45 days from the date it was mailed.

H.R. REP. NO. 69-1, at 10, 13–14 (1925).

S. REP. NO. 69-52, at 25–26 (1926).

Improving the Board of Tax Appeals 133

paying the tax and suing for refund in either district court or the Court of

Claims.

In conference the House receded from its position.

If enacted, the House proposal would have had a profound influence on

tax litigation by requiring that virtually all tax controversies be heard by the

Board. But this was not the only jurisdictional issue dealt with, and several

other jurisdictional amendments were actually effected by the 1926

legislation. Although none of them were controversial, they were of some

significance and were the most complicated features of the new legislation

dealing with the Board.

100

2. Effect of Payment and Limited Refund Jurisdiction

The 1926 Act adopted two important jurisdictional changes involving

the related subjects of the effect of payment on the Board’s power to

review a deficiency assertion and the jurisdiction of the Board to consider

whether an overpayment of tax had been made. The Board had held that,

under the 1924 Act, it lost jurisdiction of any case in which the deficiency

asserted by the Commissioner was paid by the taxpayer prior to the time

the Board rendered its decision.

101

The Board’s only authority was to

determine the existence of a deficiency; if the asserted deficiency was paid,

the Board had nothing to decide. Similarly, since no deficiency was

involved, the Board had held that the 1924 legislation gave it no authority

to decide whether a taxpayer was entitled to a refund of tax.

102

The first of these rulings burdened those taxpayers who wished to avail

themselves of the Board procedure but wanted to forestall the running of

interest on any deficiency ultimately found by paying the tax asserted in the

deficiency notice. Such a taxpayer could use the Board procedure or pay

the tax; the taxpayer could not do both. The second ruling made the Board

procedure cumbersome for the taxpayer against whom a deficiency was

asserted but who believed that not only was no deficiency due, but also that

the taxpayer had overpaid the tax. The taxpayer could contest the asserted

deficiency before the Board but could obtain a refund only by instituting an

action in district court or the Court of Claims—even though the deficiency

related to the same year as the overpayment or the same issue.

The House version of the bill, which virtually abolished separate refund

proceedings, provided the Board with jurisdiction to determine all questions

Id.

H.R. REP. NO. 69-356, at 48–49 (1926).

100

For contemporary descriptions of these changes, see Latham, supra note 36;

Herman T. Reiling, Changes in the House Bill Affecting Taxable Income, 4 N

AT’L INC.

AX MAG. 6 (1926); Willis W. Ritter, Jurisdiction of the Board of Tax Appeals Under Act

of 1926, 4 N

AT’L INC. TAX MAG. 128 (1926).

101

Northwestern Mut. Life Ins. Co., 1 B.T.A. 767 (1925).

102

Everett Knitting Works, 1 B.T.A. 5 (1924).

134 The United States Tax Court – An Historical Analysis

of tax liability for the tax year in issue, including whether the taxpayer was

entitled to a refund.

103

Conversely, the bill permitted the Board to

determine a greater deficiency than that initially asserted by the

Commissioner in the deficiency notice and authorized the Board to

prescribe rules governing “under what conditions and at what times” the

Commissioner could assert the additional tax.

104

Senate amendments eliminated the Board’s exclusive jurisdiction over

tax years for which a deficiency notice was issued. The taxpayer’s option of

either contesting the deficiency before the Board, or paying the deficiency

and seeking a refund by way of suit in either district court or the Court of

Claims was preserved. The Senate, however, did not completely revert to

the statutory scheme that existed under the 1924 Act. In the first place, the

Senate substantially adopted the House provision granting the Board

plenary jurisdiction to redetermine tax liability with respect to any year for

which a petition was filed. Thus, the Board could determine a greater

deficiency than was initially asserted if the additional amount was claimed

by the Commissioner at or before the Board hearing, or it could find that

no deficiency existed and that the taxpayer had overpaid his tax for the year

103

The text of the House version of the bill is reproduced below:

If the Board of Tax Appeals finds that there is no deficiency and further

finds that the taxpayer has made an overpayment of tax in respect of the

taxable year in respect of which the Commissioner determined the

deficiency, the Board shall have jurisdiction to determine the amount of

such overpayment, and such amount shall, when the decision of the Board

has become final, be credited or refunded to the taxpayer . . . .

H.R. 1, 69th Cong., 1st Sess. § 281(e) (1925), as passed by the House, as enacted,

Revenue Act of 1926, ch. 27, § 284(e), 44 Stat. 67. This statute, as amended, is now

codified at I.R.C. § 6512(b)(1).

104

H.R. 1, 69th Cong., 1st Sess. § 274(e) (1925), as passed by the House. The

final version of the Act made no reference to the Board’s power to make rules

governing the assertion of greater deficiencies. Revenue Act of 1926, ch. 27,

§ 274(e), 44 Stat. 56 (now codified at I.R.C. § 6214(a)). Nevertheless, in its first

revision of its rules of practice and procedure after enactment of the 1926 Act, the

Board amended the rule with respect to the burden of proof to put the burden on

the Commissioner “in respect of any new matter of fact pleaded in his answer . . .

.” B.T.A.

RULE 30 (April 1, 1926 ed.)

Improving the Board of Tax Appeals 135

with a resulting entitlement to a refund or credit.

105

These provisions were

retained in the final version of the Act.

106

Additionally, the Senate bill provided that a taxpayer could waive the

restrictions on assessment and collection imposed during the pendency of a

Board proceeding, and pay the asserted deficiency. Such a waiver would

not prevent the taxpayer from receiving a refund or credit of tax as a result

of a Board determination that the deficiency was less than that asserted by

the Commissioner.

107

This amendment permitted a taxpayer to forestall the

running of interest by paying the asserted deficiency without thereby

depriving the Board of jurisdiction to decide the proper amount of tax due.

The conference accepted the amendment.

108

105

H.R. 1, 69th Cong., 1st Sess. §§ 274(e), 284(e) (1926), as passed by the

Senate. Under the House bill, the Commissioner was not restricted to raising the

deficiency at or before the Board hearing. This was believed to be unjust as not

giving sufficient opportunity to the taxpayer to rebut the claim for additional tax.

67 C

ONG. REC. 3376 (1926).

106

Revenue Act of 1926, ch. 27, §§ 274(e), 284(e), 1001, 1005, 44 Stat. 56, 67,

109, 110. These provisions, as amended, are now codified at I.R.C. §§ 6214(a),

6512(b)(1).

107

H.R. 1, 69th Cong., 1st Sess. § 274(d) (1926), as reported by the Senate

Finance Comm. provided as follows:

The taxpayer shall at any time have the right, by a signed notice in writing

filed with the Commissioner, to wave the restrictions provided in

subdivision (a) of this section on the assessment and collection of the whole

or any part of the deficiency. Such waiver shall not bar the taxpayer from

receiving a credit or refund under subdivision (e) of section 284 if the

decision of the Board which has become final determines an overpayment

of tax in respect of the year to which the waiver relates.

The House bill did not deal specifically with the question of whether Board

jurisdiction would be lost if the contested deficiency was paid by the taxpayer prior

to the time the Board rendered its decision. The Board was given exclusive

jurisdiction over any year with respect to which a deficiency notice was issued and

could, if no deficiency was found, determine an overpayment of tax that would be

refunded or credited to the taxpayer. However, as used in the bill, “deficiency”

seemed to refer only to the deficiency originally determined by the Commissioner,

and the language was at least susceptible to the interpretation that no overpayment

could be determined if at least some portion of the deficiency was correct. Thus, if

the Commissioner determined a deficiency of $1,000 that the taxpayer paid before

the rendition of the Board decision, and the Board determined a deficiency of $1,

arguably no overpayment of $999 could be determined by the Board because there

was a deficiency. H.R. 1, 69th Cong., 1st Sess. § 281(e) (1925), as passed by the

House.

108

H.R. REP. NO. 69-356, at 40 (1926); Revenue Act of 1926, ch. 27, § 274(d),

44 Stat. 56 (now codified at I.R.C. § 6213(d)).

136 The United States Tax Court – An Historical Analysis

3. Jeopardy Assessments

Other important jurisdictional changes from the 1924 Act were made

with respect to jeopardy assessments. In general, both the 1924 and 1926

Acts provided that a deficiency could be neither assessed nor collected until

60 days following the mailing of a deficiency notice, and, if a petition was

filed with the Board with respect to the notice, the bar on assessment and

collection was further extended until the Board rendered its decision.

109

In spite of the general policy of forbidding the Commissioner from

assessing or collecting a deficiency before the taxpayer was afforded an

opportunity for a hearing before the Board, an exception was necessary in

those cases in which a delay in assessment would jeopardize collection of

the tax. Circumstances jeopardizing collection could arise in cases in which

fraud was suspected or an imminent bankruptcy could deplete the assets of

the taxpayer necessary to pay the asserted tax.

110

To prevent disruptions in

tax collections for these reasons, the 1924 and 1926 Acts authorized the

Commissioner to make jeopardy assessments regardless of whether a

deficiency notice had been sent to the taxpayer and regardless of whether

the question of liability for the tax assessed was pending before the

Board.

111

The jeopardy assessment could vary from the deficiency asserted

in a deficiency notice, if any, and could be made up to the time when the

decision of the Board became final.

112

The action of the Commissioner in

109

Revenue Act of 1924, ch. 234, § 274(a)–(c), 43 Stat. 297; Revenue Act of

1926, ch. 27, § 274(a)–(c), 44 Stat. 55.

Under the 1924 Act, a taxpayer aggrieved by a premature assessment was not

given any express statutory remedy, and in one case, it was held that no injunction

could be obtained against an illegal assessment. Joseph Garneu Co. v. Bowers, 8

F.2d 378 (S.D.N.Y. 1925). Contra Lafayette Worsted Co. v. Page, 6 F.2d 399

(D.R.I. 1925). See Rev. Stat. § 3224 (1873) (now codified at I.R.C. § 7421(a). In the

1926 Act, this problem was eliminated by a provision authorizing an injunction

against a premature assessment or collection. Revenue Act of 1926, ch. 27,

§§ 274(a), 508(d), 44 Stat. 55 (now codified at I.R.C. § 6213(a)).

110

See 1 LAURENCE F. CASEY, FEDERAL TAX PRACTICE § 2.18 (1955). Until

1926, the Commissioner also viewed the expiration of the period of limitations on

assessment as jeopardizing collection of the tax. See Part I, notes 114–120 and

accompanying text.

111

Revenue Act of 1924, ch. 234, § 274(d), 43 Stat. 297; Revenue Act of 1926,

ch. 27, § 279, 44 Stat. 59.

112

Revenue Act of 1924, ch. 234, § 274(d), 43 Stat. 297; Revenue Act of 1926,

ch. 27, § 279(c)–(e), 44 Stat. 59. Under the 1926 Act, the Board decision was not

technically final until rights of appeal had been exhausted, but no jeopardy

assessment could be made after a petition for review of a Board decision was filed.

Id. § 279(e), 44 Stat. 60. Generally, the 1926 Act prevented the Commissioner from

sending a second deficiency notice for the same year if a petition was filed with the

Board with respect to the first notice. Id. § 274(f), 44 Stat. 56. By employing the

Improving the Board of Tax Appeals 137

issuing jeopardy assessments, although not originally subject to review,

withstood constitutional attack.

113

Under the 1924 Act, a taxpayer against whom a jeopardy assessment had

been made could contest the assessment in one of two ways. First, the

taxpayer could pay the assessment and pursue the standard refund

procedure before the Bureau and the courts.

114

This procedure precluded a

hearing before the Board. Alternatively, the taxpayer could file a claim in

abatement with the Bureau accompanied by a satisfactory bond in an

amount up to twice the amount of the claimed abatement.

115

Collection of

the tax would then be stayed pending Bureau consideration of the claim.

116

The Commissioner was required to notify the taxpayer of his decision, and

if the claim was denied in whole or in part the taxpayer could, within 60

days of the mailing of notice of the denial of the claim, petition the Board

jeopardy assessment device, the Commissioner could avoid this prohibition since

the jeopardy assessment could be more or less than the deficiency originally

asserted. Id. § 279(c), 44 Stat. 59. The only limitation imposed on this power

provided that after the Board had rendered a decision, the jeopardy assessment

could be no more than the deficiency determined by the Board. Id. § 279(d), 44

Stat. 60.

113

Phillips v. Commissioner, 283 U.S. 589 (l931); see also S. REP. NO. 69-52, at

27 (1926); Couzens v. Commissioner, 11 B.T.A. 1040 (1928); California Associated

Raisin Co., 1 B.T.A. 1251 (1925). However, through two opinions issued in the

mid-1970’s, the Supreme Court raised concerns over the constitutional adequacy of

the then-existing procedures for challenging a jeopardy assessment. See Laing v.

United States, 423 U.S. 161, 185–88 (1976) (Brennan, J., concurring) (raising Fifth

Amendment Due Process concerns that were avoided by the majority’s statutory

construction); Commissioner v. Shapiro, 424 U.S. 614, 629 (1976) (noting that “the

Due Process Clause requires that the party whose property is taken be given an

opportunity for some kind of pre-deprivation or prompt post-deprivation hearing

at which some showing of the probable validity of the deprivation must be made”).

Shortly after these decisions, Congress enacted § 7429 as part of the Tax Reform

Act of 1976 to provide taxpayers with additional procedural protections in this

setting. To start, the statute provides taxpayers with a right to an administrative

review of the jeopardy assessment. See I.R.C. § 7429(a)(2), (3). As originally

enacted, taxpayers could seek judicial review of this administrative proceeding (or

lack thereof) in Federal district court only. See I.R.C. § 7429(b)(2). As modified in

1988, the statute now permits taxpayers to seek judicial review in the Tax Court if

the taxpayer had previously invoked the court’s deficiency jurisdiction with respect

to the tax liability that serves as the subject of the assessment. See I.R.C.

§ 7429(b)(3). The Tax Court’s jurisdiction in this setting is discussed in more detail

in Part VI.C.1.

114

Revenue Act of 1924, ch. 234, §§ 281(a), 1011, 1012, 1014, 43 Stat. 301,

342, 343.

115

Id. § 279(a), 43 Stat. 300.

116

Id.

138 The United States Tax Court – An Historical Analysis

to review the Commissioner’s action.

117

Collection of the tax would

continue to be stayed until the Board’s decision.

118

If the claim was allowed

by the Board, the Commissioner could initiate suit in court to collect the tax

that had been assessed, but the Commissioner could not collect the tax

before obtaining a favorable judgment.

119

If the Board, on the other hand,

denied the claim, the tax would be immediately collected and the taxpayer

could pursue a refund action.

120

Thus, under a textual reading of the 1924

Act, the only means by which a taxpayer could obtain a Board hearing was

to file a claim in abatement, accompanied by a bond.

121

Board review

would be predicated not on the determination of a deficiency, but rather on

the denial of the claim in abatement.

In its version of the 1926 Revenue Bill, the House, which had eliminated

federal court refund actions even with respect to jeopardy assessments,

122

generally retained the claim in abatement procedure that had applied under

the 1924 Act.

123

However, because this procedure was to be the only

means of obtaining judicial review of jeopardy assessments, and because

not all taxpayers could obtain bonds, claims in abatement were permitted to

be filed even if not accompanied by a bond.

124

In such a case the tax would

be collected and the Bureau would then review the merits of the claim. If

the claim was denied, the taxpayer could appeal to the Board, and if the

Board allowed the claim, the collected tax would be refunded to the

taxpayer.

The House bill continued the 1924 Act feature predicating Board review

of a jeopardy assessment on the denial of a claim in abatement. Such

review was distinct from review of a deficiency determination, and once a

jeopardy assessment was made, all prior Board proceedings with respect to

a deficiency notice would be terminated. Because the House bill allowed a

jeopardy assessment any time before a decision of the Board became final

or an appeal from a Board decision was perfected,

125

some cases could

117

Id. § 279(b).

118

Id. § 279(a).

119

Id. § 279(b).

120

Id.

121

Id. But see California Associated Raisin Co., 1 B.T.A. 1251 (1925);

Northwestern Mut. Life Ins. Co., 1 B.T.A. 767 (1925); California Associated Raisin

Co., 1 B.T.A. 314 (1925).

122

See supra notes 91–95 and accompanying text.

123

H.R. 1, 69th Cong., 1st Sess. §§ 274(d), 279 (1925), as passed by the House.

124

67 CONG. REC. 897 (1925).

125

As passed by the House, the bill provided that a jeopardy assessment, in any

amount, could be made at any time prior to a decision by the Board with respect to

the tax year. H.R. 1, 69th Cong., 1st Sess. § 274(d) (1925). Moreover, even after a

decision by the Board, a jeopardy assessment could be made until the earlier of the

expiration of the 90-day appeal period, or the filing of an appeal bond, although in

Improving the Board of Tax Appeals 139

require two hearings in the Board, one hearing with respect to the original

deficiency notice and a later hearing based on the denial of a claim in

abatement.

The Senate approved of late jeopardy assessments because collection of

tax could become jeopardized at any time, and, to protect the revenues,

summary assessment would have to be allowed until either completion of

the judicial proceedings or until an appeal bond was filed.

126

However, the

claim in abatement procedure would be unnecessarily complicated for a

taxpayer required to bring his case to the Board twice.

127

Moreover, the

procedure was to some extent a waste of time because it required

administrative review of a jeopardy assessment that had already been

approved. Accordingly, the Senate bill substituted a streamlined procedure

for obtaining Board review of taxes subject to a jeopardy assessment. If the

assessment was made prior to the mailing of a deficiency notice, the Senate

bill required the Commissioner to mail such a notice within 60 days after

making the assessment.

128

The taxpayer could then file a petition with the

Board based on that notice and the Board would proceed to determine tax

liability for the year.

129

If, on the other hand, the jeopardy assessment was

made after a deficiency notice had been sent, the assessment would not

terminate Board jurisdiction based on the original notice, and the Board’s

proceeding would simply continue.

130

No jeopardy assessment could be

made after the Board’s decision became final or was appealed to a court of

appeals.

131

Regardless of when the jeopardy assessment was made, the

taxpayer was extended the option of either paying the tax assessed or

staying payment by filing a satisfactory bond.

132

Whether or not a bond was

filed would not affect Board jurisdiction; as under the House bill, if the

assessment was paid, the Board proceeding would become in effect a

refund action. As a result of these changes, the claim in abatement became

unnecessary and was abolished.

133

The conference committee on the 1926

such a case the amount of the assessment could not exceed the deficiency found by

the Board. Id. Thus, jeopardy assessments were permitted even after the Board

proceeding was virtually completed.

126

See S. REP. NO. 69-52, at 27 (1926).

127

Id. at 26–27.

128

H.R. 1, 69th Cong., 1st Sess. § 279(b) (1926), as passed by the Senate.

129

Id. §§ 274(a), 279(c).

130

Id. § 279(c).

131

Id. § 279(d).

132

Id. § 279(f).

133

Id. § 279(k).

140 The United States Tax Court – An Historical Analysis

Revenue Bill accepted the Senate modifications,

134

and a procedure was

thereby established that remained in place for decades.

135

E. Members

The provisions of the 1926 Act concerning appeals and jurisdictional

matters were of long-lasting importance to the Board, but they aroused little

controversy compared to those aspects dealing with Board membership—

the number of members, their salary, tenure, background, appointment and

removal, and the restrictions on their practice after they left office.

To some extent the concern about these matters related to the efficiency

and productivity of the Board. In its first months of existence, the Board

managed to keep pace with its workload, but the number of cases being

134

H.R. REP. NO. 69-356, at 42 (1926).

135

Revenue Act of 1926, ch. 27, § 279, 44 Stat. 59 (now codified, as amended,

at I.R.C. §§ 6861, 6863). [As part of the Tax Reform Act of 1976, Congress

enacted § 7429 to provide for administrative and judicial review of jeopardy

assessments. These provisions, and the Tax Court’s limited jurisdiction in this

setting, are discussed in Part VI.C.]

In addition to the provisions described above, various other jurisdictional

changes were initiated in 1926 that have persisted to the present. These included:

1. A determination that an additional tax was due because of a “mathematical

error appearing upon the face of the return” was not to be appealable to the Board

and was subject to summary assessment. Revenue Act of 1926, ch. 27, § 274(f), 44

Stat. 56 (now codified at I.R.C. § 6213(b)(1)).

2. In redetermining a deficiency for a tax year, the Board could consider facts

with relation to tax liability for other years, but could not redetermine tax liability

for such other years. Id. § 274(g) (now codified at I.R.C. § 6214(b)).

3. The Board could determine the applicability of penalties, additional amounts,

and additions to tax, as well as tax liability. Id. § 274(e) (now codified at I.R.C.

§ 6214(a)). The Board had held that it possessed such jurisdiction under the 1924

Act, see Gutterman Strauss Co., 1 B.T.A. 243 (1924), but the issue was not free of

doubt.

4. Upon the adjudication of bankruptcy or the appointment of a receiver, the

Commissioner was directed to assess tax deficiencies immediately, and the taxpayer

was not permitted to petition the Board for redetermination. Revenue Act of 1926,

ch. 27, § 282(a), 44 Stat. 62 (now codified at I.R.C. § 6871).

5. The period for filing a petition after the mailing of the deficiency notice was

extended by one day if the last day of the regulation period fell on a Sunday. Id.

§ 274(a), 44 Stat. 55 (now codified at I.R.C. § 6213(a)).

6. The Board could increase the deficiency above the amount originally

determined by the Commissioner, but the increased amount could not be asserted

by the Commissioner in a further deficiency notice if a petition to the Board was

filed with respect to the first notice. Rather, the increased amount would have to be

asserted to the Board at or before the hearing. Id. §§ 274(e), (f), 44 Stat. 56 (now

codified at I.R.C. §§ 6212(c), 6214(a)).

Improving the Board of Tax Appeals 141

brought was increasing dramatically and doubts were expressed whether the

Board could continue to be effective if it became burdened with an

unmanageable backlog.

136

The number and quality of members would bear

directly on the dispatch with which cases could be considered and disposed.

1. Number of Members

The 1924 Act authorized the appointment of up to 28 members for a

two-year period ending June 2, 1926,

137

at which time the terms of all the

members appointed during the initial period were to expire and the

permanent membership of the Board was to be reduced to seven.

138

Despite the authorization for 28 members during the two-year period, only

12 persons were originally appointed to the Board, and at no time did the

membership exceed 16.

139

By 1925, most observers were agreed that a seven-member Board would

be insufficient, and debate centered on how many more than that figure

would be needed. Although some support existed for maintaining the

authorized Board membership at 28, at least temporarily,

140

a consensus

soon developed for a somewhat smaller number. The Administration,

while not taking a definitive position on the issue, contended that

membership should be no less than 16.

141

This view was publicly supported

by Board Chairman Korner, who doubted that the Board could function

with less than its current membership of 15

142

and suggested that 16 would

be preferable.

143

Because the Board was generally expected to encounter difficulties in

keeping current with its caseload, it is somewhat surprising that only

minimal support developed for providing a membership substantially in

excess of 16. Even strong supporters of the Board rejected the idea of a

larger membership because of the effect it would have on the Board’s mode

of operation.

144

The Board held regular meetings to review decisions prior

136

Nelson T. Hartson, The Board of Tax Appeals in its Relation to the Bureau of

Internal Revenue, 3 N

AT’L INC. TAX MAG. 215, 216–17 (1925).

137

Revenue Act of 1924, ch. 234, § 900(a), 43 Stat. 336.

138

Id. §§ 900(a), (b).

139

See Part II, notes 180–191 and accompanying text.

140

1925 House Hearings, supra note 2, at 66 (testimony of James Emery, Nat’l

Ass’n of Mfrs.), 81 (statement of N.Y. State Soc’y of C.P.A.’s).

141

Id. at 10 (testimony of Secretary Mellon).

142

Id. at 868.

143

Id. at 873. There could then be sufficient personnel for five separate three

member divisions in addition to the chairman. See also id. at 883 (testimony of

George Morris, Am. Bar Ass’n).

144

Ivins, supra note 33, at 391; 1925 House Hearings, supra note 2, at 883

(testimony of George Morris, Am. Bar Ass’n). In the summer of 1925, a legislative

142 The United States Tax Court – An Historical Analysis

to their promulgation,

145

because decisions rendered in this manner would

likely be well considered and not in conflict with earlier precedent. A large

membership might reduce the Board’s ability to function in this manner.

The committee doubts whether any number in excess of 16 could

continue to meet informally and avoid getting into the dangerous

realm of requiring a formal procedure, thereby turning its judicial

discussions into a form of parliamentary meeting conducted under

artificial rules.

146

Additionally, maintaining a 16-member Board would permit the

reappointment of the existing members, who were favorably viewed by the

public, but would not so increase the size of the body that new

appointments might change its character.

147

Not everyone was of the view that the Board should be composed of 16

members or more. Some critics contended that the Board should be

smaller, and proposals were made for six, seven, eight, ten, and twelve

members. These proposals were based on diverse grounds. Some felt that

the increase in tax litigation was due to problems within the Bureau, “the

officious agents who stir up tax questions and then keep them pending and

pending and pending for the purpose of keeping themselves in positions

and drawing their salaries.”

148

If the Bureau were managed properly, these

abuses would cease and the volume of tax litigation would be reduced

dramatically. Others believed that the best solution to the problem of tax

administration was to improve the law by creating an income tax that by

virtue of its simplicity and clarity would not generate many disputes. Such

improvement would obviate the necessity of “multiplying staffs and

benches of lawyers.”

149

Finally, there were those who argued that although

committee of the Board suggested a permanent membership of 19. See Graupner,

supra note 38. Its concern was to have enough members to deal with the increasing

caseload. However, this proposal was never advanced in public.

145

H.R. REP. NO. 69-1, at 18 (1925); S. REP. NO. 69-52, at 34–35 (1926).

146

H.R. REP. NO. 69-1, at 18 (1925); S. REP. NO. 69-52, at 34–35 (1926).

147

1925 House Hearings, supra note 2, at 884 (testimony of George Morris,

Am. Bar Ass’n).

148

67 CONG. REC. 1127 (1925) (remarks of Mr. Edwards). Mr. Edwards

preferred a Board of six, eight, or ten members. Id. at 1128.

149

S. REP. NO. 69-52, Part 2, at 13 (1926). The report of the Finance

Committee minority recommended a Board of 12 to be reduced to seven within

five years. Congressman Edwards, an advocate of reducing Government spending

by eliminating unnecessary commissions, boards, and bureaus, warned that

Americans might find themselves in the position of a man lynched by a lawless

mob around whose neck a placard had been hung “I am in statu quo.”

The people from around the country gathered and viewed the situation,

but they could not make out this Latin: “Statu quo.” They sent for the

Improving the Board of Tax Appeals 143

there were bound to be many uncertainties in the tax law, the volume of

case precedents that was being accumulated would soon answer most of the

questions raised by the statute. When that happened, the number of cases

would diminish, and a smaller Board would be sufficient.

150

Board

supporters confronted these arguments by pointing out that tax litigation

was increasing and showed no sign of lessening in the foreseeable future.

151

Additionally, a reduction in the number of Board members might

jeopardize the practice of holding hearings outside Washington, D.C.

These hearings were considered an important function of the Board, but

they reduced its efficiency. A small Board might not be able to continue

them.

152

In the final analysis, the controlling consideration was probably that the

Board seemed successful with its current membership and any

congressional tinkering would be unlikely to improve it. Accordingly, a

membership of 16 was proposed by both tax committees

153

and

incorporated in the bills as passed by the House and the Senate. The only

disagreement between the two bodies on this issue related to a Senate

amendment authorizing the President to reduce the number of members in

the event of a decrease in the volume of tax litigation.

154

The Senate

amendment was rejected in conference,

155

and the authorized membership

of the Board/Tax Court remained at 16 until 1981.

Citing the expanded jurisdiction of the Tax Court and the growth of

complex tax litigation in the tax shelter arena,

156

Congress in 1980 increased

justice of the peace, the wise man of the community, to come over and

interpret the Latin. The old justice came over, with his dictionary, viewed

the remains, took in the situation, and said: “That is Latin, and the best I

can make out of it is it means, in this case, ‘I am in a hell of a fix.’”

67 C

ONG. REC. 1127 (1925).

150

67 CONG. REC. 3749 (1926) (remarks of Senator King).

151

Id. at 1128 (remarks of Messrs. Green and Garrett).

152

Id. at 3749 (remarks of Senator George).

153

H.R. REP. NO. 69-1, at 18 (1925); S. REP. NO. 69-52, at 34 (1926).

154

Pursuant to the Senate bill, the President was authorized to reduce by

executive order the number of members of the Board if he determined that the

functions of the Board could be performed by less than the number of members

then in office. After the promulgation of such an order, no further appointments

to the Board could be made until its membership was reduced below the number

of members specified in the order. H.R. 1, 69th Cong., 1st Sess. § 1000, amending

Revenue Act of 1924, § 901(c) (1926), as reported to and passed by the Senate; S.

EP. NO. 69-52, at 35 (1926).

155

H.R. REP. NO. 69-356, at 53 (1926); Revenue Act of 1926, ch. 27, § 1000,

amending Revenue Act of 1924, § 900, 44 Stat. 105 (now codified at I.R.C.

§ 7443(a)).

156

S. REP. NO. 96-933, at 2 (1980).

144 The United States Tax Court – An Historical Analysis

the membership of the Tax Court from 16 to 19.

157

As part of the same

legislation, Congress dropped the statutory prohibition on individuals being

appointed to Tax Court bench after attaining age 65.

158

In addition to

expressing concern that the prohibition could deprive the court of

experienced personnel, Congress noted the incongruity of the provision

with federal policies against age discrimination.

159

These legislative changes

to the contours of the Tax Court bench took effect on February 1, 1981.

160

2. Compensation of Members

The 1924 Act had set Board members’ compensation at an annual rate

of $7,500,

161

despite a strong Administration plea that the figure should be

$10,000.

162

In 1925, a renewed effort was made to have the compensation

increased.

Some were opposed to increasing Board members’ pay, especially in the

Senate, where a provision to retain the $7,500 salary was defeated 41 to

19.

163

The sponsor of the provision, Senator King, objected to the increase

on the ground that many of the Board members came from the Bureau

where they earned at most $6,000. Moreover, Senator King could not

conceive of a proposal to pay Board members, who the Senator referred to

as “young boys,” more than district court judges.

164

Most sentiment, however, favored an increase. Witnesses testifying

before the Ways and Means Committee in 1925 were unanimous in the

view that compensation should be raised to attract and retain qualified

members, a serious problem because of the opportunities for lucrative

157

Pub. L. No. 96-439, § 1(a), 94 Stat. 1878 (1980).

158

Id. § 1(b).

159

S. REP. NO. 96-933, at 2–3.

160

Pub. L. No. 96-439, § 1(c), 94 Stat. 1878.

161

Revenue Act of 1924, ch. 234, § 900(b), 43 Stat. 336.

162

See Part II, notes 119–135 and accompanying text.

163

67 CONG. REC. 3881–82 (1926).

164

Senator King explained his position in the following terms:

I think it is unfair. It may not be defended it seems to be by any Senator. I

am willing that they shall receive the same compensation that is now

received by the district judges of the United States, to wit, $7,500 per

annum. This salary is more than is received by the judges of the supreme

court of a majority of the States of the Union. Why these young boys,

many of who went into the bureaus as young boys 22 or 23 years of age and

have been there only a few years, should be transplanted to these positions

and then receive more than the Federal judges of the United States, many of

who are lawyers of distinction and character and ability and who have been

practicing their profession for 20 or 30 years, surpasses my comprehension.

Id. The average age of the 15 Board members in 1925 was 45 years.

Improving the Board of Tax Appeals 145

private practice.

165

Two highly qualified members of the original Board had

left after only brief tenures, but they might have remained if the

compensation had been more generous.

166

The $7,500 salary was

characterized as “a pittance” that made “it quite impossible, judged by

ordinary standards, for [a member] properly to maintain and support his

family.”

167

George Morris, representing the American Bar Association,

suggested that “as long as we pay them $7,500 a year, they all ought to

resign.”

168

Congressman Ogden Mills took a broader view of the situation:

I venture to say that the historian of the future will be amazed at the

lack of emphasis which has been placed upon adequate [tax]

administration in the United States during this period, and the utter

failure and unwillingness to provide the proper salaries and the

conditions necessary to retain the extraordinarily competent men

which the Treasury Department has secured from time to time, only

to see them just pass through the Treasury, acquire an education in

tax matters and then become tax experts in private employment.

169

George Morris and former Board member Ivins favored an increase to

$12,000.

170

Former Chairman Hamel was a little more conservative and

estimated that a $10,000 salary should be sufficient.

171

The $10,000 figure

was apparently the compensation favored by most Board members. The

Board privately proposed to Administration and congressional officials that

members’ compensation be raised to $12,000; however, this was “done with

the full knowledge that it will not be likely to pass but with the purpose of

getting a compromise raise to $10,000.”

172

Advocates of higher compensation regularly drew comparisons with

members of the Interstate Commerce Commission, the United States

Shipping Board, and the Federal Reserve Board, who received salaries of

165

See 1925 House Hearings, supra note 2, at 852–53, 885–87, 922; see also 67

ONG. REC. 524 (1925) (remarks of Chairman Green); id. at 558 (remarks of Mr.

Mills).

166

“I can say frankly to you that $12,000 would have kept me on the job, but I

doubt if any less would.” 1925 House Hearings, supra note 2, at 920–21 (testimony

of former member Ivins). “If the salary had been $10,000 a year, with a term of at

least 15 years, giving some feeling of permanency, I do not believe that those two

would have resigned. I think I would not have resigned.” Id. at 928 (testimony of

former Chairman Hamel referring to the resignations of Mr. Ivins and himself).

167

Id. at 852 (testimony of Dr. Joseph J. Klein).

168

Id. at 885.

169

67 CONG. REC. 558 (1925).

170

1925 House Hearings, supra note 2, at 886, 920–21.

171

Id. at 928.

172

Graupner, supra note 38.

146 The United States Tax Court – An Historical Analysis

$12,000, and members of the Federal Trade Commission, the Federal Farm

Loan Board, and the Railway Labor Board, who received $10,000.

173

the other hand, district court judges received only $7,500.

174

The Ways and

Means Committee settled on a salary of $10,000,

175

and this figure was

ultimately enacted.

176

3. Tenure of Members

The question of term of office stirred the greatest controversy of all the

Board provisions. Under the 1924 Act, the terms of the original members

were to expire on June 2, 1926; the tenure of the first seven members

appointed after June 2, 1926, were to be staggered,

177

but the succeeding

terms were set at a uniform period of ten years.

178

Members of the Board, who were privately seeking full article III status,

naturally favored life tenure.

179

In hearings before the Ways and Means

Committee, this position was advanced by two distinguished witnesses—

Solicitor of Internal Revenue A.W. Gregg, one of the principal draftsmen of

the 1924 Act, and Dr. T. S. Adams, an economist and academician who was

an important figure in the early development of the income tax.

180

Several

reasons were advanced for life tenure. First, a limited term of office was

frequently cited as a reason for the difficulty of attracting qualified

members.

181

Monetary compensation provided to Board members was low

compared to what they could obtain in private practice, and tenure security

was considered a necessary countervailing inducement.

182

Additionally,

tenure guarantees were seen as a means of protecting the independence of

the Board. No evidence existed that the Board had ever succumbed to

outside influence, but the protection was nevertheless deemed desirable in

173

H.R. REP. NO. 69-1, at 18 (1925); S. REP. NO. 69-52, at 5 (1926).

174

67 CONG. REC. 3881 (1926) (remarks of Senator King).

175

H.R. REP. NO. 69-1, at 18 (1925).

176

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 901(a), 44 Stat. 106.

177

Staggering the terms, which prevented a simultaneous change in the entire

Board membership, was believed to be necessary to assure the stability of the

Board, an important objective in view of the value associated with its

precedent-setting function. See 1925 House Hearings, supra note 2, at 884

(testimony of George Morris, Am. Bar Ass’n).

178

Revenue Act of 1924, ch. 234, § 900(b), 43 Stat. 336.

179

See supra note 38 and accompanying text.

180

1925 House Hearings, supra note 2, at 932 (testimony of Solicitor Gregg),

939 (testimony of Dr. T. S. Adams). The Committee on Taxation of the American

Bar Association, however, proposed a 16-year term as adequate. Id. at 884.

181

E.g., Ivins, supra note 33, at 39l.

182

1925 House Hearings, supra note 2, at 938–39 (testimony of Dr. T. S.

Adams).

Improving the Board of Tax Appeals 147

view of the sensitivity of matters passed on by the Board and the members’

vulnerability to pressure from both private and governmental sources.

183

Finally, life tenure was also supported on the basis of an analogy to the

Board of General Appraisers (later to become the Customs Court and, later

hence, the United States Court of International Trade), the members of

which held appointment during good behavior.

184

Because the Board of

General Appraisers had a similar function in respect to customs duties as

the Board of Tax Appeals did in respect to internal taxes, members of the

latter body should have the same benefits as those of the former. This was

especially true, it was argued, since the work of the Board of Tax Appeals

was more important.

185

183

The Board dealt with issues involving hundreds of millions of dollars, and

its judgments ought not be subject to extraneous pressure. This point was

emphasized by Ogden Mills, who saw the danger to the Board’s independence

coming from both private and governmental sources.

These men know that at some time or other they are going to be subjected

to two kinds of pressure, the one, political pressure, exerted, it may be, in

the guise of a congressional investigation committee that years after they

have exercised their best discretion and judgment may challenge that

discretion and judgment on a set of facts which might justify two

conclusions; the other of a different kind – pressure that may come from

powerful and dissatisfied taxpayers. You are not going to get the best kind

of service from those men unless you say to them, “Gentlemen, we have

picked you because you are competent, we have picked you because you

know the law, we are going to trust you, and we are going to assure you that

as long as you use your best ability, as long as you are competent the United

States Government will see to it that you have that security which will

enable you at all times and in the most difficult cases to give the kind of

decision that will be prompted not by fear of political or other pressure, but

by your own judgment and conscience.”

67 C

ONG. REC. 732 (1925). The allusion in Congressman Mills’ remarks to

congressional investigating committees undoubtedly had particular reference to the

then current activities of the Couzens’ committee in the Senate, which was

investigating the operation of the Bureau of Internal Revenue. See Part I, notes

128–132 and accompanying text.

184

The Board of General Appraisers was created in 1890. Act of June 10,

1890, ch. 407, § 12, 26 Stat. 136. Its members were granted life tenure in 1908.

Act of May 27, 1908, ch. 205, § 3, 35 Stat. 406. In 1926, it was renamed the

Customs Court. Act of May 28, 1926, ch. 411, § 1, 44 Stat. 669. As a result of the

Customs Courts Act of 1980, the court was subsequently renamed the United

States Court of International Trade. See Pub. L. No. 96-417, § 101, 94 Stat. 1727

(1980).

185

H.R. REP. NO. 69-1, at 18 (1925); 67 CONG. REC. 732 (1925) (remarks of

Mr. Mills).

148 The United States Tax Court – An Historical Analysis

The Ways and Means Committee was generally friendly towards the

Board of Tax Appeals,

186

and it was therefore not surprising that the

Committee recommended granting Board members tenure during good

behavior.

187

What may have been surprising, however, especially to the

members of the Committee, was the profound opposition that the proposal

encountered.

Several arguments were advanced against life tenure. First, the

Constitution provided life tenure for federal court judges but made no such

provision for any other officials. On this basis, Representative Collins

argued that the framers intended to restrict life tenure to those for whom it

was specifically reserved.

188

The argument could be supported by the

general structure of the Constitution, under which the executive and

legislative branches were essentially under political control while the judicial

branch alone was insulated from such control. To grant life tenure to an

executive branch employee was to insulate him from the public

responsibility inherent in the political process. Either unaware that

members of the Board of General Appraisers had been accorded life

tenure,

189

or believing that Board to be an article III court, Representative

Collins found evidence for his position in the fact that the proposal was

unprecedented.

190

Opponents of life tenure also pointed out that the provisions of the

1924 Act, while not providing indefinite tenure to members, did guarantee

terms of ten years. They argued that because this amount of time would

span more than two presidential administrations, appointees were

sufficiently insulated from the effects of inappropriate political pressure.

191

Some even challenged the desirability of an independent Board on the

ground that each Administration is accountable for the activities of the

executive branch and should be in a position to control its activities

through personnel of its own choice.

192

186

The Committee had figured prominently in the creation of the Board, and

its ranking Republican and Democratic members were closely tied to certain

members of the Board. Chairman Green was the father of William R. Green Jr.,

and ranking Democrat John N. Garner was a former Law partner of William D.

Love. See Part II, notes 188–189 and accompanying text. Moreover, witnesses

appearing before the Committee in 1925 were uniformly favorable toward the

Board and its work. See 67 C

ONG. REC. 524 (1925) (remarks of Mr. Green).

187

H.R. REP. NO. 69-1, at 18 (1925).

188

67 CONG. REC. 1130–31 (1925).

189

Act of May 27, 1908, ch. 205, § 3, 35 Stat. 406.

190

67 CONG. REC. 1130 (1925).

191

Id. at 715 (remarks of Mr. Johnson).

192

See id. at 1131 (remarks of Mr. Collins). One Senator observed, “I have

been one of those who believed that to a very great extent to the victor belongs the

spoils, and I think that each administration ought to have people within it who are

Improving the Board of Tax Appeals 149

Finally, there were those who observed that any move toward indefinite

tenure was premature. The taxes that formed the basis of Board

jurisdiction were relatively new, and their future was uncertain. The Board

itself was only two years old and had been instituted on an experimental

basis. Although it seemed to be successfully filling what appeared to be a

continuing need, the possibility existed that Congress might decide to

discontinue its activities. Were it to do so, the Government would be faced

with the problem of “a number of governmental wards whose salaries we

can not get rid of even though we may want to install another or a better

system of handling these tax appeals.”

193

To a considerable extent, the validity of the pro and con arguments on

life tenure was obscured by the ambiguous status of the Board itself. If the

Board was viewed as a judicial body, its members ought to have been

provided with the independence ordinarily associated with courts. Because

the Board was functioning like a court without any of the traits ordinarily

associated with an administrative body, there was solid support for the

position of the Ways and Means Committee. On the other hand, few

congressmen advocated making the Board a court in form as well as in

substance. Even the Ways and Means Committee bill continued the status

of the Board as an independent agency in the executive branch.

194

Because

of this refusal to recognize the Board as a court, a strong argument could be

made against providing protections to Board members that historically had

been generally reserved for courts. Theoretically, the question was a close

one—as a practical matter, the decisive considerations were probably based

on less lofty considerations.

It is frequently difficult to convince a congressman, who has to run for

reelection every two or six years, that some offices of the Government

should be free of accountability to the people or their elected

representatives. Although the Constitution authorizes the creation of such

offices, many people cannot escape the feeling that there is something

fundamentally undemocratic in life tenure. Accordingly, much of the

debate on tenure focused on considerations that would be equally

applicable to lifetime appointments to the Supreme Court as well as to the

Board of Tax Appeals. Congressman Doughton, for example, maintained

that “to hold a member on, drawing full pay, when on account of age or

disability he is unable to perform the duties of his office in a proper and

satisfactory manner . . . [is] an unwise and indefensible policy.”

195

The life

tenure proposal was also criticized as “un-American, un-Democratic . . .

in sympathy with it and its policies.” Id. at 3791 (1926) (remarks of Senator

Harrison).

193

Id. at 1131 (remarks of Mr. Collins).

194

See supra notes 38–42 and accompanying text.

195

67 CONG. REC. 665 (1925).

150 The United States Tax Court – An Historical Analysis

un-Republican” and “extremely vicious.”

196

“[I]t breeds and nurtures

autocracy. It is the womb of despotism.”

197

One member, who did “not

believe in a life-term office for the judiciary, particularly for judges of

inferior courts,”

198

asserted that life tenure was obnoxious to the “genius

and spirit of American institutions.”

199

These views were apparently shared by an overwhelming majority of the

House.

200

Rather than suffer certain defeat on the floor, the Ways and

Means Committee offered an amendment to its own bill eliminating tenure

during good behavior and substituting a 14-year term for Board members,

with the initial members having staggered terms of from eight to 14 years.

201

The amendment was adopted by a vote of 200 to 10.

202

In the Senate, the Finance Committee reported the bill preserving the

ten-year term of office provided in the 1924 Act, believing that this tenure

in combination with a $10,000 salary would be sufficient to retain the

196

Id. at 1133 (remarks of Mr. Lazier); see also id. at 1127 (remarks of Mr.

Edwards).

197

Id. at 1133 (remarks of Mr. Hill).

198

Id. at 731 (remarks of Mr. Garrett).

199

Id.

200

Cf. id. at 1125 (remarks of Chairman Green). The unpopularity of life

tenure is further illustrated by the following quotes.

It undermines the structure of our free institutions. It strikes at the very

heart of the Republic. Carried to its logical conclusion, it means autocracy,

despotism and tyranny. Let us strike it from this bill or announce that the

words, “a government of the people, by the people, and for the people” are

but barren sounds and that democracy has been stifled and time has barred

appeal.

Id. at 1133 (remarks of Mr. Hill).

[I]t will only be a short time before this body will be setting aside the

judgment of the legislative branch of the Government on questions of

legislation; and the partisan press and the party leaders whose views this

board will reflect, will declare their actions to be finalities and point to its

immaculate wisdom and purity. Statutes will be enacted which they will

declare inoperative and this “August tribunal” will be referred to as if

endowed with a wisdom unknown to the rest of mankind on tax questions.

Id. at 1131 (remarks of Mr. Collins).

If this board is to be created and its members hold office for life, you create

an office-holding aristocracy and destroy the incentive for young men to

qualify themselves for this service. This proposal is the essence of

bureaucratic government, and as Archibald Allison said nearly 100 years

ago, in discussing conditions in France, that tyranny may be exercised by

bureaus as well as by kings and autocrats.

Id. at 1134 (remarks of Mr. Lozier).

201

Id. at 1125.

202

Id. at 1135.

Improving the Board of Tax Appeals 151

services of “competent men.”

203

Efforts were made on the Senate floor to

reduce the term to five

204

or six

205

years, and the latter proposal failed

passage by only two votes.

206

In the conference between the House and

Senate, a compromise of 12 years was reached

207

and adopted in the final

legislation.

208

The 12-year term of office remained until 1969, when, as part

of the amendments effected by the Tax Reform Act of 1969, it was

increased to 15 years.

209

4. Removal of Members

Under the 1924 Act, the exclusive statutory basis for removal of

members was on the grounds of “inefficiency, neglect of duty, or

malfeasance in office.”

210

Only the President could exercise the power of

removal and only for the reasons specified. This removal provision had

been inserted in 1924 as a means of further ensuring the independence of

the Board from the Treasury Department.

211

The 1926 Revenue Bill, as

reported by the Ways and Means Committee, contained substantially the

same removal procedure but additionally provided that removal could be

effected only after “notice and opportunity for hearing.”

212

During the consideration of the 1926 bill, questions were raised

concerning the propriety of the removal provision in light of the status of

the Board. If the offices were judicial, as some believed, then life tenure

should be provided and removal should be exclusively by impeachment in

the House and trial in the Senate.

213

If, on the other hand, the members

were executive officers, they should not have life tenure, and their removal

should be by the President for any cause.

214

An amendment was offered on the House floor to strike out the

restrictions on presidential removal on the theory that a Board member

203

S. REP. NO. 69-52, at 35 (1926).

204

67 CONG. REC. 3748 (1926).

205

Id. at 379l.

206

Id. at 3792.

207

H.R. REP. NO. 69-356, at 53 (1926).

208

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 901(b), 44 Stat. 106

209

Pub. L. No. 91-172, § 952(b), 83 Stat. 730 (amending I.R.C. § 7443(e)).

210

Revenue Act of 1924, ch. 234, § 900(b), 43 Stat. 336.

211

See Part II, notes 55–76 and accompanying text.

212

H.R. 1, 69th Cong., 1st Sess. § 1000, amending Revenue Act of 1924, § 901

(1925).

213

67 CONG. REC. 1130 (1925) (remarks of Mr. Summers).

214

Id. at 1128 (remarks of Mr. Garret). Arguably, however, even if the Board

was purely executive in nature, the fact that Senate approval was necessary for

appointment to the Board might justify restricting the power to remove to cases in

which the Senate concurred. See id. at 1132–33 (remarks of Mr. Collins).

152 The United States Tax Court – An Historical Analysis

might not be chargeable with inefficiency, neglect of duty, or malfeasance,

yet be unfit for office, and the President ought to have the power to

remove him.

215

The amendment was rejected concurrently with

modification of the tenure provision,

216

and the two actions appear

interrelated. Although few congressmen were able to support life tenure

for Board members,

217

considerable sentiment existed in favor of protecting

the Board insofar as possible from political pressure.

218

Retaining the

limited removal provision was a middle ground for accommodating the two

positions, and a further illustration of the ambiguous status of the Board.

As stated above, the procedure was open to criticism on constitutional

grounds, but the criticism was relatively insubstantial, since the members of

several preexisting agencies were similarly protected.

219

The provision has

remained in the law to the present day.

220

5. Restrictions on Practice

The 1924 Act provided that no member, after leaving the Board, could

practice before either the Bureau or the Board for a period of two years.

221

The limitation was only applicable to those members appointed after the

expiration of the two-year temporary Board.

222

Thus, Chairman Hamel and

member Ivins, who had left the Board in 1925, were unaffected by the

restriction. The provision had been inserted at the prompting of

Congressman LaGuardia, who like others was concerned with the problem

215

Id. at 1133.

216

Id. at 1135.

217

See supra notes 200–202 and accompanying text.

218

See, e.g., 67 CONG. REC. 1134–35 (1925) (remarks of Mr. Mills).

219

These agencies included the Board of General Appraisers, the Railroad

Labor Board, the Federal Farm Loan Board, the Federal Reserve Board, the

Federal Trade Commission, the Interstate Commerce Commission, the United

States Tariff Commission, and the United States Shipping Board. Id. at 1135.

220

I.R.C. § 7443(f). In the course of the appeal of the Tax Court’s decision in

Kuretski v. Commissioner, T.C. Memo. 2012-262 (generally rejecting the taxpayers’

challenges to the Commissioner’s determination to proceed with a proposed levy),

the taxpayers contended that § 7443(f) is unconstitutional because the prospect of

the President removing a Tax Court judge, who exercises the judicial power of the

United States, violates separation-of-powers principles. See Brief for Appellants,

Kuretski v. Commissioner, Case No. 13-1090 (D.C. Cir. 2013). The taxpayers

therefore sought a declaration that § 7443(f) is unconstitutional and a remand of

their case to be heard before an adjudicator who was not subject to the removal

power. At the time of publication, the Court of Appeals for the District of

Columbia Circuit had heard oral argument but had not issued its opinion in the

case.

221

Revenue Act of 1924, ch. 234, § 900(c), 43 Stat. 337.

222

Id.

Improving the Board of Tax Appeals 153

of former government employees using their position and experience in

public service for purposes of private gain.

223

High turnover had been

disrupting the operations of the Treasury Department—it had been termed

“the Nation’s scandal”—and many felt that if the opportunity for

capitalizing on the special expertise obtained in government work were

removed the problem could be alleviated.

224

Deferring the effective date of

the provision had largely defused the issue in 1924, but it attracted an

increasing amount of attention in the ensuing months.

At the hearings of the Ways and Means Committee on the 1926

Revenue Bill, several witnesses addressed the problem,

225

and most agreed

that the restriction should be eased. Curiously, while the arguments in

favor of the restriction were based on retaining the services of competent

personnel, the critics of the limitation opposed it on virtually the same

ground—that its effect would be to make recruitment more difficult since

more flies could be caught “with honey than with vinegar.”

226

According to

former member Ivins, the practice restriction amounted to a “dishonorable

discharge” from service on the Board and was “calculated to deter anyone

with the requisite qualifications from accepting appointment.”

227

Other

critics of the restriction argued that members remained on the Board

because of “devotion to service” rather than because of the practice

limitation.

228

Moreover, the practice limitation may well have played a part

in the early resignation of two members of the original Board, and if the

limitation was retained, other members of the Board might resign to retain

the right to practice their profession.

229

Finally, the argument was made

that federal judges were not forbidden to practice before the courts of

which they were formerly members, and no special considerations existed in

the case of the Board to merit a different treatment.

230

True, certain former

employees of the Treasury were able to capitalize on the inside information

they had acquired; but this was not the case with Board members. The

Board was independent of Treasury, and Board members’ familiarity with

cases they worked on was derived from evidence introduced in public

proceedings.

Opponents of the practice limitations contained in the 1924 Act

advanced several alternative proposals. One group suggested that the

223

See Part II, notes 114–118 and accompanying text.

224

See 1925 House Hearings, supra note 2, at 853 (remarks of Mr. Garner).

225

1925 House Hearings, supra note 2, at 81–82, 852–53, 884–85, 918, 929.

226

Id. at 853 (testimony of Dr. Joseph Klein).

227

Ivins, supra note 33, at 394.

228

1925 House Hearings, supra note 2, at 852 (testimony of Dr. Joseph Klein).

229

Id. at 853, 918.

230

Id. at 852 (testimony of Dr. Joseph Klein), 885 (testimony of George

Morris, Am. Bar Ass’n)

154 The United States Tax Court – An Historical Analysis

restriction be eliminated entirely.

231

Others proposed that a retired Board

member only be barred from participating in a matter that was before the

Board during his term in office.

232

A third position was that the restriction

could be eased, but its purpose retained, if it were only applied in the case

of a member who failed to serve out his term.

233

Although the Ways and

Means Committee was generally sympathetic toward the Board, it chose not

to adopt any of these proposals. Rather, as reported by the Committee, the

1926 bill provided that a retired member would not be permitted to practice

before the Board for a four-year period after leaving office, and if a

member were removed from office for inefficiency, neglect, or malfeasance,

the member would be forever barred.

234

In one sense, the Committee

provision was a relaxation of the restriction contained in the 1924 Act

because it did not bar a former member from practice before the Bureau.

On the other hand, it extended the period of ineligibility to practice before

the Board from two to four years, and indefinitely if the member was

removed for cause. The provision was a pointed illustration of the depth of

the concern over high turnover, and apparently followed a proposal by Dr.

T. S. Adams that the retention of the practice limitation would not

prejudice recruiting competent personnel in view of the $10,000 salary and

life tenure that was provided by other portions of the bill.

235

When the Committee members recognized that the life tenure provision

would not pass the House floor, they offered an amendment reducing

tenure to 14 years and eliminating the four-year bar on practice by former

members.

236

Tying elimination of the practice limitation to the elimination

of life tenure was opposed by some members of the House, who believed

that the restriction should be retained in any event.

237

However, the

lopsided margin by which the Committee amendment was adopted (200 to

ten)

238

indicated that most agreed with Chairman Green’s response to a

die-hard advocate of practice limitations. “If the gentleman wants to fix

things so we can not get any good men on the board, that would be one

way of doing it.”

239

Thus, as passed by the House, the bill only prohibited Board practice by

members who had been removed for cause. The provision was retained in

231

Id. at 884–85.

232

Id. at 82, 854.

233

Id. at 919.

234

H.R. 1, 69th Cong., 1st Sess. § 1000, amending Revenue Act of 1924, § 902

(1926), as reported to the House.

235

See H.R. REP. NO. 69-1, at 18 (1925).

236

67 CONG. REC. 1125 (1925).

237

Id. at 1126 (remarks of Mr. Lozier).

238

Id. at 1135.

239

Id. at 1126.

Improving the Board of Tax Appeals 155

the final Act,

240

and, with one modification, has remained the rule to the

present.

241

6. Background of Members

The controversy that surrounded the activities of members when they

terminated their service on the Board was mirrored by the concern over the

background of appointees. For example, one proposal was made to require

a bipartisan Board, with no more than nine members selected from any one

political party.

242

The membership of various other executive agencies was

restricted in this manner, and the argument was made that the same policy

should apply to the Board. The proposal was not adopted, principally on

the ground suggested by Chairman Green that the Board functioned as a

court and limitation of the political affiliations of judicial appointments was

inappropriate.

243

Rather ingenuously, Chairman Green also stated that the

politics of the members of the Board were both irrelevant and unknown.

244

Although Chairman Green’s profession of ignorance may have been

honest, available evidence indicates that the Administration took a keener

interest in the subject.

245

Another source of concern over the background of Board members

related to the suspicion that appointments were made on the basis of

favoritism. “[A] remarkable number . . . [are] related to distinguished

gentlemen in the public service.”

246

The four members who were

appointed in March of 1925 all had apparently close ties to members of the

Ways and Means Committee or the Finance Committee. Opposition

erupted when the nominations were announced, but quickly diminished,

and the appointments were expeditiously confirmed.

247

The memory

nevertheless apparently still rankled some, although no specific proposal

was made to legislate an end to the practice.

The greatest concern over the background of Board members related to

their past employment by Treasury or by the Solicitor of Internal Revenue,

240

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924, § 902,

44 Stat. 106.

241

I.R.C. § 7443(g). In 1953, when retired pay was provided for Tax Court

judges, a proviso was inserted requiring a judge to forfeit retired pay if, after

retirement, he obtains employment with the Federal Government or performs

“legal or accounting services in the field of Federal taxation . . . .” I.R.C. §

7447(f)(2), added by Act of Aug. 7, 1953, ch. 352, 67 Stat. 482.

242

67 CONG. REC. 1126 (1925) (remarks of Mr. Moore).

243

Id.

244

Id.

245

See Part II, notes 180–188 and accompanying text.

246

67 CONG. REC. 3752 (1926) (remarks of Sen. Reed).

247

See Part II, notes 187–188 and accompanying text.

156 The United States Tax Court – An Historical Analysis

an official of the Justice Department, who was the legal counsel of the

Commissioner.

248

When the first appointments to the Board were

announced in the summer of 1924, a wave of protest issued from

accountants and, to a lesser extent, lawyers.

249

They felt that the purpose of

Congress in removing the Board from the Treasury Department and

making it an independent executive agency would be thwarted if Treasury

played a part in selecting appointees for the Board. Even more damaging

would be a Board dominated by former employees of the tax collection

system, supposedly imbued with a pro-Government bias, and of the first 12

appointees, five came directly from employment with Treasury or the

Solicitor, three had been so employed previously, and two had been officials

of state taxing agencies.

250

After the Board began operation, the furor soon subsided. By the time

congressional consideration of the 1926 Revenue Bill had begun,

accounting and legal associations were unanimous in their respect for the

independence of the Board.

251

Nevertheless, the issue revived when the bill

reached the Senate floor, where an amendment was adopted with no

discussion that would have made ineligible for appointment to the Board

any person who within two years had been an “attaché” of the Bureau; the

provision was made inapplicable to those then members of the Board.

252

Although there was apparently strong support for the amendment in the

Senate, the provision was deleted by the House-Senate conference,

253

and

no such limitation was contained in the Act as finally passed.

The controversy seemed to have ended with the enactment of the 1926

legislation in February of that year. However, on May 26, 1926, it again

surfaced with the announcement of the names of the 16 individuals whom

President Coolidge nominated for appointment to the Board.

254

Thirteen

of the nominees were holdovers from the old Board of 15, and their

nominations did not arouse opposition.

255

The two members who were not

248

The 1926 Act eliminated the position of Solicitor and replaced it with the

General Counsel for the Bureau of Internal Revenue, an official of the Treasury

Department. Revenue Act of 1926, ch. 27, § 1201, 44 Stat. 126.

249

See Part II, notes 196–214 and accompanying text.

250

See Part II, notes 203–210 and accompanying text.

251

See Part II, notes 295–306 and accompanying text.

252

67 CONG. REC. 3754 (1926) (amendment offered by Sen. Glass).

253

H.R. REP. NO. 69-356, at 53 (1926).

254

Thirteen Members of Board of Tax Appeals Reappointed, 4 NAT’L INC. TAX MAG.

206 (1926).

255

These individuals were: Charles Rogers Arundell, William R. Green Jr.,

Jules Gilmer Korner Jr., William C. Lansdon, Benjamin H. Littleton, William D.

Love, John J. Marquette, Logan Morris, Percy W. Phillips, Charles P. Smith, John

M. Sternhagen, Charles M. Trammell, and Sumner L. Trussell. Id.

Improving the Board of Tax Appeals 157

reappointed, A.E. Grapnel and Albert E. James, both Republicans,

256

were

widely rumored to have been passed over because of their differences of

opinion with the Board’s Chairman, Jules Gilmer Korner, concerning

“administrative matters.”

257

Of the three new appointees, two had no

Bureau affiliation and were noncontroversial.

258

The third, however, John

B. Milliken, was an Assistant Solicitor of Internal Revenue, and his

nomination provoked the fury of the Senators who had originally led the

effort to prohibit appointment of former employees of the Bureau. These

Senators, led by Carter Glass of Virginia and George W. Norris of

Nebraska, believed that the Milliken nomination was inconsistent with the

expressed “judgment of the Senate,”

259

and a resolution was proposed to

express “the sense of the Senate” that future appointments to the Board

should only be made in accordance with the provisions of the Senate

amendment that had been eliminated by the conference from the 1926

Act.

260

The resolution sparked rather lengthy debate and afforded an

opportunity for Senator Norris to repeat, in a different context, the same

points he made in 1924 in successfully arguing for reduction of the salaries

of Board members from $10,000 to $7,500.

261

Considerable has been said at various times, in conversations and

otherwise, to the effect that the members of this board ought to be

experts, and that they ought to come from a bureau that is dealing

with tax questions. I want to say just a few words about that point.

These men are going to occupy positions which are easier to fill

than that any judge anywhere in the United States of general

jurisdiction now occupies, so far as work is concerned. In any State

court in this Union a judge of general jurisdiction, who tries a

256

See Part II, note 182 and accompanying text.

257

67 CONG. REC. 10817–18 (1926).

258

J. Edgar Murdock was formerly an assistant district attorney in

Westmoreland County, Pennsylvania; Ernest H. Van Fossan had been the Director

of Claims for the U.S. Shipping Board. Thirteen Members of Board of Tax Appeals

Reappointed, 4

NAT’L INC. TAX MAG. 206 (1926).

259

67 CONG. REC. 10812 (1926) (remarks of Mr. Glass).

260

S. Res. 242, 69th Cong., 1st Sess. (1926). As introduced, the resolution

provided:

Resolved, That it is the sense of the Senate that hereafter no person who has

been an attaché of the United States Bureau of Internal Revenue should be

appointed to any vacancy on the Board of Tax Appeals until at least two

years have elapsed since such official connection with said Bureau.

67 C

ONG. REC. 10764 (1926).

Some question existed whether the resolution, if adopted, would apply to the

Milliken nomination, which was then before the Senate for confirmation. The

intent that it would not was made clear. Id. at 10814, 10816, 10818.

261

See Part II, notes 126–135 and accompanying text.

158 The United States Tax Court – An Historical Analysis

criminal case to-day, a civil case to-morrow, a tax case the next day,

and a replevin case the day after that, as far as work is concerned, as

far as study is concerned, has more work to do than anyone of these

appointees. As far as ability is concerned, it requires at least as much,

because the jurisdiction of such a judge covers a world of subjects

and a great deal of ground upon which technicalities may arise.

These men are going to adjudicate one law, practically, pass on

one statute, and the questions which arise under it. Even though he

had never read the statute, any lawyer in a few days’ time could easily

become familiar with it and be able to fill completely and entirely all

the requirements of a position on this board.

262

The author of the resolution, Senator Glass, believed that it should be

prospective only and should not apply to the 16 nominations that had been

recently presented for Senate confirmation.

263

Senator Norris, on the other

hand, believed that if the principle behind the resolution was sound, it

should be applied to the current nominations as well, and he offered an

amendment to that effect.

264

A third alternative, offered by Senator Heflin,

262

67 CONG. REC. 10813 (1926).

263

See supra note 260.

264

67 CONG. REC. 10813 (1926). One highlight of the debate was an

interchange between Senator Norris and an opponent of the amendment, Senator

Ashurst, who believed that since a provision similar to S. Res. 242 had been

removed from the 1926 Act, the resolution should not be retroactive:

Mr. ASHURST. . . . I wish it distinctly understood that no one who has

served a day in the Senate with the esteemed Senator from Nebraska would

think of him for a moment in connection with any purpose other than that

moved by a high order of statesmanship. But I do say, if the Senator will

pardon me further, and this will appeal to the logic of my friend, whom I

recognize as a logician, that the Senate first went on record as opposed to

nominating for membership on the Tax Appeals Board men in the bureau.

The Senate went on record in that fashion, did it not?

Mr. NORRIS. Yes; it went on record.

Mr. ASHURST. The next and only action taken by the Senate since that

time upon the same subject was the action recalling that first action —

Mr. NORRIS. Oh, no.

Mr. ASHURST. Otherwise the amendment would be in the law to-day.

Mr. NORRIS. I do not agree with the Senator in that statement.

Mr. ASHURST. It required action on the part of the Senate before we

could dispose of that matter.

Mr. NORRIS. The Senate did recede; I admit that.

Mr. ASHURST. Is not the Senator, therefore, bound to admit that the

previous action on this subject by the Senate cancelled and recalled its prior

action?

Mr. NORRIS. No; I do not admit that.

Mr. ASHURST. Then we did not take any action at all.

Improving the Board of Tax Appeals 159

would have barred appointment of any person who had, during the

previous two-year period, worked as a “tax expert” for “private”

interests.

265

The resolution was adopted, but without the Norris and Heflin

modifications.

266

On the following day, the Senate confirmed the new

nominations to the Board, including that of Mr. Milliken.

267

For almost four years, there was adherence to the terms of the Senate

resolution; four new Board members were appointed to succeed retiring

members, and none had served with the Bureau within two years of their

appointment.

268

Then, in 1930, the President nominated the first woman

Board member, Annabel Matthews, who was on the staff of the

Interpretative Division of the General Counsel to the Commissioner.

Amidst statements that her case was not to be a precedent for the future,

and justifications based on her replacement of a member who had come to

the Board from the Solicitor’s office, her nomination was confirmed.

269

Following Matthews’ appointment, several individuals joined the Board and

Tax Court after recent service with Treasury with no resulting

controversy.

270

F. Practice and Procedure

By its terms, the 1924 Act left the resolution of most procedural and

evidentiary issues to the discretion of the Board.

271

But despite the broad

latitude granted in the statute, the Board felt constrained to adopt, in

general, judicial forms of procedure.

272

Provisions for pleadings were based

on those prevailing in courts, and similar provisions were made for

Mr. NORRIS. I will concede the Senator has a right to take that view of

it.

Mr. ASHURST. Then I will have to withdraw some of the praise which a

moment ago I gave the Senator as a logician. [Laughter.]

Mr. NORRIS. The Senator can not get me to agree to something that I

do not believe in by calling me a logician. [Laughter.]

Id. at 10815.

265

Id. at 10813, 10816-17.

266

Id. at 10818.

267

N.Y. TIMES, June 9, 1926, at 22, col. 8.

268

The appointees during this period were Eugene Black, Stephen J.

McMahon, Herbert F. Seawell, and Forest D. Siefkin.

269

See 8 NAT’L INC. TAX MAG. 105 (1930).

270

Those judges included Craig S. Atkins, Howard A. Dawson Jr., William M.

Fay, Clarence V. Opper, Irene Feagin Scott, Charles R. Simpson, Norman O.

Tietjens, Russell E. Train, and Bolon B. Turner. Today, it is common for

individuals to join the Tax Court bench from private practice, from the staffs of

congressional tax committees, or from the Service.

271

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

272

See Part II, notes 219–229 and accompanying text.

160 The United States Tax Court – An Historical Analysis

motions, briefs, depositions, calendars, subpoenas, and admission to

practice.

273

The Board adopted judicial standards for the receipt of

evidence,

274

and, as in federal court tax proceedings, imposed the burden of

proof on the taxpayer.

275

In 1926, some attention was directed to these

matters, but the new legislation made few changes.

Minor criticism had been directed at the Board for its adoption of

judicial rules of practice and procedure.

276

Because the Board was formally

at least an agency in the executive branch, many persons who were familiar

with practice before the Bureau of Internal Revenue expected Board

procedure to continue the informality that had obtained before the Income

Tax Unit and the Committee on Appeals and Review.

277

The adoption of

formal practice requirements left these expectations unfulfilled, and the

unfamiliarity of many tax practitioners, particularly accountants, with

judicial forms of procedure led to costly errors by taxpayers’

representatives. Arguably the purpose in creating the Board was subverted

when faulty pleadings, failures of proof, or other formalistic irregularities

resulted in a large number of otherwise meritorious cases being lost on

purely procedural grounds. A further difficulty with formal procedures was

found in the additional time required for the Board’s consideration and

disposition of cases.

278

Certainly, informal procedures would be more

expeditious. Moreover, the publicity associated with the judicial type

proceedings required by the 1924 Act

279

was criticized as forcing taxpayers

to choose between unattractive alternatives—either pay the tax or disclose

private financial and business matters to creditors and competitors.

280

Comment was also directed at the Board rule requiring the taxpayer to

bear the burden of proving the deficiency erroneous, and some argued that

because the Government was the party seeking to impose an additional tax,

it should be required to show some rational basis for the proposed

action.

281

In less than dazzling displays of legal erudition, it was alleged that

placing the burden of proof on the taxpayer was “contrary to established

273

See generally B.T.A. Rules of Practice and Procedure (July, 1924 ed.).

274

See, e.g., Bruce & Human Drug Co., 1 B.T.A. 342 (1925); Lee Sturgess, 2

B.T.A. 69 (1925); Harlan A. Allen, 2 B.T.A. 794 (1925).

275

B.T.A. RULE 20 (July, 1924 ed.).

276

1925 House Hearings, supra note 2, at 937–38, 943–44; Should the Board of

Tax Appeals Modify its Rules of Practice?, 2

NAT’L INC. TAX MAG. 270 (1924).

277

See Part II, notes 244–269 and accompanying text.

278

1925 House Hearings, supra note 2, at 943 (testimony of L.R. Gottlieb, Nat’l

Industrial Conference Board).

279

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

280

1925 House Hearings, supra note 2, at 943–44 (testimony of L.R. Gottlieb,

Nat’l Industrial Conference Board).

281

See id. at 877 (testimony of Edward Gore, American Institute of

Accountants).

Improving the Board of Tax Appeals 161

legal practice”

282

and violated the Anglo-Saxon presumption of

innocence.

283

Finally, controversy was created by the Board’s rule permitting practice

by attorneys and certified public accountants.

284

The Bureau did not restrict

the persons who could practice before it so long as the applicant was of

good moral character and could demonstrate “satisfactory educational

qualifications and evidence of an ability to understand tax questions . . . .”

285

For this reason some argued that admission to practice before the Board

should be more liberal.

286

However, the Board’s judicial procedure led

others to conclude that the admission rules were too liberal and only

attorneys should be permitted to practice.

287

Criticism on these counts was relatively sparse and ineffectual, and no

serious effort was launched to undo either the court-like practice before the

Board or the compromise effected with respect to admission to practice. If

anything, the difficulties encountered by the Board in requiring

conformance to its rules strengthened the position of those who argued

that the Board should be made a court in name as well as substance.

288

this had been done, confusion concerning the nature of the Board would

have been reduced and persons practicing before it would have better

understood that the informal procedures applied in the Bureau were not to

be used.

No change in the Board’s general rules of practice and procedure were

made as a result of the 1926 Act. In the view of Chairman Korner, none

were necessary because the 1926 amendments, although significant in other

areas, did not materially affect the conduct of Board proceedings.

289

Nevertheless, controversy did arise in connection with the Board’s rule on

admission to practice.

290

Because Board decisions could be appealed

directly to the circuit courts after the 1926 Act, there was some question as

to the propriety of permitting certified public accountants to continue to

282

Id. at 849 (testimony of D.A. Smith, American Paper and Pulp Assoc.). In

fact, the rule was well established in the federal courts that taxpayers had the

burden of proof in refund actions. See, e.g., Germantown Trust Co. v. Lederer, 263

F. 672 (3d Cir. 1920).

283

Id. at 877 (testimony of Edward Gore, American Institute of Accountants).

284

B.T.A. RULE 2 (July, 1924 ed.). See Should the Board of Tax Appeals Modify its

Rules of Practice?, 2 N

AT’L INC. TAX MAG. 270 (1924).

285

Circular 230, II-2 CUM. BULL. 372, 373 (1923).

286

Should the Board of Tax Appeals Modify its Rules of Practice?, 2 NAT’L INC. TAX

MAG. 270, 271 (1924).

287

Id. at 271, 277.

288

See supra note 25 and accompanying text.

289

J. Gilmer Korner, Procedure in the Appeal of Tax Cases Under the Revenue Act of

1926, 4 N

AT’L INC. TAX MAG. 413, 415 (1926) [hereinafter cited as Korner].

290

Id. at 415–16.

162 The United States Tax Court – An Historical Analysis

represent taxpayers before the Board. Only attorneys were admitted to

practice in the circuit courts, and a taxpayer who was represented in the

Board by an accountant would have to retain an attorney if the case were

appealed. Obviously some duplication of effort and additional expense

would attend such a change of counsel. Moreover, since the proceeding on

appeal would not be de novo, as it had been under the 1924 Act, the record

compiled in the Board would be of great importance in the ultimate

outcome of the case. All but one of the members of the Board were

lawyers,

291

and apparently they generally believed that attorneys were better

able than accountants to prepare a record before the Board that would

withstand appellate scrutiny.

292

Nevertheless, probably as the result of

pressure from accounting associations, no change was made in the rule

permitting accountants to practice. That this decision was arrived at

reluctantly was indicated by Chairman Korner’s suggestion that an

accountant would only be justified in appearing for a client before the

Board if the accountant could determine in advance that the client would be

willing to abide by an unfavorable decision of the Board and that the

Government would be unlikely to appeal if the Board decision went against

it.

293

Obviously, not many cases could meet these requirements.

The only significant statutory amendment in 1926 with respect to Board

procedure related to the rules of evidence to be applied. Despite statutory

authority in the 1924 Act to develop its own rules of evidence,

294

the Board

refused to do so. As was pointed out by Chairman Green of the Ways and

Means Committee, it would have been impracticable for the Board to

“write a treatise on evidence.”

295

Rather, the Board concluded that it must

follow evidentiary rules generally accepted by courts.

296

Because its

proceedings did not involve juries, the Board chose to adopt the liberal

rules of evidence applicable in equity proceedings.

297

But these rules were

neither codified nor uniform, and because they differed from jurisdiction to

jurisdiction, the Board had the problem of identifying the particular rules to

follow. Apparently, the Board chose to follow generally the evidentiary rules

applicable in the particular jurisdiction in which a case was tried.

298

Most

291

W. C. Lansdon, who served on the Board from 1924–34, was an economist

and journalist. He was the only non-lawyer ever appointed to the Board/Tax

Court.

292

See Korner, supra note 289.

293

Id.

294

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

295

67 CONG. REC. 1143 (1925).

296

See Part II, notes 261–265 and accompanying text.

297

See 1925 House Hearings, supra note 2, at 929 (testimony of former

Chairman Hamel).

298

See Memorandum from Thomas C. Lavery to Robert H. Jackson, General

Counsel, c. August, 1935, filed at the U.S. Tax Court in “Evidence.”

Improving the Board of Tax Appeals 163

cases were tried in the District of Columbia,

299

and as a result those rules

were most often applied. In any event, the particular rules applied were not

of critical importance under the 1924 Act, because Board decisions were

not final and could be collaterally reviewed in district court or the Court of

Claims.

300

The changes made in the 1926 Act with respect to the appealability of

Board decisions made the identification of applicable evidentiary rules more

important. Board decisions were no longer subject to collateral review;

once the jurisdiction of the Board was invoked, it would serve as the

exclusive trial forum.

301

For this reason, the proper factual development of

a case before the Board was essential—errors by counsel or the Board

could no longer be corrected in a subsequent proceeding. Moreover, rulings

by the Board on the admissibility of evidence were clearly within the scope

of appellate review,

302

and a more certain identification of the applicable

evidentiary rules became essential.

303

Accordingly, the 1926 Act removed the reference to Board

determination of rules of evidence and required the Board to follow the

rules applied “in courts of equity of the District of Columbia.”

304

Equity

rules were selected because they were the most permissive in admitting

evidence.

305

More specifically, the equity rules applicable in the District of

Columbia were chosen over the equity rules applicable in the federal court

for the district in which the Board happened to hear an appeal because each

district court applied the rules of evidence of the state in which it sat.

306

require the Board to apply 48 different rules of evidence depending on

where it tried a case was felt to be too onerous a burden to impose.

307

G. Division Decisions and Expediting the Board’s Workload

The Bureau of Internal Revenue’s Committee on Appeals and Review,

which was the forerunner of the Board of Tax Appeals, had generally

299

See Part II, notes 270–284 and accompanying text.

300

See supra note 46 and accompanying text.

301

See supra notes 57–62 and accompanying text.

302

See H.R. REP. NO. 69-1, at 19–20 (1925); S. REP. NO. 69-52, at 36 (1926).

303

See 67 CONG. REC. 1144 (1925) (remarks of Mr. Mills).

304

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 907(a), 44 Stat. 107.

305

67 CONG. REC. 1144 (1925) (remarks of Mr. Green).

306

See id. (remarks of Mr. Mills). The Supreme Court, pursuant to Rev. Stat.

§ 862 (1873), provided for the evidentiary rules to be followed in trials in equity.

Federal Equity Rule 46.

307

67 CONG. REC. 1144 (1925) (remarks of Mr. Green).

164 The United States Tax Court – An Historical Analysis

functioned in divisions comprised of three committee members.

308

Probably the Committee could have processed more cases had it used

single-member divisions, but certain advantages were gained by collegial

review of cases. This was especially true in the case of the Committee, the

members of which were divided among lawyers, accountants, and engineers

whose different fields of expertise could be brought to bear in the solution

of problems. Because the Committee’s proceedings were not public and

because it functioned pursuant to informal procedures, the inefficiency

inherent in having three committee members consider a single case never

presented a critical problem. The Committee managed to stay relatively

current with its heavy workload.

309

The original Administration proposal for the creation of the Board of

Tax Appeals sought generally to perpetuate the character and procedures of

the Committee on Appeals and Review; it provided for informal procedures

and for the designation of divisions and division chiefs.

310

Without stating

so directly, the proposal indicated that divisions would be comprised of at

least three members.

311

Congress, however, modified the Mellon plan to make the Board’s

functions more nearly judicial than those of the Committee;

312

not only

were written findings of fact required in every case, as proposed by the

Administration,

313

but written opinions were required as well whenever the

amount in controversy exceeded $10,000.

314

Additionally, Board

proceedings had to be open to the public and conducted in accordance with

judicial standards of procedure.

315

Even though these modifications

virtually assured that membership on the Board would be confined to

308

For a discussion of the Committee on Appeals and Review, see Part I, notes

221–256 and accompanying text.

309

See Part II, note 91.

310

Committee Print No. 1 of the Revenue Bill of 1924, 68th Cong., 1st Sess.

§ 1000(b), (e) (Dec. 19, 1923) [hereinafter cited as 1924 Administration Bill].

311

Id. § 1000(b) provided:

The chairman, with the approval of the Secretary, may from time to time

divide the Board into divisions and assign the members thereto, and

designate a chief thereof. If a division, as a result of a vacancy or the

absence or inability of a member assigned thereto to serve thereon, is

composed of less than three members, the chairman may assign other

members thereto, or he may direct the division to proceed with the

transaction of business.

As a result of action to make the Board independent of Treasury, Congress

eliminated from the bill the power of the Secretary to approve the selection of

division and division chiefs. See Part II, notes 55–76 and accompanying text.

312

See Part II, notes 77–97 and accompanying text.

313

1924 Administration Bill, supra note 310, § 1000(e).

314

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

315

Id.; see also Part II, notes 84–88 and accompanying text.

Improving the Board of Tax Appeals 165

lawyers,

316

the portion of the Administration proposal authorizing the

creation of divisions was retained.

317

Its retention may have resulted either

from a failure to recognize that the inter-disciplinary nature of the

Committee would not be carried forward and therefore no benefit would be

derived from multi-member divisions, or from a belief that sounder

decisions could be obtained through a collegial process even when the

background and training of the judicial officers were similar.

Although the statute provided for the creation of divisions, it clearly

indicated that decisions could be made by the full Board as well.

318

Chairman Hamel initially refrained from exercising his authority to create

divisions, with the result that the first few cases were heard en banc.

319

the end of the summer of 1924, it was apparent that the Board would not

be able to handle the numerous cases coming up for trial if the en banc

practice was retained, and in September Mr. Hamel divided his 12-member

Board into three divisions—one division had three members

320

and two

others had four members each.

321

With the appointment of four additional

members in March 1925, a fourth division was created.

322

The Chairman of

the Board, who had important administrative and review responsibilities,

was excluded from membership on a division.

As the number of appeals to the Board increased, the issue of division

size soon emerged as part of a general concern with productivity. A great

many small cases were being filed,

323

and the question was raised whether

special small case divisions should be established having only a single

member.

324

Obviously, a greater number of cases could be disposed of in

this manner, but ambiguities in the 1924 Act created doubt as to whether

316

See Part II, notes 213–215 and accompanying text.

317

Revenue Act of 1924, ch. 234, § 900(f), 43 Stat. 337.

318

Id. §§ 900(e), (f).

319

John H. Parrott, 1 B.T.A. 1 (1924); Everett Knitting Works, 1 B.T.A. 5

(1924).

320

Division No. 1 was comprised of Mr. Ivins, Chief, Mr. Korner, and Mr.

Marquette. Memorandum from Chairman Hamel, September 3, 1924, filed at the

U.S. Tax Court in “Organizing the Board: Memoranda & Correspondence.”

321

Division No. 2 was comprised of Mr. James, Chief, Mr. Sternhagen, Mr.

Trammell, and Mr. Trussell. Division No. 3 was comprised of Mr. Graupner, Chief,

Mr. Lansdon, Mr. Littleton, and Mr. Smith. Id.

322

Memorandum from Chairman Hamel, March 28, 1925, filed at the U.S. Tax

Court in “Divisions.”

323

More than 30% of the appeals filed involved deficiencies of less than $500.

See 1925 House Hearings, supra note 2, at 887 (testimony of George Morris).

324

Small cases were so troublesome that some Board members were privately

urging that Board jurisdiction be limited to cases involving deficiencies of more

than a certain amount, say $500. See Graupner, supra note 38. Politically, of course,

this proposal was unacceptable and it was never advocated seriously in public. Cf.

1925 House Hearings supra note 2, at 887–89 (testimony of George Morris).

166 The United States Tax Court – An Historical Analysis

divisions of less than three were authorized.

325

Because of uncertainty over

this question, no special small case divisions were established.

326

With the congressional consideration of the Revenue Bill of 1926, a

proposal was advanced to eliminate any inference that divisions must be

comprised of more than a single member.

327

Supporters of the proposal

argued that one-member divisions would enable the Board to hear more

cases both in Washington and in the field by increasing the number of

divisions; that individual members would be able to devote more time to

the consideration of cases with a resulting increase of decisions; and that

the Board as a whole would be able to review more division decisions

because of the reduced burden on the individual members.

328

The House

adopted the proposal but required that decisions by single-member

divisions be reviewed by the entire Board.

329

Obviously, the proviso

attached to single-member divisions was a vestige of the belief in the value

of collegial decisions. The Senate, probably at the urging of the Board,

adopted the authorization for single-member divisions without the

requirement of Board review.

330

The Senate version prevailed in

conference.

331

Although the roots of the single-member division proposal

lay in the concern over small cases, no limitation was imposed on the use of

small divisions.

Four months after the passage of the 1926 Act, the Board adopted a

“plan of reorganization,” which had as its foundation the institution of

one-member divisions.

332

By this time a substantial backlog of cases had

developed, and the problem of productivity was becoming acute. More

than 11,000 cases were pending before the Board and new appeals averaged

325

Ivins, supra note 33, at 410; see also supra notes 310–317 and accompanying

text.

326

A practice soon developed to ameliorate the rigors of the three-member

division requirement. Hearings before divisions were frequently held before a

single member of the division who would then report to the full division, which

would then render a decision that would be reviewed by the full board. 1925

House Hearings, supra note 2, at 890 (interchange between Chairman Green and

George Morris).

327

Id. at 887 (testimony of George Morris), 912 (testimony of James Ivins).

328

See Korner, supra note 289, at 416.

329

See H.R. REP. NO. 69-356, at 53 (1926).

330

See id.

331

Id. The 1926 Act simply provided that the Chairman was authorized to

“divide the Board into divisions of one or more members . . . .” Revenue Act of

1926, ch. 27, § 1000, amending Revenue Act of 1924, § 906(a), 44 Stat. 106 (now

codified at I.R.C. § 7444(c)).

332

Memorandum from Chairman Korner to members of the Board, June 11,

1926, filed at the U.S. Tax Court in “Divisions” [hereinafter cited as Reorganization

Memorandum].

Improving the Board of Tax Appeals 167

800 to 900 per month.

333

In contrast, for fiscal 1926, the Board had

managed to dispose of cases at the rate of slightly more than 300 per

month.

334

There was considerable concern on the Board with its growing docket

of cases.

335

From a purely personal point of view, the members must have

viewed with some alarm the increasing popularity of their new agency.

Throughout the first two years of the Board’s existence, they had invested

enormous time in discharging their duties. It is doubtful that they had

much time or energy to devote to their personal lives.

336

One can well

imagine their frustration at being unable to decrease the backlog with these

efforts. But aside from the personal sacrifices required, they also recognized

the danger to the Board if it became so overwhelmed with work that it

could not discharge its statutory mandate to decide cases “as quickly as

practicable.”

337

Some persons professing to be friendly to the Board were

already beginning to call for modifications in the law that would decrease

the importance of the Board in tax litigation. For example, one proposal

was made to give the federal district courts concurrent jurisdiction with the

Board to redetermine deficiencies.

338

Naturally, Board members opposed

such a plan,

339

because its adoption might well have resulted in the Board’s

immediate obsolescence. To forestall these proposals some action was

necessary to make the Board more efficient.

Part of the workload problem was beyond the control of the Board.

For example, many taxpayers were appealing from deficiency assertions that

were clearly proper.

340

The Board hoped that the newly authorized

imposition of a $10 filing fee

341

would decrease the number of frivolous

appeals, and, in fact, evidence soon indicated that the filing fee was

reducing appeals by 25 percent.

342

333

Id. at 1–2.

334

See Part II, note 113.

335

Chairman Korner, for example, referred to “a feeling of serious

apprehension among the members as to the ability of the Board to stem the tide”

of cases pending. Memorandum from Chairman Korner to members of the Board,

June 12, 1926, filed at the U.S. Tax Court in “Divisions.”

336

See Part II, notes 291–293 and accompanying text.

337

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 907(a), 44 Stat. 107 (now codified at I.R.C. § 7459(a)).

338

Lyle T. Alverson, Has the Board of Tax Appeals Failed?, 4 NAT’L INC. TAX

MAG. 337, 358 (1926).

339

See Letter from J. Gilmer Korner to Chairman Green, No. 24, 1926, pp. 2,

5, filed at the U.S. Tax Court in “Revenue Act of 1926: Memoranda &

Correspondence.”

340

Reorganization Memorandum, supra note 332, at 4.

341

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924, § 904,

44 Stat. 106.

342

Reorganization Memorandum, supra note 332, at 2, 4.

168 The United States Tax Court – An Historical Analysis

Another cause of the growing backlog could be attributed to audit

practices in the Bureau. Many conferees in the Income Tax Unit were

hesitant to settle cases on a basis acceptable to taxpayers. They were

probably concerned that their careers would be retarded if they became

known as pro-taxpayer. The availability of the Board procedure

undoubtedly encouraged this practice since an aggrieved taxpayer would

have a further appeal before having to pay a disputed tax. Additionally,

many appeals resulted from the issuance of deficiency notices to preserve

the Bureau’s position in the face of an imminent tolling of the statute of

limitations. Finally, many erroneous deficiencies were asserted as a result of

field audits that were not reviewed by the generally more competent staff

located in the Bureau’s central office in Washington.

343

Interestingly,

decentralization of the audit function during this period was being urged as

a means of reducing the Bureau’s backlog of unaudited returns.

344

The

errors thereby spawned served to increase the Board’s backlog.

The Board received assurances that Treasury was endeavoring to solve

these problems,

345

but Chairman Korner was convinced that the Board

must take steps of its own to increase the number of cases it could

handle.

346

To this end the Board adopted two significant procedural

changes. First, the four multi-member divisions were replaced by 16

single-member divisions.

347

An indication of how quickly the backlog

problem developed was that, under the reorganization plan, single-member

divisions were to hear all appeals, even though the authorization for these

divisions was justified principally as a means of disposing of small cases.

The second procedural modification involved Board review of division

decisions. Up until this time, the entire Board reviewed every decision prior

to its promulgation.

348

The statute had never required such review,

349

but

the importance of uniformity of decision was believed to make the practice

necessary. Board review, however, consumed considerable time, and

Chairman Korner believed that a great number of cases simply involved the

343

Id. at 4.

344

See Part I, notes 85–95 and accompanying text.

345

Reorganization Memorandum, supra note 332, at 5–6. For example, the

General Counsel had established a special section to settle cases involving less than

$1,000. Id.

346

Id. at 7.

347

Memorandum from Chairman Korner to members of the Board, June 25,

1926, filed at the U.S. Tax Court in “Divisions.”

348

See 1925 House Hearings, supra note 2, at 860 (testimony of Chairman

Korner).

349

Both the 1924 and 1926 Acts provided a division decision would become

final if Board review was not directed by the Chairman within 30 days. Revenue

Act of 1924, ch. 234, § 900(f), 43 Stat. 337; Revenue Act of 1926, ch. 27, § 1000,

amending Revenue Act of 1924, § 906(b), 44 Stat. 106.

Improving the Board of Tax Appeals 169

application of well-established precedents to disputed facts. In these

situations, he urged that review by the full Board was unnecessary and

proposed that the Board should employ an expert, to be called either a

“coordinator” or “administrative assistant,” to review division decisions and

make recommendations as to whether they deserved consideration by the

entire Board.

350

Chairman Korner, however, was not prepared to dispense

altogether with collegial review, and a further element of his plan was the

grouping of single-member divisions into “parts” comprised of three

divisions. Division decisions would be reviewed by the parts much as they

had been formerly reviewed by the entire Board; the decisions would then

be forwarded to the Chairman and the coordinator, who would determine

on a case by case basis whether full Board review was necessary.

351

Although the Board members had no objection to the use of

single-member divisions,

352

a majority were unwilling to accept the Korner

proposal insofar as it eliminated the necessity for full Board review of

division decisions.

353

The legislative history of the 1926 Act indicated that

Congress believed Board review to be of the utmost importance

354

and little

sentiment existed in favor of thwarting congressional expectations.

355

Accordingly, a compromise was struck. The services of a coordinator

would not be retained and the Chairman would continue to refer all

division decisions to the full Board for review. However, the proposal to

group the single-member divisions into parts would be retained, and the

parts would be given the additional duty of recommending to the Chairman

whether a case should be given “full consideration by the Board” or should

be promulgated without “exhaustive Board consideration.”

356

Hopefully,

this procedure would reduce the burden on the Board while preserving the

practice deemed so important by Congress.

The system thus adopted was retained for only a year. In the spring of

1927, the Board changed to an approach similar to that originally proposed

350

Reorganization Memorandum, supra note 326, at 10–16.

351

Id.

352

The creation of the divisions was, under the statute, solely within the

province of the Chairman. Revenue Act of 1926, ch. 27, § 1000, amending Revenue

Act of 1924, § 906(a), 44 Stat. 106.

353

B.T.A. Conference Minutes, June 23, 1926.

354

“The committee . . . is of the opinion that the great value of the board lies

in its practice in meeting regularly for common discussion and consideration of

opinions prepared and proposed to be issued.” H.R.

REP. NO. 69-1, at 18 (1925).

355

As with the selection of divisions, the decision to call for Board review was,

under the statute, within the discretion of the Chairman. Revenue Act of 1926, ch.

27, § 1000, amending Revenue Act of 1924, § 906(b), 44 Stat. 106. Thus, Chairman

Korner could have enforced his will on the Board. That he did not is indicative of

the collegial nature of the Board.

356

B.T.A. Conference Minutes, June 23, 1926.

170 The United States Tax Court – An Historical Analysis

by Chairman Korner. Division decisions would be reviewed by the parts

and then forwarded to the Chairman who would decide whether full Board

review would be desirable. If cases were reviewed by the full Board, such

would be indicated in the published reports. If no Board review was given,

the names of the members of the part that had considered the case would

be printed with the report of the case.

357

Five years later, with the abolition

of parts, the present system was adopted, under which division decisions

are forwarded directly to the Chief Judge who then determines whether or

not the full court should review.

358

The benefits of the streamlined procedure soon became apparent, and

the number of cases disposed of by the Board increased from 3,900 in 1926

to 5,400 in 1927.

359

With the elimination of the necessity for Board review

in every case, further efficiencies were achieved, and in 1928 the Board

disposed of 7,100 cases.

360

H. Conclusion

The creation of the Board in 1924 and the statutory modifications

accomplished in 1926 were responsive to a basic need of tax administration:

the provision of a procedure for pre-assessment adjudication of tax

disputes. As has been described in this and the preceding parts of the

study, controversy surrounded the determination of the best means of

filling this need; hence, the statutory rules concerning the Board resulted

from a series of compromises. But even though the statutory structure of

the Board did not completely conform to the views of any single group,

certain general characteristics of the new agency could be identified,

characteristics which in large measure have remained unchanged over the

years.

The most important of these characteristics resulted from the

recognition that the adjudicating body should be independent of the agency

charged with the collection function. The Board was spawned in a period

of general disfavor with the Bureau of Internal Revenue, which was

experiencing considerable difficulty in coping with the administrative

problems created by the new broad-based income and profits taxes.

361

Among the Bureau’s real or imagined defects were inefficiency,

arbitrariness, and favoritism. The original Administration proposal for

creation of the Board provided that the Board would be independent of the

Bureau, but would remain a part of the Treasury Department.

362

Such a

357

B.T.A. Conference Minutes, May 31, 1927, June 3, 1927.

358

B.T.A. Conference Minutes, April 1, 8, 1932.

359

See Part II, note 113.

360

Id.

361

See generally Part I, notes 52–141 and accompanying text.

362

See Part II, notes 25–54 and accompanying text.

Improving the Board of Tax Appeals 171

connection with the Bureau, albeit indirect, proved unacceptable to

Congress. The Board ultimately was established separate from both

Treasury and the Bureau as an independent agency in the executive branch

of Government.

363

It retained this status for almost half a century.

Although its members originally had been chosen largely on

recommendations from Treasury officials and it has had to work closely

with the tax collection agency (which has been a party in every one of its tax

proceedings), the Board and later the Tax Court has striven to maintain its

independence in both substance and appearance. Its success in this

endeavor is suggested by the fact that throughout its history no serious

charge of conscious partiality has ever been leveled against it.

364

The issue

of independence has continued to be a major theme of Tax Court affairs

and was largely responsible for the court’s change of status in 1969 from an

independent agency in the executive branch to a legislative court.

365

This

issue also figured prominently in the provision of the Tax Court with its

own building in 1974. Until that time, for most of its history, the

363

See Part II, notes 55–97 and accompanying text.

364

Occasionally, critics have contended that the court’s lack of full judicial

status may cause it to unconsciously favor the Government. See B. Anthony

Billings, D. Larry Crumbley & L. Murphy Smith, Are U.S. Tax Court Decisions Subject

to the Bias of the Judge?, 55 T

AX NOTES 1259 (1992); Deborah A. Geier, The Tax

Court, Article III, and the Proposal Advanced by the Federal Courts Study Committee: A

Study in Applied Constitutional Theory, 76 C

ORNELL L. REV. 985, 997–99 (1991);

Daniel Ginsberg, Is the Tax Court Constitutional?, 35 M

ISS. L.J. 382 (1964); see also J.

Edward Maule, Instant Replays, Weak Teams, and Disputed Calls: An Empirical Study of

Alleged Tax Court Bias, 66 T

ENN. L. REV. 351, 355–63 (1999) (recounted the then-

existing charges that the Tax Court decisions exhibited bias in favor of the

Government). Not surprisingly, a few Tax Court judges have gone on record to

dispute allegations of bias. See David Laro, The Evolution of the Tax Court as an

Independent Tribunal, 1995 U.

ILL. L. REV. 17, 25–26, 28 (1995) (describing why it is

“myopic to derive any meaningful conclusion of bias based solely on statistics of

the prevailing party in the Tax Court,” concluding that taxpayers “need not have

any anxiety with respect to claims of alleged pro-government bias” at the Tax

Court); Theodore Tannenwald, Jr., The United States Tax Court: Yesterday, Today, and

Tomorrow, 15 A

M. J. TAX POL’Y 1, 5 (1998) (describing the characterization of the

Tax Court as a pro-Government tribunal as “a canard that has existed for a long

time”). In a 1999 article, Professor James Maule undertook an empirical

examination of whether a pro-Government bias exists at the Tax Court, one that

focused on the resolution of issues by the Tax Court that present the opportunity

for the exertion of bias, rather than focusing on overall case outcomes than can

have a variety of contributing causes. Maule, supra at 365–67. He concluded that

no pro-Government bias exists. Id. at 425–26.

365

Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83 Stat. 730 (amending

I.R.C. § 7441).

172 The United States Tax Court – An Historical Analysis

Board/Tax Court

366

had been physically located in the Internal Revenue

Building.

A second characteristic of the Board/Tax Court has involved the nature

of its proceedings. The Coolidge Administration favored informal

proceedings as a means of expediting the Board’s work,

367

but Congress

insisted on the more formal practice of courts.

368

In Congress’ view the

interests of precision, publicity of proceedings, and the establishment of a

cohesive body of precedents were of paramount importance and could only

be achieved by a judicial-type body. Undoubtedly, the strictures of formal

procedures have slowed the handling of cases, and the problem of backlog

has plagued the Board/Tax Court almost from the first. Nevertheless, the

tax laws are of such intrinsic complexity that the need for a specialized

“court” to resolve disputes and formulate interpretations has not been

questioned since 1924. The Board/Tax Court has continuously operated

pursuant to judicial procedures and its member/judges,

369

especially in

recent times, usually have been selected from the swelling ranks of the tax

bar. Efforts to increase the efficiency with which tax disputes are

adjudicated generally have been restricted to improvements of

administrative procedures within the Bureau/Service

370

and increased

reliance on streamlined judicial procedures that encourage pre-trial

settlements.

371

366

Any effort to describe events spanning the history of the Board of Tax

Appeals and the Tax Court is met with a formidable problem of nomenclature. In

1942, the name of the Board of Tax Appeals was changed to the Tax Court of the

United States. Revenue Act of 1942, ch. 619, § 504(a), 56 Stat. 957. At that time,

“members” of the Board became “judges” of the court. Id. The “Chairman” of the

Board was changed to the “Presiding Judge” of the court. Id. In 1948, the

“Presiding Judge” became the “Chief Judge.” Act of June 25, 1948, ch. 646, § 32,

62 Stat. 991. In 1969, the “Tax Court of United States” became the “United States

Tax Court.” Tax Reform Act of 1969, Pub. L. No. 91-172, §§ 951, 961, 83 Stat.

730, 734. Adding to the confusion, in 1953, the Bureau of Internal Revenue

became the Internal Revenue Service. See I

NTERNAL REVENUE SERVICE, INCOME

TAXES 1862–1962: A HISTORY OF THE INTERNAL REVENUE SERVICE 26–27

(1962).

367

See Part II, notes 77–80 and accompanying text.

368

See Part II, notes 81–88 and accompanying text.

369

See supra note 366.

370

Id.

371

An exception to the general requirement of formal judicial procedures was

the institution of a small tax case procedure in 1969. Act of Dec. 30, 1969, Pub. L.

No. 91-172, § 957(a), 83 Stat. 733 (amending I.R.C. § 7463). In cases in which the

procedure is applicable, no appeal is permitted from the Tax Court decision and

formal procedural rules are relaxed. See T

AX CT. R. 174 (July 6, 2012 ed.). The Tax

Court’s small tax case procedures are discussed in Part XIII.A.

Improving the Board of Tax Appeals 173

Related to the Board/Tax Court’s judicial “nature” is a third

characteristic of court status. Over the years, attempts have been made to

accord it full article III court status.

372

Although other specialized courts

have been established under article III,

373

Congress has consistently resisted

similar proposals with respect to the Board/Tax Court. The Board/Tax

Court has always performed an exclusively judicial function, and the failure

to fully recognize this fact has created certain ambiguities. In general, the

response of Congress has been to provide the Board/Tax Court with an

increasing number of court indicia while withholding formal recognition.

For example, in 1926 Congress provided for appeal of Board decisions

rather than collateral review;

374

in 1948 the law was further amended to

make clear that Tax Court decisions would be reviewed on appeal under the

same standards applicable to decisions by district courts sitting without

juries.

375

In the case of Tax Court judges, a similar evolution has occurred;

in 1953 a pension system was provided similar to that applicable to federal

judges,

376

and 16 years later a form of modified life tenure was granted to

Tax Court judges.

377

The most significant softening of the congressional

refusal to recognize the judicial status of the Board/Tax Court was

accomplished by the Tax Reform Act of 1969, which changed the Tax

Court from an independent agency in the executive branch to a court

established under article I.

378

Despite the fact that some questions may still

be raised concerning the court’s status,

379

the compromise effected in 1969

would appear to have settled the court’s status for the foreseeable future.

A fourth important characteristic of the Board/Tax Court has involved

its jurisdictional role within the general tax litigation structure. Prior to

1924, tax controversies could be tried in either district court or the Court of

372

See, e.g., supra notes 18–45 and accompanying text.

373

For example, the United States Court of International Trade (successor to

the Board of General Appraisers, which later became the Customs Court) enjoys

article III status. Similarly, the Court of Claims once held article III status. See

Glidden Co. v. Zdanok, 370 U.S. 530 (1962). [However, as part of the Federal

Courts Improvement Act of 1982, Congress replaced this tribunal with the United

States Court of Claims (later renamed the United States Court of Federal Claims),

which Congress established as an article I legislative court. See Pub. L. No. 97-164,

§ 171(a), 96 Stat. 25, 27 (1982).]

374

Revenue Act of 1926, ch. 27, § 1001, 44 Stat. 109.

375

Act of June 25, 1948, ch. 646, § 36, 62 Stat. 991.

376

Act of Aug. 7, 1953, ch. 352, 67 Stat. 482.

377

Tax Reform Act of 1969, Pub. L. No. 91-172, § 954(a), 83 Stat. 730

(amending I.R.C. § 7447(b)(3)). Under the new law, a Tax Court judge who is not

reappointed will be entitled to a full judicial pension if he has notified the President

of his willingness to accept reappointment.

378

Id. § 951 (amending I.R.C. § 7441).

379

See Harold Dubroff, Federal Taxation, 1973/74 ANN. SURVEY OF AM. LAW

265, 272–85 (1974).

174 The United States Tax Court – An Historical Analysis

Claims.

380

Payment of the disputed tax and disallowance of a claim for

refund served as a prerequisite to the jurisdiction of these courts. With the

creation of the Board in 1924, taxpayers for the first time could obtain an

adjudication of tax liability in advance of the necessity for payment. This

fundamental change was effected as an addition to the existing system and

not as part of a general overhaul of the entire litigating structure. Thus, the

jurisdiction of district courts and the Court of Claims continued to be

limited to refund claims. Conversely, the Board’s jurisdiction was restricted

to redetermining deficiencies; it was given no authority to review the merits

of refund claims. In 1926, the Board was given a limited degree of refund

jurisdiction,

381

and, more recently, taxpayers have been permitted to seek

declaratory relief in the Tax Court with respect to certain matters.

382

But in

general the structure created in 1924 has remained to the present despite

criticism that it provides taxpayers with too much opportunity for forum

shopping and impedes the development of uniform interpretations of the

tax laws.

380

See Part I, notes 142–197 and accompanying text.

381

See supra notes 101–108 and accompanying text. In 1988, Congress provided

the Tax Court with authority to order payment of any refund it determined. See

I.R.C. § 6512(b)(2) (enacted as part of the Technical and Miscellaneous Revenue

Act of 1988, Pub. L. No. 100-647, § 6244(a), 102 Stat. 3342, 3750). This outwardly

judicial component of the Tax Court’s expanded jurisdiction is discussed in Part

VI.B.

382

Act of September 2, 1974, Pub. L. No. 93-406, § 1041(a), 88 Stat. 949,

adding I.R.C. § 7476 (qualification of certain deferred compensation plans). For a

discussion of the Tax Court’s declaratory judgment jurisdiction, see Part VII.A.

The Board Becomes a Court 175

ART IV

THE BOARD BECOMES A COURT

The evolution of the name and status of the Tax Court has occurred in a

three-stage process. The court was originally established in 1924 as the

Board of Tax Appeals, “an independent agency in the executive branch of

the Government.”

In 1942, the name of the Board was changed to the

Tax Court of the United States, but despite its new title the court’s status as

an agency of the executive branch was not disturbed.

Finally, in 1969, the

court was established as a legislative court under article I of the

Constitution, and its name was changed to the United States Tax Court.

To the uninitiated these changes in the status and name of the court may

seem of minor significance. They had little effect on the court’s function

and powers.

Moreover, since the protections afforded to most federal

judges only apply to courts created pursuant to article III of the

Constitution,

the changes had only minor impact on the status of Tax

Court judges.

Nevertheless, the changes made in the name and status of

the court have been highly controversial and provide an insight into the role

of this tribunal as perceived by the Congress, the Departments of Treasury

and Justice, the tax bar, and the court itself.

A. The Board of Tax Appeals from 1924 to 1942

The original proposal to create the Board of Tax Appeals was submitted

to Congress in late 1923 by Secretary of the Treasury Andrew Mellon. It

provided that the Board would be an agency of the Treasury Department,

Revenue Act of 1924, ch. 234, §§ 900(a), (k), 43 Stat. 336, 338.

Revenue Act of 1942, ch. 619, § 504, 56 Stat. 957.

Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83 Stat. 730, amending

NT. REV. CODE OF 1954, § 7441. For a discussion of the meaning of the term

“legislative court” see notes 65–69 and accompanying text infra.

As part of the legislation establishing the Tax Court pursuant to article I, the

court was given power to enforce its own process and to punish contempt. Id.

§ 956, 83 Stat. 732 (adding the provision now codified at I.R.C. § 7456(c)).

These protections include tenure during good behavior and undiminished

compensation while in office. U.S.

CONST. art. III, § 1.

The 1969 Act increased the terms of office of Tax Court judges to 15 years

(formerly terms had been 12 years) and provided for full judicial pensions to judges

who are not reappointed after the expiration of their terms, provided they notify

the President prior to such expiration that they are willing to accept reappointment.

Id. §§ 952(b), 954(a), 83 Stat. 730 (amending I.R.C. §§ 7443(e), 7447(b)).

176 The United States Tax Court – An Historical Analysis

independent of the Bureau of Internal Revenue,

which would review tax

deficiency assertions pursuant to informal procedures.

In the view of

Treasury, such a body would combine the advantages of impartiality with

expeditious disposition of the troublesome number of disputes arising

under the tax laws.

Congress, which was well aware of shortcomings in the

administration of the tax laws, adopted in general the proposal for creation

of the Board, but in doing so made substantial modifications.

Most

importantly, Congress insisted that the Board be independent of Treasury

and that it follow the formal procedures of courts rather than the informal

practice generally applicable in the Bureau.

Although independence and judicial procedures are characteristics

shared by all federal courts, the legislative history of the 1924 Act does not

disclose that any congressional consideration was given to according the

Board full court status. The only alternatives Congress considered in this

regard were (1) the Administration’s proposal that the Board be a division

of the Treasury Department; (2) the House-passed version of the bill,

which, while not creating the Board as a full-fledged federal court,

removed statutory reference to the status of the Board and eliminated the

Secretary of the Treasury’s control over the Board; and (3) the Senate

version of the bill, ultimately enacted, which retained the House provisions

but added that the Board was “an independent agency in the executive

branch of the Government.”

The provision added by the Senate was

apparently inserted at the suggestion of Middleton Beaman, House

Legislative Counsel, to provide for the treatment of the Board’s financial

accounts by the General Accounting Office.

The first effort to remove the Board from the executive branch and

formally declare it to be a court was made in connection with the

consideration of the Revenue Act of 1926.

By this time the Board had

The name of the Bureau of Internal Revenue was changed to the Internal

Revenue Service in 1953. INTERNAL REVENUE SERVICE, INCOME TAXES 1862–

1962: A

HISTORY OF THE INTERNAL REVENUE SERVICE 26–27 (1962).

See Part II, notes 25–54 and accompanying text.

Id. at notes 77–80 and accompanying text.

Id. at notes 55–167 and accompanying text.

Id. at notes 55–97 and accompanying text.

The Board could not have been a full federal court under the House bill

because members of the Board were provided with tenure for a term of years—not

good behavior as required under article III of the Constitution. Moreover,

although not controlling, the fact that the House bill did not change the name of

the Board to a court indicated the absence of intention to create a court.

Part II, notes 55–76 and accompanying text.

Letter from Presiding Judge Turner to Roswell Magill, June 17, 1947, filed at

the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

Ch. 27, 44 Stat. 9.

The Board Becomes a Court 177

been in existence for more than a year, its judicial character was clearly

manifested by the procedures it had adopted, and its work was favorably

viewed by lawyers, accountants, businessmen, and the Treasury.

At the

suggestion of A.W. Gregg, who was then Solicitor of Internal Revenue as

well as an adviser and protégé of Secretary Mellon, the Board organized a

committee to formulate legislative proposals with respect to its status and

operations.

Among the changes proposed by the committee was

replacement of the Board with a “Court of Tax Appeals,” a court of record,

the members of which would serve during good behavior.

Secretary

Mellon and the Treasury Department privately supported the Board’s

proposal for court status.

However, when Mellon later testified before the

Ways and Means Committee at its hearing on the Revenue Bill of 1926, his

comments with respect to the Board were quite general and did not include

any reference to making the Board a court.

Subsequently during the

hearings, Solicitor Gregg suggested that the Board be made a court,

but he

did not press the suggestion after being informed by Representative Garner,

ranking Democrat on the Ways and Means Committee, that there was great

reluctance in Congress to create additional federal courts with tenured

judges.

The Board itself did not publicly urge that it be formally changed

to a court, and no version of the 1926 bill contained such a provision.

Even though no serious congressional consideration was given to

making the Board a court, the Board’s peculiar status as “a court in all but

name”

did have an impact on the 1926 legislation, and in several respects

the Revenue Act of 1926 was a response to suggestions that if full court

status for the Board was infeasible, an effort should be made to provide the

Board with as many court attributes as possible.

These suggestions were

based on the widespread view that the Board was successfully functioning

as a judicial body, and could be even more successful if it were made more

court-like. To some extent Congress proved willing to adopt this

Part II, notes 270–323 and accompanying text.

See Letter from A.E. Graupner to J. Gilmer Korner, Aug. 28, 1925, filed at

the U.S. Tax Court in “Revenue Act of 1926: Memoranda & Correspondence.”

Id.

Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and Means,

69th Cong., 1st Sess. 10 (1925) [hereinafter cited as 1925 House Hearings].

Id. at 932–33, 935–36.

See id. at 935 (remarks of Mr. Garner).

F INAL REP. OF THE ATT’Y GEN’S COMM. ON ADMIN. PROC. IN GOV’T

AGENCIES, S. Doc. No. 77-8, at 205 (1941).

1925 House Hearings, supra note 20, at 935–36 (testimony of Solicitor A.W.

Gregg).

178 The United States Tax Court – An Historical Analysis

approach.

Of major importance, Board decisions were made directly

appealable to the courts of appeals and from these courts, on certiorari, to

the Supreme Court; in the absence of an appeal, Board decisions were final

and not subject to collateral attack.

Additionally, the requirement that

Board proceedings conform to judicial standards of procedure and evidence

was clarified;

the Board was given power to dismiss cases for procedural

defects without the necessity of written findings of fact and opinions,

and

it was authorized to impose filing fees.

These changes did not, however, meet all the criticisms that had been

leveled against the Board’s status as an agency of the executive branch. The

Board still had a name that obscured the nature of its activities. As a result,

many taxpayers who were unfamiliar with the Board assumed it functioned

like an administrative body rather than like a court and were thereby led

into procedural errors.

Additionally, the Board lacked judicial powers of

trial courts generally to enforce subpoenas and punish contempt.

Enforcement of the Board’s process could only be obtained in United

States district court, a cumbersome procedure that reduced the efficiency of

the Board’s operation.

Finally, the usual constitutional guarantees of

independence accorded to federal judges—tenure during good behavior

and compensation undiminished while in office—were not applicable to the

Board.

There was some suggestion that the absence of the constitutional

protections might subject Board members to inappropriate pressures from

governmental and private sources.

Additionally, the absence of life tenure

and the prestige associated with the federal judiciary were thought by some

See Bolon B. Turner, The Tax Court of the United States, its Origin and Function, in

HE HISTORY AND PHILOSOPHY OF TAXATION 31, 37–38 (1955) [hereinafter cited

as Turner].

Revenue Act of 1926, ch. 27, §§ 1001, 1005, 44 Stat. 109, 110; see also Part III,

notes 46–87 and accompanying text.

See Turner, supra note 25, at 37.

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924, § 907(b),

44 Stat. 107.

Id. § 1000, amending Revenue Act of 1924, § 904, 44 Stat. 106; see also Part III,

notes 46–87 and accompanying text.

See Part III, notes 25–26 and accompanying text.

See, e.g., Revenue Act of 1924, ch. 234, § 1025(a), 43 Stat. 348; see also Part III,

notes 32–34 and accompanying text.

The Ways and Means Committee recommended that the 1926 Act provide

members of the Board with life tenure. H.R.

REP. NO. 69-1, at 18 (1925).

Congress, however, rejected this proposal and instead provided a term of office of

12 years. Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 901(b), 44 Stat. 106; see also Part III, notes 177–209 and accompanying text.

67 CONG. REC. 732 (1925) (remarks of Mr. Mills).

The Board Becomes a Court 179

to make it difficult to induce able people to accept membership on the

Board.

In spite of these criticisms, during the next 16 years the issue of Board

status received legislative attention only once. In 1928, a decision of the

Court of Appeals for the Seventh Circuit indicated that the Board’s duties

included investigating as well as adjudicating tax disputes, and thus it should

consider evidence other than that which was introduced by the parties.

This ruling was clearly contrary to the legislative purpose in creating the

Board,

but the confusion of the Seventh Circuit was understandable in

view of the Board’s formal status as an agency of the executive branch.

The decision provoked an immediate congressional reaction. The Revenue

Bill of 1928, as it passed the House, provided that no Board decision should

be modified or reversed because of the failure of the Board to consider

evidence that was not adduced at the hearing.

The Senate shared the

House view that the functions of the Board were purely judicial, but it

believed the provisions of existing law clearly indicated that the decision of

the Seventh Circuit was erroneous.

Accordingly, the Senate excised the

House provision. The Senate opinion prevailed. As enacted, the Revenue

Act of 1928 made no reference to the question on the assumption, which

proved correct, that future courts would heed the congressional view clearly

expressed in the committee reports.

The limited amount of consideration given to formally establishing the

Board as a court in these early years is somewhat surprising since virtually

no precedent existed for making a body like the Board an agency of the

executive branch. By 1924, several independent executive agencies had

been created, such as the Interstate Commerce Commission and the

Federal Trade Commission,

which had adjudicatory functions. These

agencies, however, were distinguishable from the Board, because the former

agencies also performed functions that were clearly administrative in nature,

See Part III, notes 27–30, 177–185 and accompanying text.

Although the case was not identified by name in later congressional criticisms

of it, it was apparently Chicago Ry. Equip. Co. v. Blair, 20 F.2d 10 (7th Cir. 1927).

See Turner, supra note 25, at 43.

See Part II, notes 77–97 and accompany text.

H.R. REP. NO. 70-2, at 30–31 (1927); H.R. REP. No. 70-1882, at 21–22

(1928).

S. REP. NO. 70-960, at 38 (1928).

H.R. REP. NO. 70-1882, at 21–22 (1928).

The Interstate Commerce Commission was created in 1887 (Act of Feb. 4,

1887, ch. 104, § 11, 24 Stat. 383 (formerly codified at 49 U.S.C. § 11 (1971)), but

was later abolished in 1995 (Interstate Commerce Commission Termination Act,

Pub. L. No. 104-88, 109 Stat. 803 (1995)). The Federal Trade Commission was

created in 1914 (Act of Sept. 26, 1914, ch. 311, § 1, 38 Stat. 717 (now codified at 15

U.S.C. § 41)).

180 The United States Tax Court – An Historical Analysis

such as investigation and rule-making.

Obviously, such bodies could not

appropriately be lodged in the judicial branch of Government. The Board,

on the other hand, was to perform only judicial duties, and no

constitutional problems would have been presented by the functions of the

Board had it been made a court.

The closest existing parallel to the Board of Tax Appeals was the Board

of General Appraisers, later to become the Customs Court, which had been

created in 1890.

Like the Board of Tax Appeals, the Board of General

Appraisers was created to adjudicate disputes concerning revenue matters.

Also like the Board of Tax Appeals, the Board of General Appraisers had a

name that obscured its judicial function.

However, unlike the Board of

Tax Appeals, the status of the Board of General Appraisers was not clearly

defined by law. No provision in the statute stated whether the Board of

General Appraisers was an executive agency or a court, and, initially, no

mention was made of the tenure of its members.

In 1908, tenure during

good behavior was provided by statute for Board of General Appraisers

members, as was the power to punish contempt.

Both of these were

characteristic of court status. On the other hand, the President could

remove Board members for neglect, malfeasance, or inefficiency,

which

did not accord with the rule that article III judges could only be expelled

from office by impeachment in the House and trial in the Senate for high

crimes and misdemeanors.

As a result of these apparent inconsistencies,

no definitive conclusion could be drawn with respect to the status of the

Board of General Appraisers.

Act of Feb. 4, 1887, ch. 104, §§ 12, 13, 24 Stat. 383 (previously codified at 49

U.S.C. §§ 12, 13 (Interstate Commerce Commission) but later repealed by the

Interstate Commerce Commission Termination Act of 1995)); Act of Sept. 26,

1914, ch. 311, §§ 5, 6, 38 Stat. 719 (now codified at 15 U.S.C. §§ 45, 46 (Federal

Trade Commission)).

Act of June 10, 1890, ch. 407, § 12, 26 Stat. 136; Act of May 27, 1908, ch. 205,

§§ 1, 3, 35 Stat. 403, 406; Act of Aug. 5, 1909, ch. 6, § 12, 36 Stat. 98; Act of Sept.

21, 1922, ch. 356, § 518, 42 Stat. 972. The Board of General Appraisers was

changed to the Customs Court in 1926. Act of May 28, 1926, ch. 411, § 1, 44 Stat.

669.

Act of June 10, 1890, ch. 407, §§ 13, 14, 26 Stat. 136.

Its name was not changed to the Customs Court until May 28, 1926, three

months after enactment of the Revenue Act of 1926. Act of May 28, 1926, ch. 411,

§ 1, 44 Stat. 669.

Act of June 10, 1890, ch. 407, § 12, 26 Stat. 136.

Act of May 27, 1908, ch. 205, § 3, 35 Stat. 406.

Id.

U.S. CONST. art II, § 4.

In 1894, an opinion of the Attorney General concluded that the General

Appraisers were officers of the Treasury Department. 21 O

P. ATT’Y GEN. 85

(1894). This ruling, however, preceded legislation that gave them life tenure and

The Board Becomes a Court 181

Clearly, in both the 1924 and 1926 Acts, Congress did not allow any

similar ambiguity to arise in the case of the Board of Tax Appeals. By

statute the Board was expressly made a part of the executive branch of

Government and the term of office of its members was limited to a definite

number of years.

Legislative history does not directly disclose the factors

that figured in the failure of Congress to provide court status for the Board.

However, several possible explanations may be suggested. First, the Board

was not to be a court in the traditional sense; juries would not be available,

jurisdiction would be highly specialized and based solely on statute, and one

of the parties, the Commissioner, would be the same in every one of its

proceedings.

Of course, these were characteristics shared with other

bodies that arguably were courts, such as the Court of Claims.

Nonetheless, the fact that in some respects the Board of Tax Appeals did

not conform to the popular image of a court probably was significant to

some members of Congress.

Second, the income and profits taxes were relatively new and

undoubtedly many hoped they would not be permanent.

On that note,

the Board itself generally was regarded as experimental.

If the taxes were

repealed, or if the Board proved to be a failure in coping with the situation

it was created to address, its discontinuance would be simplified if its

members were not accorded tenure during good behavior. Of course, the

judicial powers to punish contempt. See supra note 46 and accompanying text. In

1929, the Supreme Court indicated in dicta that the status of the Customs Court

was still subject to question after its name change. Ex parte Bakelite Corp., 279

U.S. 438, 457–58 (1929). In 1956, Congress declared the Customs Court to be an

article III court, and there was good reason to believe the Supreme Court would

honor that declaration. Act of July 14, 1956, ch. 589, 70 Stat. 532; Glidden Co. v.

Zdanok, 370 U.S. 530 (1962).

Revenue Act of 1924, ch. 234, §§ 900(b), (k), 43 Stat. 336, 338; Revenue Act

of 1926, ch. 27, § 1000, amending Revenue Act of 1924, §§ 900, 901(b), 44 Stat. 105,

106.

See Glidden Co. v. Zdanok, 370 U.S. 530, 589 (1962) (Douglas, J., dissenting)

(arguing that such courts are not comprehended by article III).

Not until 1933 was it settled that the Court of Claims was a legislative court.

Williams v. United States, 289 U.S. 553 (1933). In 1962, the court’s status was

resettled when it was held to be an article III court following a congressional

declaration to this effect in 1953. Act of July 28, 1953, § 1, ch. 253, 67 Stat. 226;

Glidden Co. v. Zdanok, 370 U.S. 530 (1962). However, the Federal Courts

Improvement Act of 1982 replaced the Court of Claims with the U.S. Court of

Claims (renamed the U.S. Court of Federal Claims in 1992), which Congress

designated as an article I court. See Federal Courts Improvement Act of 1982, Pub.

L. No. 97-164, § 105(a), 96 Stat. 25, 26–28 (1982) (codified at 28 U.S.C. § 171).

See Letter from Robert Ash to Harold Dubroff, June 4, 1975, filed at the U.S.

Tax Court in “Revenue Act of 1924: Memoranda & Correspondence.”

See Part II, note 112 and accompanying text.

182 The United States Tax Court – An Historical Analysis

Constitution would probably be satisfied if the judges of a defunct article

III tribunal were transferred to another court,

but it was generally

expected that the expertise of Board members would be restricted to tax

matters and therefore would not be suitable for courts of general

jurisdiction.

Third, elevation to court status would most immediately benefit Board

members and, in the ordinary course, they would be the ones who would

actively seek the change. However, when the Revenue Bill of 1924 was

being considered, there were no Board members yet appointed. A potent

source of support for court status therefore was lacking. By the fall of

1925, when Congress began consideration of the Revenue Bill of 1926, the

Board did have a membership “constituency” that sought court

recognition.

However, the Board was in its infancy, and though it found

support for its cause in the Coolidge Administration,

this was not

sufficient to overcome the traditional reluctance of Congress to create

offices of indefinite tenure.

Fourth, the time and manner of the congressional treatment of

legislation concerning the Board made unlikely any consideration of making

it a court. The House of Representatives, which considered the Revenue

Bill of 1924 before the Senate, modified the Administration proposal so as

to make the Board independent of Treasury.

But since the House

retained that part of the Treasury proposal that provided for informal

procedures,

court status would have been inappropriate. When the bill

reached the Senate floor, a successful effort was made to require the Board

to conform to judicial procedures.

But by this time the Board’s

independence was apparently considered assured, and the possibility of

providing it with the constitutional protections associated with article III

was not even raised. The issue of the Board’s independence received scant

attention two years later during consideration of the Revenue Bill of 1926.

To some extent, the Board’s prospects for court status at that time were

diminished by the high praise lavished on it for its impartiality in the first

Such a procedure was employed when Congress abolished the Commerce

Court in 1913. See Glidden Co. v. Zdanok, 370 U.S. 530, 560–61 (1962).

See 67 CONG. REC. 524 (1925)(remarks of Mr. Green); 65 CONG. REC. 7695

(1924) (remarks of Senator Norris).

See supra notes 17–18 and accompanying text.

See supra notes 19–21 and accompanying text.

See Part III, notes 186–209 and accompanying text.

See Part II, notes 71–76 and accompanying text.

Id. at notes 77–81 and accompanying text.

Id. at notes 82–97 and accompanying text.

See Part III, notes 38–45 and accompanying text.

The Board Becomes a Court 183

years of its existence.

With the disappearance of the controversy over the

Board’s independence, a potent argument for court status was removed.

Finally, the location of the Board in the executive branch was probably

influenced by the then-existing state of decisional law with regard to the

recognition and classification of judicial bodies. Today, ample authority

exists for the proposition that courts created by or pursuant to article III of

the Constitution, termed either constitutional courts or article III courts, are

not the only types of courts that may carry out judicial functions of the

Federal Government.

Other types of courts, termed either legislative

courts or article I courts, are permitted to perform a variety of specialized

judicial activities. Article I courts, not being subject to the requirements of

article III, may have jurisdiction over matters that are not cases or

controversies, and their judges are not protected by the guarantees of tenure

during good behavior and undiminished compensation. As early as 1828,

the Supreme Court recognized the validity of legislative courts created to

carry out judicial activities in the territories.

By 1924, legislative courts

were also sanctioned for the District of Columbia.

Until 1929, however,

territorial and District of Columbia courts were the only types of legislative

courts expressly recognized by the Supreme Court. In that year, the Court

decided the case of Ex parte Bakelite Corp.,

which, in holding the Court of

Customs Appeals to be a legislative court, broadly construed the

congressional power to create such bodies with respect to

various matters, arising between the government and others, which

from their nature do not require judicial determination and yet are

susceptible of it. The mode of determining matters of this class is

completely within congressional control. Congress may reserve to

itself the power to decide, may delegate that power to executive

officers, or may commit it to judicial tribunals.

Conspicuous among such matters are claims against the United

States. These may arise in many ways and may be for money, lands

or other things. They all admit of legislative or executive

determination, and yet from their nature are susceptible of

determination by courts; but no court can have cognizance of them

except as Congress makes specific provision therefor. Nor do

claimants have any right to sue on them unless Congress consents;

and Congress may attach to its consent such conditions as it deems

See Part II, notes 294–323 and accompanying text.

See, e.g., Palmore v. United States, 411 U.S. 389 (1973).

American Ins. Co. v. Canter, 26 U.S. (1 Pet.) 511 (1828).

See Keller v. Potomac Elec. Co., 261 U.S. 428 (1923).

279 U.S. 438 (1929).

184 The United States Tax Court – An Historical Analysis

proper, even to requiring that the suits be brought in a legislative

court specially created to consider them.

Were the Bakelite decision available in 1924 and 1926 when major

legislation with respect to the Board was considered, Congress might well

have chosen to adopt the article I approach. However, in the absence of

that decision and with the uncertainty of the boundaries of the legislative

court doctrine, denominating and creating the Board as a “court” may have

been viewed as tantamount to providing article III status. This, of course,

would have been incompatible with the refusal of Congress to provide life

tenure to Board members.

With the identification of the broadened

legislative court doctrine in 1929, the issue of court status for the Board

might have been opened for reconsideration were it not for the decision in

that same year of Old Colony Trust Co. v. Commissioner,

in which the

Supreme Court approved the constitutionality of providing appeals from

Board decisions to the courts of appeals and then to the Supreme Court. In

the course of its opinion, the Court also indicated approval of the Board’s

status as “an executive or administrative board.”

Old Colony presented the Court with the opportunity to hold that the

Board, although denominated an agency of the executive branch, was in

effect a legislative court. However, it chose not to do so, perhaps as a result

of the approval in Bakelite, decided two weeks earlier, of the broad

discretion of Congress to provide for the adjudication of disputes “arising

between the government and others.”

As a result, the status of the

Board/Tax Court until 1969 was always subject to some question.

On the

basis of Old Colony, many concluded that the Board’s status was

indistinguishable from any other agency of the executive branch—in effect,

it was an administrative body.

However, others argued that its functions,

Id. at 451–52 (footnotes omitted).

See supra note 59.

279 U.S. 716 (1929).

Id. at 725.

Ex Parte Bakelite Corp., 279 U.S. 438, 45l (1929).

In 1969, the court was established as a legislative court. Tax Reform Act of

1969, Pub. L. No. 91-172, § 951, 83 Stat. 730, amending I.R.C.

§ 7441. Even after

this change, some questions could be raised concerning the court’s status. See

Harold Dubroff, Federal Taxation, 1973–74 A

NN. SURVEY OF AMER. L. 265, 272–85

(1974) [hereinafter cited as Dubroff].

Dobson v. Commissioner, 320 U.S. 489, 495 (1943) (referring to the Tax

Court as an “administrative tribunal”); 1 J.

MOORE, FEDERAL PRACTICE, ¶ 0.4[3], at

66 (2d ed. 1948); Letter from Francis Biddle, Attorney General to Rep. Robert L.

Doughton, July 3, 1942, reprinted in Hearings on H.R. 7378 Before the Senate Comm. on

Finance, 77th Cong., 2d Sess. 2,299 (1942).

The Board Becomes a Court 185

powers, and duties compelled treating it as a legislative court.

Support for

this view could be found in the fact that the Board was in most material

respects similar to the Court of Customs and Patent Appeals and the Court

of Claims, both of which had been held to be legislative courts.

Still,

others argued that in view of the importance of the Board’s duties and the

primacy of the constitutional principle of separation of powers, the Board

should be recognized as an article III court.

B. The Tax Court of the United States – An Independent Agency in the

Executive Branch of the Government

The years 1926 through 1940 did not witness any significant effort to

change either the name or status of the Board of Tax Appeals. The

decisiveness with which the 1926 life tenure proposal was defeated and

Congress’ refusal at that time even to consider full court status for the

Board undoubtedly discouraged even the most optimistic Board supporters

from publicly broaching the subject. Additionally, the economic depression

of the 1930’s, if anything, increased congressional hostility to creating

judicial offices of privilege in a society beset by uncertainty.

Finally, the

Supreme Court had in several opinions at least implicitly approved the

constitutionality of an agency of the executive branch performing judicial

functions

and thereby eliminated a potentially compelling reason for

change.

Turner, supra note 25, at 38–46.

Williams v. United States, 289 U.S. 553 (1933) (Court of Claims); Ex parte

Bakelite Corp., 279 U.S. 438 (1929) (Court of Customs and Patent Appeals).

Following congressional declarations that these tribunals were article III courts, the

Supreme Court ruled that they had constitutional court status. See Glidden Co. v.

Zdanok, 370 U.S. 530 (1962); see also Dubroff, supra note 74, at 275–79.

Daniel L. Ginsberg, Is the Tax Court Constitutional?, 35 MISS. L. J. 382 (1964)

[hereinafter cited as Ginsberg].

Evidence of this view could be found in legislation adopted during this period

reducing the compensation of judges not protected by article III. The Legislative

Appropriation Act of 1932, ch. 314, § 107(a)(5), 47 Stat. 402, reduced judicial

salaries of non-article III judges to a maximum of $10,000. This act was the subject

of Williams v. United States, 289 U.S. 553 (1933), in which it was held that the Court

of Claims was a legislative, not a constitutional, court, and therefore the salaries of

its judges could be reduced.

Phillips v. Commissioner, 283 U.S. 589, 599–600 (1931); Old Colony Trust

Co. v. Commissioner, 279 U.S. 716, 725 (1929); Williamsport Wire Rope Co. v.

United States, 277 U.S. 551, 265–65 (1928); Blair v. Oesterlein Machine Co., 275

U.S. 220, 225–227 (1927); Goldsmith v. Board of Tax Appeals, 270 U.S. 117, 121–

22 (1926).

Although not widespread, the view was held by some that the 1926 legislation

was unconstitutional in permitting direct appellate review in the federal courts of

186 The United States Tax Court – An Historical Analysis

By 1941, however, the depression was ending and the memory of the

1926 defeat of formal court recognition was fading. A time had been

reached when the Board and its supporters in Congress, the Administration,

and the bar could resume efforts to conform the status and perquisites of

the “Board” to its judicial nature. Probably few foresaw in 1941 that these

efforts would ultimately span a period of almost three decades and would

be marked by as many failures and frustrations as successes.

1. The Revenue Act of 1942 – the Board of Tax Appeals is Renamed

the Tax Court of the United States

In 1941, Board members and their supporters apparently believed that

the Board’s best chance for elevation to court status lay in its similarity to

the Customs Court, formerly named the Board of General Appraisers. Like

the Board of Tax Appeals, the Customs Court adjudicated disputes with

respect to revenue legislation, its procedures were judicial in nature, it

functioned without juries, and its jurisdiction was highly specialized.

Also

like the Board, the Customs Court had started out as part of the executive

branch

and with a name that belied its true nature and duties. Yet

Congress had seen fit in due course to accord the Customs Court a court

name,

if not a full court status,

and also to accord its judges life tenure,

findings by the Board, since the latter was an agency of the executive branch. 67

ONG. REC. 3756 (1925) (remarks of Senator Cummins); see also James Craig

Peacock, An Anomalous and Topsy-Turvy Appellate System, 19 A.B.A. J. 11 (1933). This

view was rejected by the Supreme Court in Old Colony Trust Co. v. Commissioner, 279

U.S. 716 (1929).

See supra notes 42–49 and accompanying text.

Although not specified in the statute, the status of the General Appraisers as

Treasury officials was recognized in an early opinion of the Attorney General. 21

P. ATT’Y GEN. 85 (1894).

Act of May 28, 1926, ch. 411, § 1, 44 Stat. 669.

Even under the 1926 legislation, the right to remove judges of the Customs

Court was reposed in the President. If these judges were article III judges, removal

should only be by impeachment in the House and conviction in the Senate. The

judicial status of the Customs Court has never been passed on by the Supreme

Court, and although it seems clear that the body is today a full article III court,

Congress having specifically provided such in 1956 (Act of July 14, 1956, ch. 589, §

1, 70 Stat. 532), its status in 1941 was far from clear. In 1929, in Ex parte Bakelite

Corp., 279 U.S. 438, the Supreme Court had said in dicta of the Customs Court:

Formerly [the Customs Court] . . . was the Board of General Appraisers.

Congress assumed to make the board a court by changing its name. There

was no change in powers, duties or personnel. The board was an executive

agency charged with the duty of reviewing acts of appraisers and collectors

in appraising and classifying imports and in liquidating and collecting

customs duties. But its functions, although mostly quasijudicial, were all

The Board Becomes a Court 187

judicial-type retirement provisions,

and powers to preserve order, to

compel the attendance of witnesses and the production of evidence, and to

punish contempt.

Relying on the analogy to the Customs Court, Board of Tax Appeals

Chairman C. Rogers Arundell, in April 1941, sought Treasury support for a

legislative proposal that Board members be provided with life tenure and

retirement provisions similar to those applicable to Customs Court judges.

Apparently, informal support for the proposal was obtained from

Administration officials, such as Assistant Secretary of the Treasury John L.

Sullivan and Commissioner of Internal Revenue Guy Helvering, as well as

from influential members of the tax bar, such as Professor Roswell Magill

of Columbia University and George Morris of the American Bar

Association.

However, there is no evidence that the Board was ever able

to gain approval of the proposal from either Administration officials of

cabinet rank or influential members of Congress, and this undoubtedly

explains why no legislative action was initiated on the matter.

In spite of this early defeat, the Board continued to seek at least partial

recognition as a court, and in 1942, having set aside its proposal for judicial

tenure and retirement, it concentrated its efforts on securing legislation that

would provide the Board with a court name. By this time, the Board had a

new Chairman, John Edgar Murdock, who was to play the predominant

role in securing approval of the 1942 change. Judge Murdock served on

the Board/Tax Court from 1926 to 1961, the second longest tenure of any

judge of the Tax Court.

Noted for his terse opinions,

Judge Murdock

was aggressive and blunt. With the beginning of consideration of the

legislation that was to become the Revenue Act of 1942,

Chairman

susceptible of performance by executive officers and had been performed

by such officers in earlier times.

Id. at 457–58 (emphasis supplied) (footnotes omitted).

Act of May 27, 1908, ch. 205, § 3, 35 Stat. 406.

Act of Sept. 21, 1922, ch. 356, § 518, 42 Stat. 973.

Act of May 27, 1908, ch. 205, § 3, 35 Stat. 406.

Letter from C. Rogers Arundell to Assistant Secretary of the Treasury John L.

Sullivan, April 1, 1941, filed at National Archives Building, Records of the Treasury

Dep’t, Record Group 56, Tax—Board of Tax Appeals 1933–42.

See Letter from Professor Roswell Magill to C. Rogers Arundell, April 24,

1941, filed at the U.S. Tax Court in “Revenue Act of 1942: Memoranda &

Correspondence.”

Judge Howard A. Dawson, Jr. was appointed to the Tax Court bench in 1962

and is still serving at the time this text was revised in 2014.

This is illustrated by a story, which may be more fable than fact, involving a

petitioner who concluded his argument before Judge Murdock with the statement,

“as God is my judge I do not owe this tax.” The judge is reputed to have replied,

“He isn’t, I am, and you do.”

Ch. 619, 56 Stat. 798.

188 The United States Tax Court – An Historical Analysis

Murdock actively sought support from both congressional and

Administration sources for a proposal to change the name of the Board of

Tax Appeals to the United States Tax Court. Among the officials he

solicited were Randolph Paul, then Assistant to the Secretary of the

Treasury and a principal draftsman of the 1942 Act, Colin Stam, the

powerful chief of staff of the Joint Committee on Internal Revenue

Taxation,

and Dean Acheson, a personal friend and then Assistant

Secretary of State.

Most importantly, Chairman Murdock found a strong

supporter on Capitol Hill: Wesley Disney, a member of the Ways and

Means Committee, was the brother of Richard L. Disney who served on the

Board and Tax Court from 1936 to 1951. Congressman Disney actively

supported the proposal in the House. Due to the substantial opposition

that developed to the plan, this support proved to be essential.

Chairman Murdock was at pains to point out that the proposal only

related to changing the name of the Board to the United States Tax Court

and changing the statutory designation of Board “members” to “judges.”

No amendment was sought with respect to the status of the Board as an

agency in the executive branch, or with respect to the term of office,

compensation, or retirement provisions of Board members.

Quite clearly,

the reception of the 1941 proposal of Chairman Arundell to accord Board

members life tenure and judicial retirement indicated that little sympathy

then existed for such changes.

Chairman Murdock advanced several reasons for the name change.

Among these were arguments that had been raised in 1926 when the Board

first attempted to secure full court status. The change (1) would reduce

confusion among the public with respect to the Board’s judicial procedures

and would reduce the number of errors spawned by the belief that, because

it was an agency of the executive branch, its practice was informal; (2)

would enable the Board to be given the power to enforce its own processes

and thereby reduce delays in those cases in which enforcement had to be

Letter from Chairman Murdock to Randolph Paul, Feb. 14, 1942, on file with

the office of Tax Legislative Counsel, U.S. Treas. Dep’t [hereinafter cited as Paul,

Feb. 14, 1942]; Letter from Chairman Murdock to Colin Stam, Feb. 28, 1942, filed

at the U.S. Tax Court in “Revenue Act of 1942: Memoranda &: Correspondence”

[hereinafter cited as Stam].

Letter from Chairman Murdock to Dean Acheson, May 26, 1942, filed at the

U.S. Tax Court in “Revenue Act of 1942: Memoranda & Correspondence.”

See Letter from Chairman Murdock to Representative Disney, Oct. 22, 1942,

filed at the U.S. Tax Court in “Revenue Act of 1942: Memoranda &

Correspondence” [hereinafter cited as Disney, Oct. 22, 1942].

See Paul, Feb. 14, 1942, supra note 94, at 5.

See Stam, supra note 94 and accompanying memorandum.

The Board Becomes a Court 189

sought in United States district court;

and (3) would validate the generally

recognized view that the Board was a court in everything but name.

100

Additionally, several new reasons were developed in support of the

name change. First, Chairman Murdock contended that the difficulties the

Board was experiencing in obtaining the use of hearing rooms in many of

the 50 cities in which it held trials could be reduced by simply naming the

Board a court. The nature of Board proceedings was judicial and

courtrooms were the most appropriate sites for trials. But many providers

of court space throughout the country were, according to Chairman

Murdock, reluctant to permit administrative hearings to be carried on in

their facilities since such hearings were generally informal ones “to which

large and undesirable crowds [were] attracted” and at which “smoking” was

permitted.

101

Accordingly, many courtrooms were unavailable to

administrative bodies; since the Board was such a body in name, it was

frequently covered by the ban on the ground that if an exception was made

in its case the provider of the courtroom space would be subjected to

criticism for favoritism. Further support was found for the change of name

in the fact that proposals had been made to give the Board concurrent

jurisdiction, with the district courts and the Court of Claims, over refund

litigation,

102

and to accord the Board power to designate trial

commissioners to conduct hearings, receive evidence, and make findings of

fact with respect to certain unusual cases.

103

Chairman Murdock believed

that these changes, made in the name of furthering the goal of providing

taxpayers with their traditional “day in court,” would be more appropriate if

the Board were called a court.

104

Finally, Chairman Murdock frankly

admitted that a change of name, which would designate “members” of the

Board as “judges” of the Tax Court, would ease a constant source of

embarrassment.

This argument was not persuasive and was later dropped. If the purpose of

the legislation was to simply change the name of the Board, presumably no change

in the Board’s inherent powers would be effected and it would not thereby be

invested with the general powers of courts to enforce orders. Thus, legislation

would be necessary to permit the Board to enforce its orders, and such legislation

could as easily give the “Board of Tax Appeals” the power to enforce its orders as

it could the “United States Tax Court.”

100

FINAL REP. OF THE ATT’Y GEN’S COMM. ON ADMIN. PROC. IN GOV’T

AGENCIES, S. Doc. No. 77-8, at 205 (1941); Joseph Kahn, The Status of the United

States Board of Tax Appeals as a Judicial Body, 7 N

AT’L INC. TAX MAG. 135, 136

(1929); Dana Latham, Jurisdiction of the United States Board of Tax Appeals Under the

Revenue Act of 1926, 15 C

AL. L. REV. 199, 201, 203 (1927); John D. Martin, The

Problem of Reducing the Volume of Published Opinions, 28 A.B.A. J. 528, 530 (1942).

101

See Stam, supra note 94, accompanying memorandum, at 5.

102

See Paul, Feb. 14, 1942, supra note 94.

103

Id.

104

Stam, supra note 94, accompanying memorandum at 7.

190 The United States Tax Court – An Historical Analysis

It is frequently necessary, during the course of a trial and at other

times, for persons to address Members of the Board. Practitioners

and others have been at a loss to find any convenient title which is at

the same time proper. They are sometimes embarrassed in this

connection and the situation is always awkward. The fact of the

matter is that they do not choose to use any such proper title as Mr.

or Member. Occasionally, Commissioner is heard, but, generally, for

their own convenience, persons address the Members as Judges.

This puts the Members in a false and uncomfortable position which

seems entirely undesirable for a tribunal of the dignity and

importance of the Board. The change in name would immediately

relieve this situation.

105

Innocuous as the proposal to change the Board’s name might seem to

be, it drew substantial opposition. One uncharitable observer who believed

the proposal emanated from “nothing more than a little vanity” suggested

constitutional infirmities in naming an agency of the executive branch a

“court.”

106

The most formidable opposition to the change came from

Francis Biddle, then Attorney General. Initially under the impression that

the proposed legislation would make the Board into a full-fledged federal

court, the Attorney General wrote Secretary of the Treasury Henry

Morgenthau expressing his disapproval of the measure.

107

In the view of

the Attorney General, the Board was operating well as an executive agency;

changing it to a court would simply create confusion and cause the Board to

lose the desirable flexibility with which it had operated in the past.

108

Additionally, the need for such a change should be demonstrated publicly,

and no hearings were ever held on the proposal with cogent arguments

advanced for creating the Board as a court. Finally, if the Board were

105

Id. at 8–9.

106

Letter from Robert Klepinger to Chairman George, Aug. 20, 1942,

reprinted in Hearings on H.R. 7378 Before the Senate Comm. on Finance, 77th Cong., 2d

Sess. 2300–01 (1942) [hereinafter cited as 1942 Senate Hearings].

107

Letter, June 5, 1942, reprinted in 1942 Senate Hearings, supra note 106, at

2298. The view that the Board sought court status in 1942 was, although

erroneous, widespread. See Hearings on H.R. 3214 Before a Subcomm. of the Senate

Comm. on the Judiciary, 80th Cong., 2d Sess. 210 (1948) (testimony of Maurice

Austin) [hereinafter cited as 1948 Senate Hearings]. Judge Turner categorically

denied this rumor, which seems to have been based on Attorney General Biddle’s

misunderstanding. Id. at 280–81.

108

The Attorney General did not specify in which regards the Board benefitted

from the flexibility associated with its non-court status. In fact, the Board had

since its inception functioned pursuant to judicial procedures. See Part II, notes

77–97, 168–293, and accompanying text.

The Board Becomes a Court 191

changed to a court, the Attorney General would be obliged to assert

responsibility for representing the Government in its proceedings.

109

Since

1926, the Treasury Department had represented the Commissioner before

the Board and this was not objectionable to the Attorney General only so

long as the Board remained an agency of the executive branch, not a

court.

110

When the Attorney General discovered that the Board had proposed

merely to change its name and not its status, he was not appeased—if

anything, his opposition seemed stronger and he expressed it to the

chairmen of both the House Ways and Means Committee and the Senate

Finance Committee.

111

In his view, a “court” operating in the executive

branch would be an incongruity, and a proposal to create such a body was

so illogical that it could only be regarded as the first step in a concerted

effort to change the Board into a full-fledged court. He also contested the

assertion that the Board was a court in everything but name. In this regard,

he pointed out that the Supreme Court had described the Board as an

“administrative body,”

112

that its jurisdiction was limited by statute,

113

that it

lacked the authority to enforce its decisions,

114

and that it did not possess

the inherent powers of a court. Finally, the Attorney General argued that

no convincing reasons had been furnished for changing the Board’s name,

and that the probable result of such a change would be to breed confusion

among the public and additional litigation over the bona fides of a “court”

located in the executive branch of Government.

Chairman Murdock was aware of the Attorney General’s views

concerning the change of the Board’s name.

115

In an effort to dilute this

109

Executive Order No. 6166, promulgated in 1933, generally provided that

the Justice Department would represent the Government in the federal courts.

110

Between 1924 and 1926, the Solicitor of Internal Revenue, an official of the

Justice Department, represented the Government before the Board of Tax

Appeals. The Revenue Act of 1926 abolished the Solicitor’s office and transferred

its duties to a new office at the Treasury Department, General Counsel for the

Bureau of Internal Revenue. Ch. 27, § 1201(a), 44 Stat. 126.

111

Letter from Attorney General Biddle to Chairman Doughton, July 3, 1942,

reprinted in 1942 Senate Hearings, supra note 106, at 2299 [hereinafter cited as

Biddle]; Letter from Attorney General Biddle to Chairman George, July 24, 1942,

reprinted in 1942 Senate Hearings, supra note 106, at 2297–98 [hereinafter cited as

George].

112

Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 725 (1929).

113

This was not a persuasive reason for contending that the Board was not a

court inasmuch as every inferior United States court has a statutorily prescribed

jurisdiction, and even the Supreme Court has some of its jurisdiction determined by

statute.

114

United States ex rel. Girard Co. v. Helvering, 301 U.S. 540, 542 (1937).

115

Letter from Chairman Murdock to Randolph Paul, May 30, 1942, filed at

the U.S. Tax Court in “Revenue Act of 1942: Memoranda & Correspondence.”

192 The United States Tax Court – An Historical Analysis

opposition while the bill was pending before the Ways and Means

Committee, he urged Treasury to make good on the informal support for

the proposal that it had already manifested. Characteristically, the manner in

which Chairman Murdock conveyed this request to Randolph Paul was

direct.

You have told me that you personally approve of . . . [the proposal]

and that the Secretary [of the Treasury] also approves of it. The

Board is grateful for this support from the Treasury and we are

looking to you to present the matter to the Ways and Means

Committee before it closes its deliberations on the present bill.

116

Randolph Paul had not misrepresented his “personal” views to

Chairman Murdock—Paul was an admirer of the Board of Tax Appeals and

probably believed that it should have been accorded full court status.

117

Nevertheless, it would have been unseemly for two important executive

departments to differ over a rather minor issue and Treasury yielded to the

deep feelings of the Attorney General; accordingly, when the name change

was considered by the Ways and Means Committee in executive session,

Treasury joined Justice in opposing approval of the provision.

118

Despite these formidable adversaries, the Ways and Means Committee

adopted the change in its version of the bill (undoubtedly a result of the

support of Congressman Disney), and this version was subsequently

adopted by the full House.

119

Following the Ways and Means deliberations,

Randolph Paul wrote Chairman Murdock congratulating the Board on its

victory and indicating regret that Treasury was obliged to officially oppose

the proposal before the Committee.

120

Chairman Murdock, who had

become a student of the legislative process, responded with the suggestion

116

Id.

117

In 1954, Paul was to write:

In point of fact the Board . . . exercises functions similar to those of a

Federal district trial court without a jury. It is difficult at this late date to

imagine how our tax system could have survived many of its tribulations

without the aid of this safety valve and judicial arrangement for the

disposition of tax controversies.

ANDOLPH E. PAUL, TAXATION IN THE UNITED STATES 136 (1954).

118

Letter from Henry Morgenthau to Francis Biddle, July 2, 1942, National

Archives Building, Records of the Treas. Dep’t, Record Group 56, Tax—Board of

Tax Appeals 1933–42; Letter from Randolph Paul to Chairman Murdock, July 3,

1942, filed at the U.S. Tax Court in “Revenue Act of 1942: Memoranda &

Correspondence” [hereinafter cited as Paul, July 3, 1942].

119

H.R. REP. NO. 77-2333, at 60, 172–73 (1942); H.R. REP. No. 77-2586, at 21,

72 (1942).

120

Paul, July 3, 1942, supra note 118.

The Board Becomes a Court 193

that “when the whole thing is over I hope to have some interesting

discussion with you on the general subject of legislation and how it comes

about, or doesn’t come about.”

121

Under the House bill, the name of the Board was to be changed to the

“United States Tax Court,” its members were to be designated “judges,”

and the position formerly denominated “chairman” would be changed to

“presiding judge.”

122

The change would not affect the status, jurisdiction,

powers or duties of the Board, or the tenure of its members; the

Government would continue to be represented in Tax Court proceedings

by the Chief Counsel for the Bureau of Internal Revenue, an official of the

Treasury Department.

123

In addition to the name change, the House bill incorporated a related

change that was not recommended by the Board. Sponsored by

Representative John Dingell, a member of the Ways and Means Committee,

a provision was inserted in the bill which provided that “[n]o qualified

person shall be denied admission to practice before . . . [the Tax Court]

because of his failure to be a member of any profession or calling.”

124

Pursuant to a Board rule dating back to 1924, only lawyers and certified

public accountants were eligible to represent taxpayers before the Board.

125

Congressman Dingell, however, was under the impression that professional

status had not been requisite for practice before the Board, and he desired

assurance that the change in name of the Board would not provide the

Board with an occasion to restrict practice to lawyers or any other

professional group.

126

Congressman Dingell’s erroneous understanding of

prior Board practice was soon corrected by Chairman Murdock, but the

Congressman continued to support the provision in the interest of not

jeopardizing the means of livelihood of qualified tax practitioners solely by

reason of their lack of professional status.

127

The form of the bill that reached the Senate was objectionable to both

Chairman Murdock and Attorney General Biddle. Chairman Murdock took

strong exception to the House provision with respect to lay practice before

the Board. He conveyed his views to Senator Walter George, Chairman of

the Finance Committee, and urged that the Senate delete the provision

121

Letter from Chairman Murdock to Randolph Paul, July 7, 1942, filed at the

U.S. Tax Court in “Revenue Act of 1942: Memoranda & Correspondence.”

122

H.R. REP. NO. 77-2333, at 172 (1942).

123

Id.

124

H.R. 7378, 77th Cong., 2d Sess. § 504(b) (1942) as reported to and passed

by the House.

125

B.T.A. RULE 2 (July, 1942 ed.).

126

88 CONG. REC. 6335–36 (1942).

127

See Letter from Chairman Murdock to Senator George, Aug. 10, 1942,

reprinted in 1942 Senate Hearings, supra note 106, at 2304.

194 The United States Tax Court – An Historical Analysis

because it would do a disservice to both the public and the Board.

128

Formerly, the Board had relied on professional licensing as the criteria for

admission to its bar. By this means it was relieved of the responsibility to

investigate independently the intellectual and ethical qualifications of

applicants. The new provision would require the Board to make such

investigations, and Chairman Murdock feared that such a duty would

impose an unduly heavy burden. Additionally, Chairman Murdock pointed

out that the Board’s rules on eligibility to practice should not be primarily

directed to protecting the means of livelihood of would-be tax practitioners.

Rather, the object of the rules should be to protect the public from

inadequate representation before the Board; membership in the legal or

accounting profession had traditionally been regarded as the best means of

assuring adequate representation. He did not believe that the Board’s own

efforts to determine qualifications to practice could be as efficient. The

result would be poorer representation for taxpayers.

Attorney General Biddle was equally displeased with the House bill.

129

For the reasons expressed above,

130

he continued to maintain that the name

of the Board should not be changed. He found additional support for this

position in the House provision opening practice to all qualified individuals.

Lay practice before an administrative body was entirely appropriate in his

view, but to permit such practice before a body denominated a court was an

anomaly that could only add to the confusion engendered by the proposed

name change.

Chairman Murdock actively sought the support of the Finance

Committee for both the name change and the elimination of the

open-practice provision.

131

He received a sympathetic hearing from

Chairman George,

132

but ultimately the Finance Committee yielded to the

Biddle position and eliminated the House provision changing the Board’s

name.

133

This modification was accepted, and the Senate version of the bill

that went to the House-Senate conference made no change in preexisting

law with respect to either the name of the Board or its rules on eligibility to

practice.

134

However, in the conference Chairman Murdock’s efforts were

partially rewarded when Senator George successfully urged the Senate

128

Id.; see also Letter from Chairman Murdock to Representative Disney, Aug.

10, 1942, filed at the U.S. Tax Court in “Revenue Act of 1942: Memoranda &

Correspondence” [hereinafter cited as Disney, Aug. 10, 1942].

129

George, supra note 111.

130

See supra notes 111–114 and accompanying text.

131

Disney, Aug. 10, 1942, supra note 128.

132

Id.

133

H.R. 7378, 77th Cong., 2d Sess. (1942), as reported by the Senate Finance

Comm.

134

H. R. REP. NO. 77-2586, at 72 (1942).

The Board Becomes a Court 195

conferees to accept, virtually unchanged, the House provisions dealing with

the Board.

135

In this version the bill passed both the House and Senate.

136

In only one minor respect did the final version of the 1942 Act fail to

conform to the original House bill. Whereas the House had adopted a

change of name to “United States Tax Court,” the conference committee

bill, and the version ultimately enacted, adopted the name “Tax Court of

the United States.”

137

Apparently, the change was incorporated at the

request of Commerce Clearing House, a publisher of law books.

138

Commerce Clearing House included in its tax services a series of books

entitled “United States Tax Cases,” and it was concerned that if the Board

was named “United States Tax Court,” confusion would result due to the

identity of the initials of the court and the books.

Although the 1942 Act retained the so-called Dingell amendment,

139

balance, the new legislation represented a significant victory for those who

viewed the Board as “a court in everything but name”—a victory made all

the more sweet in the overcoming of the Justice and Treasury Department

opposition. One can easily sense Chairman Murdock’s gratification in the

remarks he addressed to his friend and principal supporter on the Hill,

Representative Disney:

I am . . . frank and glad to acknowledge that I will take great personal

satisfaction from having the right to be called Judge, and to be

relieved of the embarrassment which I have heretofore felt when so

frequently people address me by that unauthorized title.

140

2. Attempts to Incorporate the Tax Court into the Federal Judicial

System

In opposing the 1942 legislation changing the name of the Board of Tax

Appeals to the Tax Court of the United States, Attorney General Biddle

observed that the measure was simply a first step in a calculated design to

make the Board a full-fledged federal court.

141

Although the name change

could be justified on independent grounds,

142

most Board members would

135

Letter from Chairman George to Chairman Murdock, Oct. 26, 1942, filed at

the U.S. Tax Court in “Revenue Act of 1942: Memoranda & Correspondence.”

136

Revenue Act of 1942, ch. 619, § 504, 56 Stat. 957.

137

Id.; H. R. REP. NO. 77-2586, at 21 (1942).

138

See Letter from Presiding Judge Turner to Judge Maris, Nov. 9, 1946, filed

at the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

139

Revenue Act of 1942, ch. 619, § 504(b), 56 Stat. 957 (now codified at I.R.C.

§ 7452).

140

Disney, Oct. 22, 1942, supra note 96.

141

Biddle, supra note 111.

142

See supra notes 98–105 and accompanying text.

196 The United States Tax Court – An Historical Analysis

probably have agreed with the Attorney General as to their ultimate

objective. The point at which the opposing forces disagreed was the

desirability of such a change. Oddly, however, the next major effort to

elevate the court’s status was initiated without the court’s instigation or

even knowledge.

In 1943, the House of Representatives undertook a project to revise and

codify into positive law title 28 of the United States Code, dealing with the

federal judicial system.

143

For the most part, the codification effort dealt

with noncontroversial matters and was directed toward eliminating

inconsistencies in prior law and providing an authoritative code that could

be relied on to be complete and current.

144

Nevertheless, the task was a

formidable one, and the committees of the House which considered the

matter

145

were assisted in the undertaking by an advisory committee of

distinguished members of the bench and bar.

146

In early 1945, during the deliberations of the advisory committee, Judge

Justin Miller of the Court of Appeals for the District of Columbia, formerly

a member of the Board of Tax Appeals,

147

raised the subject of the Tax

143

Hearings on H.R. 1600 and H.R. 2055 Before Subcomm. No. 1 of the House Comm.

on the Judiciary, 80th Cong., 1st Sess., ser. 2, at 6 (1947) (testimony of Mr. Keogh)

[hereinafter cited as 1947 House Hearings].

144

Id.

145

Originally, the codification was assigned to the Committee on Revision of

the Laws. In 1946, that Committee was abolished, and its work was taken over by

the Judiciary Committee. 1948 Senate Hearings, supra note 107, at 531 (testimony

of Charles Zinn).

146

Charles Zinn was general counsel to the committees. John F. X. Finn of

the New York Law Revision Commission was its special counsel. An advisory

committee was also assembled to assist in the work, and it consisted of Judge Floyd

Thompson, former chief justice of the Illinois Supreme Court; Justin Miller, former

member of the Board of Tax Appeals and the Court of Appeals for the District of

Columbia; Judge John B. Sanborn of the Court of Appeals for the Eighth Circuit;

Walter P. Armstrong, former president of the American Bar Association; Professor

John Dickinson of the University of Pennsylvania; Judge John Parker of the Court

of Appeals for the Fourth Circuit; Judge Alexander Holtzoff of the U.S. District

Court for the District of Columbia; and Professor James Moore of Yale Law

School. In addition to the advisory committee, the United States Judicial

Conference and the Supreme Court appointed panels to assist in the revision effort.

These panels consisted of Chief Justice Harlan F. Stone and Justices Felix

Frankfurter and William O. Douglas of the Supreme Court; Judge Albert Maris of

the Court of Appeals for the Third Circuit; Judge Clarence Galston, district court

judge of the eastern district of New York; and Judge William Smith, district court

judge of the district of New Jersey.

H.R. REP. No. 80-308, at 2–4 (1947); H.R. REP.

No. 79-2646, at 2–4 (1946).

147

Judge Miller resigned from the Board in 1937. In 1945, Judge Miller

resigned from the Court of Appeals to become President of the Association of

The Board Becomes a Court 197

Court and suggested that the provisions dealing with the court should be

incorporated into the revised title 28.

148

Judge Miller argued that because

the court was a judicial tribunal, both its codification in the Internal

Revenue Code

149

and its status as an agency of the executive branch of

Government were inappropriate.

150

Moreover, judges of the court should be provided with the same life

tenure and other emoluments as were applicable to judges of the Court of

Claims, the Court of Customs and Patent Appeals, and the Customs

Court.

151

Apparently, most members of the advisory committee favored

the idea.

152

However, Judge Alexander Holtzoff, a member of the advisory

committee and then an Assistant Attorney General,

153

and representatives

of the Internal Revenue Bureau questioned what effect the change would

have on the rules regarding representation of the Government before the

court. This question resulted in the initial rejection of the proposal.

154

discussed below, the question of the appropriate agency to represent the

Government has never been resolved to the satisfaction of all. Ultimately,

however, the House Committee on Revision of the Laws, which initially

considered the legislation, concluded that a jurisdictional dispute between

Justice and Treasury should not prevent recognition of the Tax Court’s true

nature. In the middle of 1946, when it reported the bill to revise title 28,

the Committee recommended that the Tax Court be removed from title 26

and placed in title 28.

155

This bill died without House action when the 79th

Congress adjourned.

156

The Committee on Revision of the Laws was

abolished by the Legislative Reorganization Act of 1946,

157

but its work on

code revision was continued in the 80th Congress by the Committee on the

Judiciary, and in 1947 substantially similar bills were introduced and

Broadcasters. However, he remained as a member of the advisory committee to

revise title 28.

148

Memorandum prepared by Judge Arundell, February 1945, filed at the U.S.

Tax Court in “79th–91st Cong.: Memoranda & Correspondence” [hereinafter cited

as Arundell].

149

INT. REV. CODE of 1939, § 1100 et seq.

150

Arundell, supra note 148.

151

Id.

152

Id.

153

Judge Holtzoff was appointed to the U.S. District Court for the District of

Columbia in 1945.

154

Arundell, supra note 148; Letter from Judge Miller to Presiding Judge

Murdock, June 25, 1945, filed at the U.S. Tax Court in “79th–91st Cong.:

Memoranda & Correspondence.”

155

H.R. 7124, 79th Cong., 2d Sess. §§ 271–277 (1946); H.R. REP. NO. 79-2646,

79th Cong., at A38–40 (1946).

156

1947 House Hearings, supra note 143, at 9–10.

157

Ch. 753, 60 Stat. 812.

198 The United States Tax Court – An Historical Analysis

reported to the House that incorporated the same general provisions with

respect to the Tax Court.

158

Judge Miller had originally proposed that the Tax Court should be

granted the same status and perquisites as the other federal courts of

specialized jurisdiction.

159

As the title 28 revision bills were reported to the

House, however, the only major change recommended was that the

provisions governing the court be moved from the Internal Revenue Code

to title 28 and that the existing statutory language with respect to the court’s

status as an agency of the executive branch be eliminated.

160

That this

action was based more on political reality rather than theoretical purity is

evidenced by suggestions in the committee reports that Congress might

wish to consider providing tenure during good behavior to Tax Court

judges as was provided to the judges of most other federal courts.

161

This

suggestion, however, received scant attention, and at no time was any

significant effort made to do more than incorporate pre-existing provisions

governing the court into title 28. The effect of the legislation merely would

have been to settle the court’s status as an article I court.

162

In view of the political impossibility of attaining article III status, the

judges of the court approved of the change. Judge Murdock was Presiding

Judge when the proposal was first advanced in 1945, and he initiated action

to obtain support from the American Bar Association.

163

In mid-1945,

Judge Bolon B. Turner succeeded Judge Murdock as Presiding Judge.

164

Judge Turner, an affable Arkansan, served on the Board and Tax Court

from 1934 to 1971. Having participated in the drafting of the 1924 and

1934 Revenue Acts, Judge Turner was no stranger to the legislative process,

and he devoted considerable energy to shepherding the title 28 proposal

through Congress. In this regard, he participated in the proceedings of the

advisory committee in drafting the recodification,

165

prepared memoranda

158

H.R. 2055, 80th Cong., 1st Sess. §§ 271–277 (1947); H.R. 3214, 80th Cong.,

1st Sess. §§ 271–277 (1947); H.R.

REP. NO. 80-308, at A39–41 (1947).

159

See Arundell, supra note 148.

160

H.R. REP. NO. 80-308, at A 39–41 (1947); H.R. REP. NO. 79-2646, at A38–

40 (1946).

161

H.R. REP. NO. 80-308, at A 40 (1947); H.R. REP. NO. 79-2646, at A38–39

(1946).

162

There were those who believed that even without such legislation, the court

was for all practical purposes an article I court. Turner, supra note 25.

163

Letters from Presiding Judge Murdock to Weston Vernon Jr., Esq.

(formerly Chairman of the American Bar Ass’n Section on Taxation, 1942–43) Feb.

14, 1945, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

164

Judge Turner became Presiding Judge on July 1, 1945. See 5 T.C. ii (1945).

165

See Letter from Presiding Judge Turner to Eugene Keogh, Nov. 30, 1945,

filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

The Board Becomes a Court 199

for congressional use detailing the history of the court and the reasons

supporting the change,

166

and gave testimony before congressional

committees advancing the court’s position.

167

A fervent supporter of court

status, and an expert on both the federal judicial system and the history of

the Tax Court, Judge Turner had no difficulty in articulating reasons for the

proposal.

168

Many of the arguments he relied on had already been used in

1926 and 1942.

169

Chief among these was the contention that the judicial

nature of the court was solidly established after more than two decades of

operation, and many authoritative statements could be assembled

evidencing virtual universal recognition of this fact.

170

In fact, Congress

166

See Memoranda prepared by Judge Turner dated May 29, 1947, June 11,

1947, June 12, 1947, June 30, 1947, May 19, 1948, filed at the U.S. Tax Court in

“79th–91st Cong.: Memoranda & Correspondence.”

167

1948 Senate Hearings, supra note 107, at 41–68, 280–301; Hearings on H.R.

3113, Before Subcomm. No. 2 of the House Comm. on the Judiciary, 81st Cong., 1st Sess.

34–47 (1949) [hereinafter cited as 1949 House Hearings].

168

See Turner, supra note 25.

169

See supra notes 98–105 and accompanying text; Part III, notes 25–37 and

accompanying text.

170

A memorandum prepared in June, 1946, by Judge Leech and filed at the

U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence” provides

some of this authority.

The judicial functions of this Court, it is thought, are fully recognized by

both Houses of Congress. The Committee on Ways and Means in its

Report of December 7, 1927, 70th Cong., 1st sess., states:

. . . The committee is of the opinion that the Board’s function is

purely judicial, and in order to clarify the situation, has provided that

no decision of the Board (whether rendered before or after the bill

becomes law) should hereafter be modified or reversed because the

Board or any of its divisions has failed to consider evidence not

adduced before the Board or division. At the same time the

committee has provided that the rules of practice and procedure of

the Board shall, just as the Federal equity rules, have the force and

effect of law.

The Senate Report No. 960, 70th Cong., 1st sess., states:

In view of certain expressions in a recent court opinion, the

House bill in section 601 provides that no decision of the Board

shall be modified or reversed because the Board has failed to

consider evidence not adduced before it. While an appellate court

has the right and duty, if an error of law has been made, to remand a

case to the Board for subsequent proceedings in accordance with

law, the existing provisions of law clearly contemplate judicial, not

administrative, procedure on the part of the Board and the

committee can see no need of further legislation on this subject. It

is not the duty of the Board to make investigations of tax cases but

200 The United States Tax Court – An Historical Analysis

during this period gave real recognition to the court’s judicial character by

to decide the case on the basis of evidence properly placed before it

by the Commissioner and the taxpayer.

In fact, only two years after its creation, the Report of the Ways and

Means Committee (1926 Revenue Bill) stated:

Since its organization in July, 1924, there have been 8,417 appeals

filed with the Board up to October 24 of this year, [1926] involving

an aggregate amount of $134,000,000. . . .

. . . No other court in the world tries cases which in the aggregate

involve such great amounts. . . .

Mr. Justice Jackson in Dobson v. Commissioner, 320 U.S. 489, thus describes

the Court:

The court is independent, and its neutrality is not clouded by

prosecuting duties. Its procedures assure fair hearings. Its

deliberations are evidenced by careful opinions. All guides to

judgment available to judges are habitually consulted and respected.

It has established a tradition of freedom from bias and pressures. It

deals with a subject that is highly specialized and so complex as to

be the despair of judges. . . .

Professor Erwin N. Griswold of the Harvard Law School, in the Harvard

Law Review of October 1944, says of this Court:

At the present time, most of the tax cases which get into court

start in the Tax Court of the United States. Congress has, of course,

declared that the Tax Court is “an independent agency in the

executive branch of the government.” This is a polite fiction that

may once have served a purpose. The Tax Court is in organization,

tradition, and function a judicial body, and should be treated as such

in any survey of judicial review in tax cases.

As was said by Mr. Justice Frankfurter in Bingham et al. v. Commissioner, 325

U.S. 365:

. . . Congress has invested the Tax Court with primary—and largely

with ultimate—authority for redetermining deficiencies. It is a

tribunal to which mastery in tax matters must be attributed. The

authority which Congress has thus given the Tax Court involves the

determination of what really happened in a situation and what it

means in the taxing world. In order to redetermine deficiencies the

Tax Court must apply technical legal principles. . . .

The late Chief Justice Stone, in Blair v. Oesterlein Co., 274 U.S. 220, said:

. . . An examination of the sections creating the Board and investing

it with power can leave no doubt that they were intended to confer

upon it appellate powers which are judicial in character. . . .

In American Woolen Co. v. White, 56 Fed. (2d) 716, it was said:

. . . This board, with the right of a judicial review of its decision

granted by the statutes, afforded the plaintiff a forum with full

authority and jurisdiction in which it could have, a judicial

determination as to every question involved in its tax liability for the

year in question. . . .

The Board Becomes a Court 201

including it within the judicial salary legislation of 1946,

171

and providing

compensation for its judges at the same rate applicable to judges of United

States district courts.

172

When the salary bill was introduced in the House, it

did not include provision for Tax Court judges.

173

In an unusual and

apparently unsolicited action, Chief Justice Stone met with the sponsor of

the bill and sought to convince him to amend the bill and expand its

coverage.

174

The Chief Justice was aware that the Tax Court was technically

an agency of the executive branch and not part of the federal judiciary, but

he did not believe that this fact should bar recognition of the type and

quality of work performed by the court.

For a long time we have been reviewing their decisions and I can tell

you out of my experience that they not only perform judicial service

but that they do it well. I hope that you will reconsider and amend

your bill so that it will include them.

175

Despite the intervention of the Chief Justice, the salary bill as passed by

the House did not cover Tax Court judges.

176

Nevertheless, as a result of

efforts by Presiding Judge Turner, it was so amended in the Senate, and

since then the salaries of Tax Court judges have been identical to those of

United States district court judges.

177

In addition to arguments based on judicial attributes, advocates of the

proposal could point to problems that the court was encountering as a

result of its technical status as part of the executive establishment. Some of

these were merely annoyances, as when the court was required to respond

to inquiries from supervisory or budgetary agencies that were routinely sent

to administrative bodies and often were wholly inappropriate when applied

to the court.

178

Two other problems were more substantial and figured

171

Act of July 31, 1946, ch. 704, 60 Stat. 716.

172

Id. § 1.

173

See 93 CONG. REC. A3280 (1947) (remarks of Mr. Hobbs).

174

Id. The bill was sponsored by Congressman Sam Hobbs, who did not

believe that legislation dealing with the salaries of federal judges should provide for

the compensation to be paid to members of an agency of the executive branch.

Congressman Hobbs was, however, a strong supporter of legislation to change the

formal status of the Tax Court and incorporate it into the federal judicial

establishment. Id. at A3279–81.

175

Id. at A3280.

176

Id.

177

Since 1969, this has been an explicit provision of the Internal Revenue

Code. Act of December 30, 1969, Pub. L. No. 91-172, § 953, 83 Stat. 730, amending

I.R.C. § 7443(c).

178

An example of this was an inquiry addressed to administrative bodies, and

the Tax Court, by the Bureau of the Budget pursuant to the Reorganization Act of

202 The United States Tax Court – An Historical Analysis

prominently in the polemics surrounding the codification of title 28. The

first of these involved the 1943 Supreme Court decision in Dobson v.

Commissioner,

179

in which the Court had ruled that, in light of the expertise of

the Tax Court and its status as an administrative body, appellate courts

should strictly adhere to the statutory admonition limiting review of Tax

Court decisions to errors of law.

180

In this regard, a unanimous Court,

speaking through Justice Jackson, ruled that “when the [reviewing] court

cannot separate the elements of a decision so as to identify a clear-cut

1945. The court was asked for its recommendations, along with reasons therefor,

with respect to the following subjects:

The functions of the court which should be abolished;

The functions, agencies, or parts of agencies which properly should be

transferred to the court;

The functions and units of the court which more appropriately belong in

another department or establishment; and

The functions or units of the court which should be consolidated or

transferred from one part of the court to another part and which the court

lacks statutory authority to consolidate or transfer.

Letter from Presiding Judge Turner to Harold Smith, Director, Bureau of the

Budget, Jan. 25, 1946, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda

& Correspondence.” Never one to pass up the opportunity to proselytize an

official to his point of view, Judge Turner concluded his response to the inquiry as

follows:

It has been my purpose in outlining the organization of the Court and its

functions to bring to your attention the fact that the Tax Court is not in any

true sense an administrative or executive department, but by the nature and

purposes served and the work done, is a part of the judicial scheme of the

Government. In connection therefore, with the plan under the

Reorganization Act of improving the administration of the Executive

Branch of the Government no change in the Tax Court under any of the

four headings outlined in your letter suggests itself or appears to be

pertinent or desirable. It is believed, however, that much confusion would

be avoided and that the Tax Court in its functioning could operate more

effectively and efficiently if it were placed in the Judiciary where its

purposes and functions indicate that it should be, rather than in the

Executive Branch of the Government where it is technically placed by

statute. It is not clear, however, that your request for recommendations

together with drafts of suitable reorganization provisions contemplates the

submission of recommendations or drafts designed to effect changes not

wholly within the Executive Branch of the Government. We are not,

therefore, submitting the draft of any plan nor of any legislation with

respect to the Tax Court.

Id.

179

320 U.S. 489, rehearing denied, 321 U.S. 231 (1944).

180

INT. REV. CODE of 1939, § 1141, as amended, act of June 25, 1948, ch. 646,

§ 36, 62 Stat. 991; see also Part XI.H.8.

The Board Becomes a Court 203

mistake of law, the decision of the Tax Court must stand.”

181

Appellate

review of Tax Court decisions after Dobson thus was considerably more

restricted than review of the decisions of district court judges sitting

without juries, the findings of which could be reversed or modified if

“clearly erroneous.”

182

The Dobson decision aroused criticism from bar

groups as well as from lower appellate courts,

183

and some supporters of

incorporating the Tax Court into the federal judiciary noted that the Dobson

problem was directly related to the court’s anomalous status as one of the

executive branch agencies.

184

The decisions of such agencies were generally

subject to more limited appellate review than the decisions of federal trial

courts sitting without juries, and Dobson was a natural, if erroneous,

extension of the illogical placement of the Tax Court in the executive

branch.

A second problem resulting from the court’s peculiar status was even

more serious than Dobson. The Administrative Procedure Act, which had

been enacted in 1946,

185

provided rules governing decision-making by

administrative bodies. The purpose of the Act was to provide procedural

protections to persons affected by government action and to minimize the

risks of abuse of bureaucratic discretion.

186

During congressional

consideration of the Act, the question had arisen whether, in light of its

application only to executive agencies and not to courts, its provisions

would apply to the Tax Court. An opinion of the Attorney General

concluded that the Act would be inapplicable to the Tax Court and,

apparently on this basis, the statute did not specify that the Tax Court was a

court for purposes of the Act.

187

Despite this authority, the Court of

Appeals for the Sixth Circuit was convinced that the position of the

Attorney General was erroneous and announced that the provisions of the

Act applied to Tax Court proceedings.

188

The Sixth Circuit never had to

181

320 U.S. at 502.

182

See Commissioner v. Duberstein, 363 U.S. 278 (1960); United States v.

United States Gypsum Co., 333 U.S. 364, 395 (1948).

183

E.g., 1948 Senate Hearings, supra note 107, at 167–73 (testimony of W.A.

Sutherland); Brooklyn Nat. Corp. v. Commissioner, 157 F.2d 450, 452–53 (2d Cir.

1946).

184

93 CONG. REC. 8387 (1947) (remarks of Mr. Robsion); Daniel M. Gribbon,

Should the Judicial Nature of the Tax Court Be Recognized?, 24 G

EO. WASH. L. REV. 619,

622 (1956) [hereinafter cited as Gribbon].

185

Act of June 11, 1946, ch. 324, 60 Stat. 237.

186

See KENNETH CULP DAVIS, ADMINISTRATIVE LAW TEXT, § 1.04 (3d ed.

1972).

187

S. REP. NO. 79-752, at 38 (1945); see also Note, Effect of the Administrative

Procedure Act on Decisions of the Tax Court, 2 T

AX L. REV. 103 (1946).

188

Lincoln Elec. Co. v. Commissioner, 162 F.2d 379, 382 (1947). The Sixth

Circuit repeated these views in Lawton v. Commissioner, 164 F.2d 380, 383–84 (1947).

See also Dawson v. Commissioner, 163 F.2d 664, 667 (1947).

204 The United States Tax Court – An Historical Analysis

face the issue of precisely how the Administrative Procedure Act should be

applied to the Tax Court; however, it was clear that if the Act was applied,

the court would have to make substantial modifications to its procedures.

For example, the Act required that the findings of an administrative hearing

officer be served upon the parties who could then demand a hearing before

the entire membership of the agency.

189

Neither the Board nor the Tax

Court had ever provided parties with a hearing before the entire

membership, and in 1927 the Board had ceased its practice of reviewing all

reports of the divisions;

190

only those cases deemed significant were referred

by the Presiding Judge to the conference, and these constituted a minority

of the cases handled by the court.

Judge Turner argued that if the Administrative Procedure Act was

applied to the court, most of the judges’ time would be taken up with

hearing appeals from determinations of the initial hearing officials. This

would probably require the cessation of the practice then followed of

having the original trial before a member of the court; commissioners

would have to be appointed for this task. The resulting procedure would

be cumbersome and would result in the court being able to handle far fewer

cases than before.

191

By locating the court in title 28 and outside the reach

of the Administrative Procedure Act, the problem would be alleviated.

These reasons for change attracted strong support among members of

the judiciary, the bar, and Congress.

192

One potent supporter of the

proposal was Congressman John M. Robsion of Kentucky, chairman of the

Judiciary Subcommittee that considered the title 28 revision legislation. He

summarized the position in favor of incorporation of the court into the

federal judiciary as follows:

It seems to me that there can be no question but that the

provisions relating to the Tax Court properly belong in the Judicial

Code because it is clear that the Court is strictly judicial in nature.

Let us consider . . . what would be the result of leaving them out of

the Judicial Code in view of the provisions of the Administrative

Procedure Act. If that body is not a court but a purely

administrative agency it would come within the purview of the

189

Act of June 11, 1946, ch. 324, § 8, 60 Stat. 237.

190

Part III, notes 357–358 and accompanying text. At no time, however, did

full court review of division reports include a hearing for the parties.

191

Memorandum prepared by Presiding Judge Turner, “Attention-Special,”

June 12, 1947, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda and

Correspondence;” see also Memorandum prepared by Judge Murdock “14 Tax

Court Questions,” Dec. 1947, filed at the U.S. Tax Court in “79th–91st Cong.:

Memoranda & Correspondence.”

192

See, e.g., Gribbon, supra note 184; 93 CONG. REC. 8385 (1947) (remarks of

Mr. Robsion).

The Board Becomes a Court 205

Administrative Procedure Act. Of course, in the view of the

Attorney General, . . . the term “court” includes the Tax Court and

similar courts and the act does not apply to their procedure nor

affect their requirements nor resort thereto. . . .

However, because the provisions relating to the Tax Court are

not now in the Judicial Code considerable confusion has arisen

regarding its status and the status of litigants.

193

Although the court and its supporters had no difficulty perceiving the

desirability of the proposed transfer to the judiciary, there were those who

did not share this view. Among these were persons prominent in the

Administration, in the Congress, and in the ranks of tax practitioners, and

they constituted a formidable obstacle to adoption of the proposal.

Lack of Administration enthusiasm for the proposal was prevalent

within both the Treasury and Justice Departments. Attorney General

Biddle had actively opposed both federal court status and the name change

for the Board of Tax Appeals in 1942, and had enlisted the support of

Secretary of the Treasury Morgenthau in this view.

194

With changes in the

heads of these Departments (Tom Clark succeeded Biddle in 1945, and

John W. Snyder succeeded Morgenthau in 1946), the Administration’s

attitude toward court status for the Tax Court moderated temporarily to the

point that, in April 1947, Attorney General Clark indicated that he had no

objection to the proposal.

195

Treasury also signified that it did not oppose

the legislation.

196

However, neither Department appeared at hearings to

urge passage or in any way publicly endorsed the measure apart from

indicating that they had no objection to its adoption. Opposition continued

to be strong among some non-cabinet rank officials, particularly in the

Justice Department.

197

Indeed, in the spring of 1949, while Clark was still

193

93 CONG. REC. 8387 (1947).

194

See supra notes 107–118 and accompanying text.

195

Letter from Tom Clark to Earl Michener, Chairman, House Judiciary

Comm., April 17, 1947, reprinted in H.R.

REP. NO. 80-308, at 8 (1947).

196

93 CONG. REC. 8385 (1947) (remarks of Mr. Robsion).

197

For example, on May 16, 1947, one month after Attorney General Clark

had expressed no objection to the proposal, a 43-page memorandum was prepared

by I. Henry Kurtz, a Justice Department attorney, for Sewell Key, Assistant

Attorney General, Tax Division, which took the position that making the Tax

Court a federal court would, in effect, have created new judicial offices that would

have required new presidential appointments. This, of course, could have resulted

in a complete change of court personnel and would have made the legislation

unacceptable to the court. Memorandum prepared by I. Henry Kurtz, filed at the

U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.” The

memorandum was in accordance with Sewell Key’s position and that of members

of his division, which had consistently opposed court status for the Tax Court.

206 The United States Tax Court – An Historical Analysis

Attorney General, a proposed report of the Justice Department opposing

incorporation of the Tax Court into title 28 was delivered to the Bureau of

the Budget.

198

Available evidence indicates that Attorney General Clark

remained steadfast in his acquiescence to the title 28 proposal and that the

proposed report, not having his personal approval, was not finalized.

199

However, soon after Clark’s resignation in the summer of 1949 to become

an Associate Justice of the Supreme Court, the Justice Department formally

changed its position and once again opposed legislation to integrate the Tax

Court into the federal judicial system.

200

Attorney General Biddle had expressed several reasons for his

opposition in 1942,

201

but the basic reasons for the reluctance of Justice

and Treasury to support the proposal centered on the question of

representation of the Government before the Tax Court. In 1924, when

the Board of Tax Appeals was created, the Solicitor of Internal Revenue, an

official of the Justice Department, was the legal representative of the

Commissioner and in this capacity represented the Government in Board

proceedings. As part of the Revenue Act of 1926, the position of Solicitor

was abolished and its functions transferred to the newly created General

Counsel for the Bureau of Internal Revenue, who was an official of the

Treasury Department.

202

Curiously, this transfer of the Commissioner’s

legal representative did not occasion any opposition from the Attorney

General, apparently because the move was supported by Secretary Mellon,

the most influential member of the Coolidge cabinet. Alexander W. Gregg

was the Solicitor of Internal Revenue at this time, and he was a protégé of

Mellon and had formerly been his special assistant. The transfer resulted in

Gregg being brought back under the direct supervision of Mellon and also

made possible a significant pay increase for Gregg.

203

Since 1926, Treasury had represented the Government in all Tax Court

proceedings, with the exception of the highly specialized renegotiation cases

Letter from Presiding Judge Turner to Charles Hamel, Sept. 22, 1948, filed at the

U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

198

See Memorandum from Mr. Kirby to Mr. Lynch, June 13, 1949, filed in the

Office of Tax Legislative Counsel, U.S. Treas. Dep’t.

199

See Letter from Presiding Judge Kern to Erwin Griswold, Sept. 8, 1949,

filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

200

See Letter from Peyton Ford, Assistant to the Attorney General, to Emanuel

Cellar, Chairman, House Judiciary Comm., March 14, 1950, filed at the U.S. Tax

Court in “79th–91st Cong.: Memoranda & Correspondence” [hereinafter cited as

Ford].

201

See supra notes 107–114 accompanying text.

202

Revenue Act of 1926, ch. 27, § 1201(a), 44 Stat. 126.

203

The 1926 Act provided a salary to the General Counsel for the Bureau of

$10,000. Id. As Solicitor, Gregg could not have earned more than $7,500. The

Classification Act of 1923, ch. 265, § 13, 42 Stat. 1492.

The Board Becomes a Court 207

that were handled by the Justice Department.

204

If the status of the Tax

Court was changed, the whole issue of representation of the Government

would have to be reopened. Treasury, which had represented the

Commissioner for more than two decades, was strongly opposed to

relinquishing that role.

205

It could argue with some justification that its

litigation responsibilities in the Tax Court were part of its overall

jurisdiction to collect revenue and set Administration tax policy. If it lost

this function, the discharge of its duties might become more difficult

because of the problem of coordinating litigation policy with another

Department. On the other hand, the Justice Department had, since 1933,

represented the Government in virtually all court actions.

206

Although

several regulatory agencies represented themselves in judicial proceedings,

Justice’s litigating role had never been seriously questioned in connection

with the Department’s representation of the Government in refund actions

or in appellate proceedings following Tax Court determinations.

207

If the

Justice Department’s role in these proceedings had never proved

troublesome, why should its representation of the Government in Tax

Court proceedings create any additional problems? Many officials in the

Justice Department therefore took the position that the crucial distinction

was between judicial and administrative proceedings. So long as the Tax

Court was characterized as an agency of the executive branch, Justice

should not object to Treasury representation of the Government position.

However, if the Tax Court was to be integrated into the system of federal

courts, even as an article I court, Justice should assume the function as the

Government’s lawyer.

208

These opposing positions had an important influence on the attitudes

that Justice and Treasury adopted toward the proposal for federal court

status. They had no strong objection to the status quo and had no

particular desire to become involved in an inter-Department dispute. As a

result, neither Department ever gave the proposal its active support,

support which would have been valuable in counteracting opposition from

other sources.

In addition to the lack of Administration enthusiasm, the proposal also

suffered from limited but vociferous opposition in Congress. As with the

Treasury-Justice situation, this opposition was largely the product of

204

The court’s former renegotiation jurisdiction is detailed in Appendix C.

205

See 93 CONG. REC. 8385 (1947) (remarks of Mr. Robsion).

206

Exec. Order No. 6166.

207

Prior to the promulgation of Exec. Order No. 6166, the Bureau of Internal

Revenue generally represented the Government in district court refund actions.

Hearings on S. 2041 Before the Subcommittee on Improvements in Judicial Machinery of the

Senate Comm. on the Judiciary, 90th Cong., 2d Sess. pt. 2, at 170 (1968) (testimony of

Professor M. Carr Ferguson) [hereinafter cited as 1968 Senate Hearings].

208

Ford, supra note 200.

208 The United States Tax Court – An Historical Analysis

jurisdictional concerns. Since its creation in 1924 as the Board of Tax

Appeals, the court had always been within the general legislative province

of the congressional tax committees, the Ways and Means Committee in the

House and the Finance Committee in the Senate. If the court were to be

incorporated in title 28 and removed from title 26, it would then come

under the supervision of the House and Senate Judiciary Committees.

Many members of the Ways and Means Committee were particularly

concerned about such a change; additional opposition emanated from the

technical staff of the Joint Committee on Internal Revenue Taxation,

headed by Colin Stam.

209

When the bill to revise title 28 and incorporate

the Tax Court therein came to the House floor, where it passed by 342 to

23, 14 of the no votes were cast by Ways and Means Committee

members.

210

Most vocal of the congressional critics of the measure was

Representative John Dingell, a member of the Ways and Means Committee

who had sponsored the adoption of the 1942 provision guaranteeing

admission to practice before the court of all “qualified” persons regardless

of their membership in any profession.

211

In articulating the concern of congressional opponents, Mr. Dingell

expressed the fear that Tax Court procedures would become formalistic if

the change were adopted and that the court’s ability to dispose of cases

rapidly would be decreased.

212

Additionally, Mr. Dingell deeply believed in

permitting non-attorneys to practice before the court and, indeed, to

become members of the court, and he felt these privileges would be

jeopardized if the tribunal were incorporated into the federal judiciary.

213

The difficulties raised by the Dobson case and the Administrative Procedure

Act were conceded by Mr. Dingell to be serious, but he believed that these

were isolated problems that could appropriately be dealt with by specific

legislation without disturbing the court’s status as an agency in the executive

branch.

214

Mr. Dingell concluded that the proposal was nothing more than

an effort by Tax Court judges to satisfy their vanity and was unjustified in

light of the fact that tax administration would suffer as a result.

215

Were the congressional opposition and the lack of Administration

enthusiasm described above the only obstacles to incorporating the court

209

See Letter from Robert N. Miller to Presiding Judge Turner, June 13, 1947,

filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

210

93 CONG. REC. 8392 (1947). It should be noted that nine members of the

committee voted for the bill, and among these was Wilbur D. Mills, who would

later support article III status for the Tax Court. See infra note 305 and

accompanying text.

211

See supra notes 124–127 and accompanying text.

212

1949 House Hearings, supra note 167, at 49–50.

213

Id. at 50–51.

214

Id.

215

93 CONG. REC. 8388 (1947).

The Board Becomes a Court 209

into the federal judiciary, the measure might have been adopted. However,

in addition to these difficulties, the supporters of the proposal found

themselves whipsawed between the concern of accountants that they be

permitted to continue to represent taxpayers before the court, and the belief

of bar groups that if the Tax Court were formally made a court, such

continuation would constitute the unauthorized practice of law.

The root of this problem could be traced back to 1924, when in one of

its first announced rules, the Board of Tax Appeals provided for admission

of attorneys and certified public accountants to its practice.

216

Probably, the

Board would have preferred to restrict its bar to lawyers, but due to the

significant role that accountants had played in the development of

administrative tax practice, the fact that the Board was at least technically a

part of the executive branch, and the significant political influence of

accounting associations, the exclusion of all accountants from practice was

infeasible. Accordingly, the compromise was struck to exclude from

practice only those accountants who had not been professionally licensed.

A large number of certified public accountants exercised their privilege to

be admitted to practice before the Board/Tax Court. By 1948, 7,310 had

been admitted to its bar, compared to admissions of 28,707 attorneys.

217

Nevertheless, most accountants recognized that their training did not equip

them to prosecute cases in a judicial context

218

and relatively few actually

practiced. As a result, the great majority of cases were handled by either

lawyers alone or lawyers assisted by accountants.

219

The emphasis on

judicial rules of procedure, the technical nature of the tax laws, the

importance in tax cases of general legal doctrines relating to property,

contracts, corporations, trusts, and estates, and the inability of accountants

to represent clients in appellate proceedings, probably all contributed to

lawyer domination of Board/Tax Court practice. The results in those cases

in which accountants attempted to try cases before the Board were not

wholly satisfactory, and on more than one occasion the Board considered

restricting its bar to attorneys.

220

Yet because so few accountants actually

tried cases, the rule permitting accountant practice was not modified by the

Board prior to the adoption of the Revenue Act of 1942 and the so-called

216

B.T.A. RULE 2 (July, 1924 ed.).

217

1948 Senate Hearings, supra note 107, at 60 (testimony of Presiding Judge

Turner).

218

1949 House Hearings, supra note 167, at 37 (testimony of Presiding Judge

Turner).

219

For example, from 1924 to 1931, accountants appeared in only 4% of the

cases docketed with the Board, and in that same period only 14.8% of accountants

enrolled with the Board appeared before it in any capacity. 1948 Senate Hearings,

supra note 107, at 51 (testimony of Presiding Judge Turner).

220

1949 House Hearings, supra note 167, at 41–42 (testimony of Presiding

Judge Turner).

210 The United States Tax Court – An Historical Analysis

Dingell amendment, permitting practice before the Tax Court by all

qualified persons regardless of their professional standing.

221

Following the adoption of the Dingell amendment, the Tax Court

substantially revised its rule respecting admission to practice. Whereas

practice privileges formerly had been virtually automatically conferred on

attorneys and certified public accountants, under the new rule only

attorneys were given this treatment.

222

All other persons, including

accountants, would be eligible to practice before the court only if they

passed an examination to be administered by the court.

223

The court

believed this result was demanded by the statutory language restricting

practice to “qualified” persons. Since by background and training there was

no reason to suppose that a certified accountant was any more qualified to

try court cases than a noncertified accountant, the court concluded that it

could be rightly accused of discrimination if it continued to admit

automatically the former group to practice while insisting that the latter

group pass an examination.

224

The new rule had an immediate and dramatic effect. Prior to 1943,

7,300 certified public accountants had been admitted to practice under the

original rule, but in the six-year period between 1942 and 1948, a total of

only 12 persons qualified for enrollment in the Tax Court bar as a result of

passing the examination.

225

As would be expected, many certified public

accountants were angered by the interpretation the court placed on the

Dingell amendment,

226

and the new rule probably served to exacerbate

professional jealousies between accountants and lawyers.

The proposal to incorporate the Tax Court into the federal judiciary

rekindled the inter-professional dispute and proved to be the most

controversial aspect of the legislation. Essentially two alternative proposals

were presented to Congress. One version retained the language of the

Dingell amendment and therefore authorized the continuation of

non-attorney practice.

227

The other version prospectively allowed the court

to determine qualifications to practice, but contained a “grandfather”

221

Ch. 619, § 504(b), 56 Stat. 957. See supra notes 124–136 and accompanying

text.

222

TAX CT. R. 2 (Feb. 9, 1943 ed.).

223

Id.

224

1949 House Hearings, supra note 167, at 43 (testimony of Presiding Judge

Turner).

225

1948 Senate Hearings, supra note 107, at 59–60 (testimony of Presiding

Judge Turner).

226

See id. at 211 (testimony of Maurice Austin, American Inst. of Accountants).

227

H.R. 3214, 80th Cong., 1st Sess. § 2560 (1947), as passed by the House and

referred to the Senate Judiciary Committee.

The Board Becomes a Court 211

provision permitting non-attorneys previously admitted to Tax Court

practice to continue to represent clients before the court in the future.

228

Neither version of the bill obtained the unqualified support of either

accountant or lawyer groups. Naturally, the continuation of the Dingell

amendment was totally unacceptable to bar associations.

229

They had

opposed non-attorney practice before the court when it was an agency of

the executive branch, and their opposition was even stronger if the court

was to be incorporated into the federal judiciary. In their view, such a rule

would expressly condone an activity that traditionally constituted the

unauthorized practice of law. Somewhat surprisingly, in addition to bar

groups, some accountant associations opposed the title 28 proposal even

with the Dingell amendment retained.

230

They did not see the benefit to be

derived from changing the status of the court and feared that the direction

of the legislation toward fuller court recognition would ultimately lead to a

repeal of the Dingell amendment and the banning of practice by all but

lawyers.

231

If the accountants were divided on the merits of the legislation with the

Dingell amendment retained, they were unanimous in their opposition to

the alternate proposal, which left the qualifications of practitioners to the

discretion of the court and protected only existing members of the Tax

Court bar with a grandfather clause.

232

Accountants had little doubt that

such a rule would inevitably result in the court barring all but attorneys

from practicing before it. Statements by Tax Court judges indicated this

was not an unrealistic fear.

233

Many accountants recognized that they were

generally not as well qualified to try Tax Court cases as were lawyers.

Nevertheless, they contended that they could better serve their clients,

many of whom they represented in administrative proceedings before the

Bureau, if they could continue their representation to at least the pre-trial

stages of Tax Court proceedings.

234

Frequently, the most realistic

228

H.R. 3113, 81st Cong., 1st Sess. §§ 13(b), 14(b) (1949).

229

E.g., 1948 Senate Hearings, supra note 107, at 88 (testimony of John Randall,

American Bar Ass’n).

230

Id. at 271–72 (testimony of George Carlson, California Society of Certified

Public Accountants). Most accounting organizations, on the other hand, had no

objection to incorporating the court into the federal judiciary so long as the Dingell

amendment was retained. See id. at 231 (statement of American Inst. of

Accountants).

231

Id. at 274–76 (testimony of George Carlson).

232

See, e.g., 1949 House Hearings, supra note 167, at 8 (testimony of Spencer

Gordon, American Inst. of Accountants).

233

1948 Senate Hearings, supra note 107, at 52–56 (testimony of Presiding

Judge Turner).

234

Id. at 221–26 (testimony of Maurice Austin, American Inst. of

Accountants).

212 The United States Tax Court – An Historical Analysis

settlement negotiations occurred after a Tax Court petition was filed, and

accountants felt that taxpayers should not have to be put to the trouble and

expense of hiring attorneys to pursue what they saw as merely an extension

of the administrative procedure.

Bar groups felt strongly that these views were unjustified. They could

perceive no adequate reason why the commencement of a court proceeding

involving tax liability should not call for the same legal skills than would the

commencement of any other kind of court action.

235

The depth of these

views is indicated by the fact that the American Bar Association refused to

endorse unqualifiedly one version of the bill that proposed to place the

grandfather provision in the text of title 28, and only grudgingly approved a

later version that would have enacted the provision in uncodified form as a

transitional rule.

236

The effort to incorporate the Tax Court into title 28, which spanned

more than four years, ultimately ended in failure. Two bills to revise and

codify title 28 were reported favorably by committees of the House of

Representatives.

237

Both bills provided for the Tax Court to become part

of the federal judicial establishment.

238

The first of these, H.R. 7124, died

without House action at the end of the 79th Congress. The second bill,

H.R. 3214, was passed by the House under suspension of the rules by the

vote of 342 to 23,

239

the major opposition coming from Congressman

Dingell and other members of the Ways and Means Committee, despite the

addition, on the House floor, of the Dingell amendment protecting the

rights of non-attorneys to practice before the court.

240

When the bill

reached the Senate, it was referred to a subcommittee of the Senate

Judiciary Committee chaired by Senator Forrest Donnell. Senator Donnell

probably favored the proposal for changing the status of the Tax Court, but

he felt obliged to provide ample time for interested parties to express their

views publicly.

241

Extensive hearings therefore were held on H.R. 3214

235

Id. at 175–76 (testimony of Cuthbert Baldwin, Louisiana State Bar Ass’n);

H.R.

REP. NO. 81-1138, at 4–5 (1949).

236

1949 House Hearings, supra note 167, at 52–53 (statement of American Bar

Ass’n).

237

H.R. 7124, 79th Cong., 2d Sess. (1946) (reported by Committee on Revision

of the laws), H.R.

REP. NO. 2646, 79th Cong., 2d Sess. (1946)); H.R. 3214, 80th

Cong., 1st Sess. (1947) (reported by committee on the Judiciary, H.R.

REP. NO. 80-

308 (1947)).

238

H.R. 7124, 79th Cong., 2d Sess. §§ 271–277 (1946); H.R. 3214, 80th Cong.,

1st Sess. §§ 271–277 (1947).

239

93 CONG. REC. 8392 (1947).

240

Id. at 8384.

241

Letter from Presiding Judge Turner to Judge Albert Maris, March 25, 1948,

filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence.”

The Board Becomes a Court 213

before it was reported to the Senate floor.

242

As a measure of the

controversy engendered by the Tax Court proposal, although it constituted

only a small part of the recodification of title 28, most of the hearings were

concerned with the question of whether Tax Court practice should be

restricted to attorneys. The delay in holding and concluding public hearings

resulted in H.R. 3214 not receiving final committee consideration until the

last few days of the 80th Congress.

243

Because of the procedural rules of

the Senate, the bill could only reach the Senate floor for a vote by way of

the consent calendar, which permitted any Senator to bar consideration of

the bill by objection.

244

The Judiciary Committee had been advised by one

of its members that if the Tax Court provision remained in the bill as

reported he would object to the bill’s consideration on the Senate floor.

245

Not wishing to delay passage of the remainder of H.R. 3214, which was

unobjectionable to all, the committee excised all Tax Court provisions from

the bill it reported except for one amendment reversing the rule in the

Dobson case.

246

The bill as reported passed the Senate,

247

and this version

also passed the House,

248

although the House Judiciary Committee

reaffirmed its support for changing the status of the Tax Court at the

earliest practical date.

249

Following passage of H.R. 3214, other bills were introduced in the 80th

and 81st Congress to amend title 28 to incorporate the Tax Court.

250

1949, hearings on one of these bills, H.R. 3113, were held by a

subcommittee of the Judiciary Committee,

251

but the problems that had

arisen earlier were apparently still present.

252

The bill was favorably

reported from committee by unanimous vote,

253

and a rule was secured for

its introduction on the House floor.

254

However, the bill was never

242

1948 Senate Hearings, supra note 107.

243

See Letter from Presiding Judge Turner to Attorney General Clark, June 17,

1948, at 14, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

244

Id.

245

Id.; Memorandum from Judge Turner to Judge Dawson, April 13, 1967, at

1, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

246

S. REP. NO. 80-1559, at 2 (1948).

247

94 CONG. REC. 7930 (1948).

248

Id. at 8501 (1948).

249

Id.

250

H.R. 7154, 80th Cong., 2d Sess. (1948); H.R. 2447, 81st Cong., 1st Sess.

(1949); H.R. 3113, 81st Cong., 1st Sess. (1949).

251

1949 House Hearings, supra note 167.

252

See id. at 7 (testimony of Spencer Gordon, representing American Institute

of Accountants).

253

H.R. REP. NO. 81-1138 (1949).

254

H.R. REP. NO. 81-1301 (1949).

214 The United States Tax Court – An Historical Analysis

calendared for consideration by the House and ultimately died at the end of

the 81st Congress.

The collapse of the effort to incorporate the Tax Court into the newly

recodified title 28 represented the nadir of the struggle for court status.

The court and its supporters could justifiably believe that their cause was

just. In the words of one court, “[t]he Tax Court . . . [was] for all practical

purposes a judicial tribunal operating in the federal judicial system.”

255

Support for this position could even be found among opponents of judicial

status, many of whom believed that the Administrative Procedure Act

should not apply to the court and that its decisions should be reviewed

under the same standards applicable to district court decisions.

256

These

opponents also readily conceded that the court had compiled a splendid

record for impartially and expertly adjudicating controversies within its

jurisdiction.

257

Yet, recognition of its court status was denied because of

controversies that, especially to a judicial mind, must have seemed wholly

irrelevant.

Defeat of a similar proposal in connection with the 1926 legislation was

followed by a long period of diminished interest in the status question

258

255

This is an excerpt from Judge Maris’s opinion in Stern v. Commissioner, 215

F.2d 701, 707–08 (3d Cir. 1954). In elaborating this view, Judge Maris wrote:

But although Congress in the Internal Revenue Code has continued to call

the tribunal “an independent agency in the Executive Branch of the

Government” it has at the same time more realistically designated it as a

court and its members as judges. And it is the fact that from its inception

as the Board of Tax Appeals in 1924 it has operated only as a judicial

tribunal in adjudicating controversies as to tax liabilities arising between

taxpayers and the Government. Its powers are wholly judicial in character.

It has never been given any administrative powers or functions nor has it

ever had any investigatory, regulatory or policy-making duties or powers.

Since the passage of the Revenue Act of 1926 its decisions have been final

and reviewable only on the record by the United States courts of appeals.

Since 1948 the scope of that review has been the same as in the case of like

decisions of the district courts. The Tax Court is thus for all practical

purposes a judicial tribunal operating in the federal judicial system.

Whether it is a legislative court created by Congress under Article I, section

8, of the Constitution, like the Customs Court, or some other form of

judicial agency placed for convenience of housekeeping in the Executive

Branch of the Government is, therefore, merely a matter of legal semantics

since, whatever it may be called, it is an “independent” judicial agency the

work of which is not subject to supervision or review in the Executive

Branch of the Government but only by the federal appellate courts.

256

See supra note 214 and accompanying text.

257

See 1949 House Hearings, supra note 167, at 48–49; Letter from Francis

Biddle to Henry Morgenthau, June 5, 1942, reprinted in 1942 Senate Hearings,

supra note 106, at 2298.

258

See supra notes 79–81 and accompanying text.

The Board Becomes a Court 215

and, not surprisingly, the same result followed the events of 1945 to 1949.

Between 1949 and 1967, only one minor effort was made to incorporate the

Tax Court into the judiciary. This followed the report of the Commission

on Organization of the Executive Branch of the Government, known as

the Hoover Commission, which was established in 1953.

259

The Hoover

Commission and its Task Force on Legal Services and Procedure concluded

that the Tax Court was a judicial body and, as such, should be moved from

the executive branch to the judiciary as part of an Administrative Court of

the United States with jurisdiction to adjudicate disputes dealing with labor,

trade, and tax matters.

260

Although the Tax Court and its supporters

welcomed the Hoover Commission finding that the court properly

belonged in the judiciary, the proposal to incorporate the court into an

Administrative Court that would deal with other specialized questions of

administrative law was regarded as unfortunate.

261

Since judges of such a

court would be required to hear cases in several disparate fields and could

not be expected to be experts in each, many believed that the expertise of

the Tax Court would inevitably be lost. This effect would be heightened by

an increased unwillingness of tax experts to accept appointment to such a

court if they were required to hear unrelated cases, as well as make the

financial sacrifice frequently attendant on leaving the private sector for

government service.

The American Bar Association agreed with these criticisms of the

Hoover Commission report and, in conjunction with the Tax Court, drafted

proposed legislation to incorporate the Tax Court into title 28 as an article

III court, independent of any administrative court having non-tax

jurisdiction.

262

The proposal was introduced in Congress by Senator

Hennings in 1958 and 1959, in connection with proposals to create separate

courts for tax, labor, and trade matters.

263

Considerable care went into

drafting the legislation, but apparently little effort was made to enlist

259

Act of July 10, 1953, ch. 184, 67 Stat. 142.

260

COMMISSION ON ORGANIZATION OF THE EXECUTIVE BRANCH OF THE

GOVERNMENT, LEGAL SERVICES AND PROCEDURE; A REPORT TO THE

CONGRESS ON LEGAL SERVICES AND PROCEDURE, 85–88 (1955): COMMISSION ON

ORGANIZATION OF THE EXECUTIVE BRANCH OF THE GOVERNMENT, TASK

FORCE REPORT ON LEGAL SERVICES AND PROCEDURE, 246–56 (1955).

261

Gribbon, supra note 184; Letter from Chief Judge Murdock to Daniel

Gribbon, June 18, 1956, filed at the U.S. Tax Court in “79th–91st Cong.:

Memoranda & Correspondence.”

262

See DOYLE, REPORT IN EXPLANATION OF S. 3796, 85th CONG., 2d SESS., c.

1958, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

263

S. 3796, S. 3797, S. 3798, 85th Cong., 2d Sess. (1958); S. 1274, 86th Cong.,

1st Sess. (1959).

216 The United States Tax Court – An Historical Analysis

supporters in Congress or the Administration. Accordingly, the bills never

proceeded beyond introduction.

Although the effort made to elevate the status of the Tax Court in the

1950s was half-hearted, a more serious and successful campaign was

initiated during this period to provide Tax Court judges with the benefits of

judicial-type retirement provisions. Tax Court judges, as employees of the

executive branch, were covered by the Civil Service retirement system, but

because benefits under this system depended on a lengthy period of federal

service, in many cases it was inadequate.

264

This was especially true for

those judges who came to the court from private life without many years of

prior government work. Since few were wealthy, they were compelled to

remain on the court for personal financial reasons when age and health

considerations might otherwise have led them into retirement.

265

As a

result, the average age of Tax Court judges had increased substantially. For

example, in 1925, the average age of members of the Board of Tax Appeals

was 45; in 1952, the average age of judges of the Tax Court had risen to 60,

with three judges over 70. Some of the judges had suffered debilitating

illnesses but simply could not afford to retire to make way for those

younger and healthier.

266

Recognition of these problems in other courts

had led Congress to provide pensions for all judges except those of the Tax

Court.

267

The Section of Taxation of the American Bar Association

believed that the situation was not only inequitable but could lead to a

serious weakening of the court because of the declining productivity of its

judges.

268

Accordingly, in 1951, the Section formed a Committee on

Retirement Benefits for Tax Court Judges to study the problem.

269

The

committee, composed entirely of former Board of Tax Appeals members,

was chaired by Edgar J. Goodrich, who served on the Board from 1931 to

1935 and was a successful Washington attorney.

270

The committee, with

the support of various allies, such as Randolph Paul,

271

Arthur Krock,

272

the

264

H.R. REP. NO. 83-846, at 2–4 (1953); S. REP. NO. 83-675, at 2–4 (1953).

265

Krock, A Harsh Exclusion from Social Security, N.Y. TIMES, March 21, 1952 at

22, col. 5 [hereinafter cited as Krock].

266

Id.

267

See H.R. REP. NO. 83-846, at 2–3 (1953).

268

See Section of Taxation Bulletin, March, 1953, at 19.

269

Letter from Morton Fisher, Chairman, Section of Taxation, to Edgar

Goodrich, March 15, 1951, filed at the U.S. Tax Court in “Material of ABA

Comm.”

270

The other members of the committee were: Charles Hamel, James Ivins,

Albert James, Jules Korner, Logan Morris, Percy Phillips, and C. M. Trammell. Id.

271

Letter from Randolph Paul to Arthur Krock, March 4, 1952, filed at the

U.S. Tax Court in “Material of ABA Comm.”

272

Krock, supra note 265.

The Board Becomes a Court 217

American Institute of Accountants,

273

and the Treasury Department,

274

was

singularly successful, and in two years secured legislation incorporating

most of its recommendations. Specifically, the legislation permitted Tax

Court judges to retire with pay after either 18 years of service or 10 years of

service and attainment of age 70.

275

The enactment of the pension legislation could not, however, obscure

the fact that in the matter of formal recognition of judicial status, the

court’s only advance since its creation in 1924 had been the change of name

effected by the 1942 legislation. It remained for a new generation of Tax

Court judges to attempt once again to have the Tax Court properly

recognized as a court, not an agency of the executive branch.

C. The United States Tax Court – A Court of Record Established Under

Article I of the Constitution

The evolution of the status of the Tax Court began to take a decisive

turn in 1967, when, at the request of the court, identical bills were

introduced in the House and Senate by the chairmen of the congressional

tax committees.

276

The bills, H.R. 10100, introduced by Chairman Wibur

D. Mills, and S. 2041, introduced by Chairman Russell B. Long,

277

reorganized the Tax Court as part of the federal judicial system. Like H.R.

3214 and H.R. 3113 some 20 years earlier, the Mills-Long bills proposed to

incorporate the Tax Court in title 28; unlike the earlier bills, however, the

effect of H.R. 10100 and S. 2041 was to make the Tax Court an article III

273

H.R. REP. NO. 83-846, at 4 (1953).

274

Id.

275

Act of Aug. 7, 1953, ch. 352, 67 Stat. 482. The ABA committee originally

proposed that the legislation also provide for dependents of judges. This aspect of

the proposal was rejected, but was later enacted in 1961. Act of Oct. 4, 1961, Pub.

L. No. 87-370, 75 Stat. 796.

276

Letter from Chief Judge Tietjens to Chairman Mills, March 27, 1967, filed at

the U.S. Tax Court in “79th–91st Cong.: Memoranda & Correspondence;” Hearings

on S. 2041 Before the Subcomm. on Improvements in Judicial Machinery of the Senate Comm.

on the Judiciary, 90th Cong., 1st Sess. 23 (1967) (testimony of Senator Long)

[hereinafter cited as 1967 Senate Hearings]. The bills had been originally drafted by

the legislative committee of the Tax Court.

277

H.R. 10100, 90th Cong., 1st Sess. (1967); S. 2041, 90th Cong., 1st Sess.

(1967). S. 2041 was cosponsored in the Senate by Senator Carl Curtis. H.R. 10100

and S. 2041 are hereinafter referred as the Mills-Long bills. Of the two bills, S.

2041 was the more significant since, as described below, it served as the impetus

for the initiation for public hearings by the Tydings subcommittee of the Senate

Committee on the Judiciary. See infra notes 301–341 and accompanying text. No

hearings were ever held and no committee report was ever issued with respect to

H.R. 10100.

218 The United States Tax Court – An Historical Analysis

court.

278

Thus, the bills accorded Tax Court judges tenure during good

behavior and eliminated the statutory provision permitting removal of

judges by the President for “inefficiency, neglect of duty, or malfeasance in

office.”

279

The transition of the court to an article III court was not to be

immediate, however, because the bills provided for the continuation in

office of existing judges for the remainder of their 12-year terms.

280

Other

significant provisions of the new bills (1) granted the court powers to

preserve order, to compel the attendance of witnesses, to compel the

production of evidence;

281

(2) required that Tax Court procedural rules

conform “as nearly as practicable” to the Federal Rules of Civil

Procedure;

282

(3) authorized the Chief Justice of the Supreme Court to

designate Tax Court judges to perform judicial duties on district courts and

courts of appeals;

283

and (4) authorized the Tax Court to appoint up to ten

commissioners to perform such duties as the Chief Judge might require,

including the hearing of small claims cases.

284

Finally, on the sensitive issue

of representation, the bill provided that the Government would continue to

be represented by the Chief Counsel for the Service,

285

and that taxpayers

would be represented by those authorized to do so by the court’s rules of

practice, but that persons formerly admitted to practice before the court

would continue to be eligible to practice.

286

As might be expected, many of the arguments in favor of the Mills-Long

bills resembled those brought forth during earlier debates over similar

proposals.

287

Thus, recognition of court status was advocated on the

ground that the Tax Court functioned as a judicial body, not as an agency of

the executive branch,

288

and that the court’s non-judicial status was

misleading to the public and could erode taxpayer confidence in a system

that relied heavily on voluntary taxpayer compliance.

289

Additionally,

judicial status would permit the court to punish contempt and enforce its

278

113 CONG. REC. 17646 (1967) (remarks of Senator Long).

279

Grounds and procedure for removing Tax Court judges were, and are,

contained in I.R.C.

§ 7443(f). The provision for life tenure was contained in § 2 of

S. 2041, adding § 274(a) to title 28.

280

Mills-Long bills, supra note 277, § 26.

281

Id. § 25(a), proposing to add 28 U.S.C. § 2651.

282

Id. § 25(a), proposing to add 28 U.S.C. § 2652.

283

Id. § 4, proposing to add 28 U.S.C. § 293(e).

284

Id. § 17(a), proposing to add 28 U.S.C. § 911.

285

Id. § 13(a), proposing to add 28 U.S.C. § 527.

286

Id. § 27.

287

See supra notes 23–34, 98–105, 168–191, and accompanying text.

288

1967 Senate Hearings, supra note 276, at 30 (testimony of Harry Mansfield,

American Bar Ass’n), 93, 101 (statement of Chief Judge Drennen).

289

Id. at 35–36 (statement of Harry Mansfield); 113 CONG. REC. 17646 (1967)

(remarks of Senator Long); 114 C

ONG. REC. 29843 (1968) (remarks of Senator

Tydings).

The Board Becomes a Court 219

own orders,

290

and would eliminate controversies such as those involving

the Administrative Procedure Act and the Dobson case, which had their

roots in the court’s anomalous “administrative setting.”

291

The increased

prestige of the Court and the provision of life tenure for its judges would

also make recruiting top caliber people for judgeships easier.

292

In addition

to these “traditional” arguments, new considerations were raised which

reflected more recent concerns. First, the court, for several years, had been

under pressure to conform its rules of practice and procedure to those of

the federal district courts, especially with regard to pretrial discovery

techniques.

293

Some advocates of H.R. 10100 and S. 2041, which

specifically provided for movement in the direction of conformance,

294

supported the bills on the ground that court status would facilitate such a

change.

295

Second, as described more fully below, consideration of the bills

resulted in serious attention being given to the question of complete

overhaul of the tax litigating system.

296

Some of the proposals made in this

regard would have increased the importance of the district courts and the

Court of Claims in relation to the Tax Court. Making the Tax Court an

article III court would permit the assignment of its judges to these other

courts, which would thereby benefit in handling the increased workloads.

297

Finally, some taxpayers had recently challenged the constitutionality of the

Tax Court, arguing that the court’s non-judicial status violated the principle

of separation of powers.

298

Although the court’s constitutionality had been

sustained by several decisions of the courts of appeals,

299

the issue,

290

113 CONG. REC. 17646 (1967) (remarks of Senator Long); 114 CONG. REC.

29843 (1968) (remarks of Senator Tydings).

291

113 CONG. REC. 17646 (1967) (remarks of Senator Long).

292

1967 Senate Hearings, supra note 276, at 35 (statement of Harry Mansfield,

American Bar Ass’n).

293

See, e.g., Michael Kaminsky, The Case for Discovery Procedure in the Tax Court, 36

AXES 498 (1958).

294

Mills-Long bills, supra note 277, § 25(a), adding 28 U.S.C. § 2652(a).

295

1967 Senate Hearings, supra note 276, at 37–38 (testimony of Harry

Mansfield, American Bar Ass’n); 114 CONG.

REC. 29843 (1968) (remarks of

Senator Tydings).

296

See infra notes 314–333 and accompanying text.

297

Mills-Long bills, supra note 277, § 4, proposing to add 28 U.S.C. § 293(e); 114

CONG.

REC. 29843 (1968) (remarks of Senator Tydings).

298

See Ginsberg, supra note 78.

299

Nash Miami Motors, Inc. v. Commissioner, 358 F.2d 636 (5th Cir. 1966);

Martin v. Commissioner, 358 F.2d 63 (7th Cir. 1966); Willmut Gas & Oil Co. v.

Fly, 322 F.2d 301 (5th Cir. 1963); Standard Hosiery Mills v. Commissioner, 249

F.2d 469 (4th Cir. 1957).

220 The United States Tax Court – An Historical Analysis

especially in light of a 1962 decision of the Supreme Court,

300

was not

entirely free of doubt. The enactment of the bills would put such

arguments to rest.

301

The principal public forum for discussion of the status of the Tax Court

was hearings conducted over a two-year period by a subcommittee, chaired

by Senator Joseph Tydings, of the Senate Committee on the Judiciary.

302

Support at the hearings for the proposal to establish the Tax Court under

article III came from the Tax Court itself,

303

from Senator Roman Hruska,

ranking Republican on the Tydings committee,

304

from Chairman Mills,

305

from the American Bar Association,

306

and from tax practitioners and

academicians.

307

300

Glidden Co. v. Zdanok, 370 U.S. 530 (1962). For a discussion of the

implications of the Glidden case on the Tax Court, see Dubroff, supra note 74, at

277–80.

301

As introduced, H.R. 10100 and S. 2041 did not immediately grant life tenure

to all Tax Court judges. Rather, they provided that as the terms of sitting judges

expired, tenured judges would be appointed. Mills-Long bills, supra note 277, § 26.

For this reason, some expressed doubts as to the validity of the proposed

legislation, but it was generally conceded that drafting changes could eliminate this

problem. 1967 Senate Hearings, supra note 276, at 36–37 (statement of Harry

Mansfield, American Bar Ass’n).

302

The subcommittee, formally known as the Subcommittee on Improvements

in Judicial Machinery, held hearings on Tax Court status in 1967, 1968, and 1969.

1967 Senate Hearings, supra note 276; 1968 Senate Hearings, supra note 207;

Hearings on S. 1973, S. 1974, S. 1975, S. 1976, S. 1977, S. 1978, S. 1979, Before the

Subcomm. on Improvements in Judicial Machinery of the Senate Comm. on the Judiciary, 91st

Cong., 1st Sess. (1969) [hereinafter cited as 1969 Senate Hearings].

In its later sessions, the subcommittee focused on the problems of the tax

litigation system as a whole. Senator Tydings himself introduced several alternative

proposals to deal with the broader problem (S. 4143–4149, 90th Cong., 2d Sess.

(1968); S. 1973–1979, 91st Cong., 1st Sess. (1969)), and the issue of constitutional

status for the Tax Court assumed a role of only collateral importance. See 115

ONG. REC. 10439–40 (1969) (remarks of Senator Tydings).

303

1967 Senate Hearings, supra note 276, at 88 (testimony of Chief Judge

Drennen); 1968 Senate Hearings, supra note 207, at 130 (testimony of Chief Judge

Drennen, Judge Fay, and Judge Tannenwald); 1969 Senate Hearings, supra note 302,

at 428 (testimony of Chief Judge Drennen).

304

1968 Senate Hearings, supra note 207, at 141–42.

305

1967 Senate Hearings, supra note 276, at 11; 1968 Senate Hearings, supra

note 207, at 136.

306

1967 Senate Hearings, supra note 276, at 30 (letter from Orison Marden,

American Bar Ass’n).

307

Id. at 57 (statements of Charles Davis, Rupert Gresham, Brian Holland,

Hart Spiegel, and Laurens Williams), 71 (letter from Professor Alan Polasky); 1968

Senate Hearings, supra note 207, at 151 (statement of Harry Mansfield, American

Bar Ass’n); 1969 Senate Hearings, supra note 302, at 183 (testimony of Bruce Lane,

The Board Becomes a Court 221

But despite the substantial support for article III status, most of the

problems that had blocked judicial status for the court in the past persisted.

One constant, and seemingly insoluble, problem was the issue of

representation of the Government in Tax Court proceedings. Treasury, the

traditional representative of the Commissioner before the Tax Court, was

loath to give up that role; Justice, the traditional representative of the

Government before the federal courts, opposed making the Tax Court a

full-fledged court unless it could assume full responsibilities of

representation.

308

In Treasury’s view, its continued representation of the Government

before the Tax Court was vital for two reasons. First, the Office of the

Chief Counsel, as part of the same Department as the Internal Revenue

Service, could work closely with the Service in settling Tax Court cases.

Because more than 80 percent of the cases docketed with the court were

disposed of by settlement, this relationship was central to the court’s ability

to continue to handle expeditiously its workload.

309

Second, Treasury

perceived its litigating role in the court as necessary to its more general

function of setting Administration tax policy. If Justice were given control

of this function, litigating positions might be adopted on the narrow ground

of winning a particular case rather than establishing cohesive and uniform

precedents.

310

These objectives were considered so important that even

though the bills providing article III status for the Tax Court specifically

provided for representation by the Chief Counsel,

311

and even though there

was substantial sentiment among Treasury officials for enhancing the

prestige of the court,

312

the Department felt obliged to oppose H.R. 10100

and S. 2041 on the chance that making the Tax Court a full constitutional

court could ultimately lead to Justice usurpation of its role.

313

American Bar Ass’n), 246 (statement of John Jones), 248 (testimony of Luther

Avery), 269 (testimony of C.W. Wellen), 308–09 (statement of Professor Alan

Polasky), 334–35 (testimony of Marvin Garbis), 348 (testimony of Professor

Richard Pugh), 352 (testimony of John Sexton).

308

1967 Senate Hearings, supra note 276, at 45–46 (statement of Mitchell

Rogovin, Assistant Attorney General, Tax Division), 79 (statement of Fred Smith,

General Counsel, Treasury Dep’t).

309

Id. at 79.

310

1968 Senate Hearings, supra note 207, at 163–64 (testimony of Sheldon

Cohen, Comm’r of Int. Rev.).

311

Mills-Long bills, supra note 277, § 13(a), proposing to add 28 U.S.C. § 527; S.

4144, 90th Cong., 2d Sess. § 111(a) (1968), proposing to add 28 U.S.C. § 527; S. 1974,

91st Cong., 1st Sess. § 111 (1969), proposing to add 28 U.S.C. § 527.

312

1968 Senate Hearings, supra note 207, at 116 (testimony of Sheldon Cohen,

Comm’r of Int. Rev.).

313

1967 Senate Hearings, supra note 276, at 91 (testimony of Chief Judge

Drennen).

222 The United States Tax Court – An Historical Analysis

The Justice Department, represented at the Tydings hearings by Mitchell

Rogovin, Assistant Attorney General, Tax Division, also opposed

enactment of the Mills-Long bills,

314

but in doing so placed surprisingly

little public emphasis on the bills’ delegation of litigating responsibilities to

Treasury. On this question, the suggestion of Justice was that Congress

leave to executive order the disposition of the representation issue.

315

The

major concern of the Justice Department was that the entire structure of

the system by which tax disputes were litigated was suspect.

316

Tax cases

could be tried in three separate systems of trial forums, each with different

procedures, attitudes, and jurisdictional requirements. Appeals from the

trial level courts could be taken to eleven intermediate appellate tribunals,

which frequently disagreed with one another, and to a single court of final

review which had a legendary distaste for tax cases. In these circumstances

the existing system was subject to criticism as being unfair to taxpayers,

unfair to the Government, and inconsistent with the goal of establishing a

uniform and rational body of interpretations of the tax laws.

317

Accordingly, Justice urged that legislative action with respect to the Tax

Court was premature and should await the outcome of a comprehensive

Department study of reform possibilities.

318

This position was well received by Senator Tydings and immediately

changed the tenor of the debate over article III status for the Tax Court.

319

In the early hearings virtually all attention was directed toward the issue of

Tax Court status, but after the Justice position was announced, the major

emphasis shifted to far more general questions, such as whether the trial of

tax cases should be restricted to a single court system, whether concurrent

jurisdiction to hear deficiency and refund cases should be given to more

than one court system, and whether a single court of appeals should be

established to provide the sole intermediate review of all tax cases.

314

Assistant Attorney General Rogovin spoke for Justice at the Tydings

hearings, but other officials of Justice may not have entirely agreed with his views.

Solicitor General Erwin Griswold had been a long-time supporter of incorporating

the court into the federal judiciary and it is unlikely that his position on this

question had changed over the years.

315

1967 Senate Hearings, supra note 276, at 45–46 (statement of Mitchell

Rogovin).

316

Id. at 40–46.

317

See, e.g., ROSWELL MAGILL, THE IMPACT OF FEDERAL TAXES 209 (1943).

318

1967 Senate Hearings, supra note 276, at 46. Assistant Attorney General

Rogovin testified at the 1967 Hearings that the Department had “taken steps to

initiate [such] a study.” Id. at 51.

319

Senator Tydings, who did not attend the 1967 hearings held by his

committee on S. 2041, when it was felt that the only issue was the status of the Tax

Court, became a champion of reform of the entire litigating structure in later years.

See 114 C

ONG. REC. 29842–44 (1968) (remarks of Senator Tydings); 115 CONG.

REC. 10439–40 (1969) (remarks of Senator Tydings).

The Board Becomes a Court 223

These were questions of considerable complexity, and the Tydings

hearings soon became a forum for widely disparate and irreconcilable

positions. For example, the Rogovin report to the Tydings subcommittee

manifested a preference for a system in which all trial jurisdiction in tax

cases would be given to the district courts.

320

This would eliminate forum

shopping by taxpayers as well as end the system’s built-in bias against those

who could not afford to pay a disputed tax and were therefore forced to

litigate in the Tax Court.

321

It would also provide a judicial remedy in a

familiar forum close to the taxpayer’s home. Since the Tax Court would be

eliminated, such a change would probably result in the Justice Department’s

obtaining control over all tax litigation.

On the other hand, most tax practitioners favored retention of the Tax

Court but urged that it and the district courts, and possibly the Court of

Claims,

322

be given concurrent jurisdiction in all tax cases.

323

This would

result in the granting of refund jurisdiction to the Tax Court and deficiency

jurisdiction to the district courts and, possibly, the Court of Claims.

Although such a change would increase the ability of taxpayers to select the

most favorable forum, it would eliminate the existing discrimination against

taxpayers who could not afford to pay the tax before litigating and were

thus barred from district court and the Court of Claims, which could only

entertain refund actions.

324

Still a third position on the issue of reform emerged from the Treasury

Department. Although Treasury was receptive to some proposals for

320

Although not explicitly stated, a comparison of the study’s discussion of

reform alternatives indicates that this was the Justice view. 1968 Senate Hearings,

supra note 207, at 120–25.

321

Jurisdiction of the district court and the Court of Claims is predicated on

prior full payment of the disputed tax. Thus, some taxpayers, because of

inadequate resources, may be foreclosed from litigating in these forums. See Part I,

notes 143–198 and accompanying text.

322

Some practitioners suggested that to simplify the tax litigating structure, the

tax jurisdiction of the Court of Claims should be eliminated. 1969 Senate Hearings,

supra note 302, at 224 (testimony of Jerry Hamovit), 246 (statement of John Jones),

248 (testimony of Luther Avery), 277 (statement of C. W. Wellen), 348 (testimony

of Professor Richard Pugh). The Court of Claims opposed loss of its tax

jurisdiction, and was supported in this by several practitioners. Id. at 427

(statement of Chief Judge Cowen, Court of Claims), 313 (testimony of Professor

Richard Pugh), 332 (statement of Marvin Garbis), 408 (statement of John Sexton).

323

See testimony and statements collected in note 322, supra.

324

After the conclusion of the Tydings hearings, the Tax Section of the

American Bar Association endorsed the position of concurrent jurisdiction with

article III status for the Tax Court. Report of Comm. on Court Procedure for the Tax

Court, 23 T

AX LAWYER 706 (1970).

224 The United States Tax Court – An Historical Analysis

change,

325

it strongly opposed any change in the existing structure tending

to reduce the importance of the Tax Court, which it believed was the most

important forum for establishing tax precedents to guide both the Service

and taxpayers.

326

For this reason Treasury opposed the proposal for

exclusive tax jurisdiction in the district courts that, of course, presupposed

the elimination of the Tax Court.

327

This proposal did not appear to have

wide support.

328

There were, however, numerous proponents of

concurrent jurisdiction of the Tax Court and the district courts, and

Treasury also opposed this plan on the ground that it would have

substantial impact on the number of cases going to the Tax Court. Juries

were available in district court, the Federal Rules of Civil Procedure

applicable to district court proceedings were more familiar to many

practitioners than were Tax Court procedures, and district courts were

generally more geographically accessible to taxpayers than the Tax Court,

which sat in only 60 locations throughout the country and generally heard

motions only in Washington. Finally, whether true or false, many were

under the impression that district courts were more favorable to taxpayers

than the Tax Court.

329

These factors all pointed toward taxpayers

preferring to litigate in district court. Yet the overwhelming bulk of tax

cases were litigated in the Tax Court.

330

Treasury believed that the major

reason for this was the fact that only the Tax Court had jurisdiction to

redetermine deficiency assertions, and that if such jurisdiction was given to

district courts the business of the Tax Court would be substantially

reduced.

331

With the new direction of the Tydings hearings, it was inevitable that the

cause of article III status for the Tax Court would suffer. Chief Judge

Drennen and other supporters of the Tax Court, including the Tax Section

of the American Bar Association, Senator Hruska, and Chairman Mills,

continued to urge that the original proposal be enacted expeditiously since

the controversy over more substantial changes in the tax litigating structure

325

In this regard, Commissioner Thrower testified that the Service was

considering several reforms. These were: (1) modification of procedures to speed

up administrative action; (2) legislative modification of the Flora rule; (3) legislative

reversal of the Lawrence rule; (4) article III or article I status for the Tax Court.

1969 Senate Hearings, supra note 302, at 463–67.

326

Id. at 448–51 (testimony of Randolph Thrower, Comm’r of Int. Rev.), 469–

76 (testimony of K. Martin Worthy, Chief Counsel for Int. Rev.).

327

Id. at 476 (testimony of K. Martin Worthy).

328

Id.

329

Id. at 487–88.

330

In the years preceding the 1969 hearings, more than 80% of tax cases were

litigated in the Tax Court. Id. at 470.

331

Id. at 477–78.

The Board Becomes a Court 225

assured that no prompt action in this direction could be taken.

332

Apparently Senator Tydings supported the Tax Court in this matter,

333

but

Justice and Treasury, for their own reasons, refused to endorse article III

status. Without their support the proposal had little chance of passage.

Other opposition further dimmed the prospects for passage of the

Mills-Long bills. Senator Long, who had himself introduced S. 2041 “by

request,”

334

appeared at the Tydings hearings to testify that although he

continued to support several features of the bill,

335

he had serious

reservations concerning its most important aspect—establishing the court

under article III.

336

Senator Long recognized the desirability of enhancing

the independent image of the court, and to this end favored moving the

court out of its headquarters in the Internal Revenue Service Building,

where it had been housed for several decades, into its own courthouse.

337

However, he could not support making it an article III court. Such action

might eventually lead to Justice Department representation of the

Government in its proceedings and the exclusion of non-lawyers from its

bar. Both of these consequences would, in the Senator’s view, be

regrettable. Moreover, article III status required tenure during good

behavior for Tax Court judges, and, like many other congressmen, Senator

Long was fundamentally opposed to such a guarantee because it could

result in the refusal by a judge to apply faithfully the enactments of

Congress, secure in the knowledge that his position would not thereby be

jeopardized. Senator Long did not oppose the tradition of generally

reappointing Tax Court judges when their terms expired;

338

nevertheless, he

believed that periodic review of a judge’s fitness to continue in office was

healthy. Although Senator Long was the only witness to express these

views at the Tydings hearings, there is little doubt that they had wide

support in Congress.

332

1968 Senate Hearings, supra note 207, at 130 (testimony of Chief Judge

Drennen), 136 (letter from Chairman Mills to Senator Tydings), 151 (statement of

Harry Mansfield, American Bar Ass’n).

333

The Tydings subcommittee favorably reported S. 2041 to the full Senate

Judiciary Committee. However, no further action was taken on the bill. 115

ONG. REC. 10439 (remarks of Senator Tydings).

334

1967 Senate Hearings, supra note 276, at 23.

335

These included: granting the court subpoena and contempt power;

permitting the expanded use of commissioners, especially in small tax cases; and

conforming the Tax Court retirement plan to the provisions applicable to other

judges. Id. at 24.

336

Id. at 23.

337

Id. at 22.

338

Since 1924, only three members of the Board and Tax Court had ever been

refused reappointment. Id. at 22.

226 The United States Tax Court – An Historical Analysis

Finally, article III status for the Tax Court was also opposed by the

United States Judicial Conference.

339

Composed of the Chief Justice of the

Supreme Court, the chief judges of each judicial circuit, the Chief Judge of

the Court of Claims, the Chief Judge of the Court of Customs and Patent

Appeals, and a district judge from each judicial circuit, the Judicial

Conference met annually to consider the problems and procedures of the

United States courts and to recommend legislation to Congress.

340

As Chief

Justice of the Supreme Court, Earl Warren was the head of the Judicial

Conference in the late 1960s, and he opposed article III status for the Tax

Court. Apparently his feeling and that of a majority of the Conference was

that full court status was inappropriate for a tribunal with such a specialized

jurisdiction as the Tax Court.

341

Although lacking direct legislative

authority, the Judicial Conference exerted considerable influence in

Congress, especially with the judiciary committees that had jurisdiction over

S. 2041.

The period of 1967 to 1969 was one of considerable frustration for the

Tax Court. Two decades had passed since the previous major effort to

incorporate the court into the judiciary, but apparently little had changed

except for the addition of a new opponent of judicial status, the Judicial

Conference, and the failure of an old adversary, the accounting profession,

to make its views known publicly.

342

By mid-1969 the court and its

supporters had concluded that the prospects for enactment of article III

status were remote.

343

Accordingly, an alternative proposal, H.R. 13494,

344

was introduced by Chairman Mills in the summer of 1969, providing for the

court to be established as a court under article I of the Constitution. As an

article I tribunal, the court would have to forego the constitutional

339

Letter from William Foley, Deputy Director, Administrative Officer of the

United States Courts, to Emanuel Celler, Chairman, House Judiciary Committee,

March 4, 1968, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

340

28 U.S.C. § 331.

341

See Letter from Chief Judge Drennen to Chief Justice Warren, Feb. 28,

1969, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

342

No accountant or accounting organization appeared to testify at the

Tydings hearings. In the quarter of a century since the adoption of the Dingell

amendment, few non-lawyers had gained admission to the Tax Court bar, and

apparently accountants had become resigned to their de facto exclusion from

practice. 1967 Senate Hearings, supra note 276, at 89.

343

Letter from Chief Judge Drennen to Judge Robert Ainsworth Jr., June 20,

1969, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence;” Letter from Chief Judge Drennen to Chairman Mills, Nov. 20,

1969, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

344

91st Cong., 1st Sess. (1969).

The Board Becomes a Court 227

guarantees of life tenure and undiminished compensation, as well as the

prestige associated with full constitutional court status. Nevertheless, H.R.

13494 had several advantages. Of primary importance, the court would no

longer be an independent agency of the executive branch of the

Government. Formal judicial status would help eliminate the

misapprehension of many that the court was simply an extension of the

administrative procedures of the Internal Revenue Service; it would also

relieve the court of the necessity of satisfying administrative procedures that

were not appropriate to its function. Even as late as 1969, the question of

the applicability of the Administrative Procedure Act to the Tax Court had

not been definitively resolved, even though it had been first raised more

than two decades earlier.

345

The bill also authorized the court to punish

contempt of its authority by fine or imprisonment, and provided that in

carrying out its powers the court would have the same assistance as is

provided generally to federal courts. The term of office of judges would be

increased from 12 to 15 years, and although automatic reappointment was

not provided, a judge who was not reappointed after serving 15 years could

retire with full pay. This was a novel approach to the problem of judicial

tenure, and permitted the forced retirement of judges without formal

removal proceedings, while guaranteeing financial independence to those so

retired. Provisions dealing with retirement benefits and survivor benefits

were liberalized to provide greater uniformity with the treatment of district

court judges. The bill also changed the name of the court to the United

States Tax Court, following the general form by which federal courts are

named, which form had been disregarded in 1942 when the Board of Tax

Appeals was renamed the Tax Court of the United States.

346

The final, and

perhaps most appealing aspect of H.R. 13494, was its acceptability to most

of the opponents of S. 2041. The amendments contained in the bill only

affected the Internal Revenue Code and made no changes in title 28. Thus,

the issue of representation of the Government was not raised to the same

degree as in prior bills that would have incorporated the court into the

judicial code. As a result, the Treasury Department indicated its approval

of the bill,

347

and the proposal ceased to be a matter of concern to the

Judicial Conference. Moreover, even though the bill increased the term of

office of Tax Court judges from 12 to 15 years, tenure during good

behavior was not applicable and the major concern of Senator Long and

those sharing his view was eliminated. Finally, the bill made no change in

the Dingell amendment and thus was not offensive to accountants, who in

345

See supra notes 185–191 and accompanying text.

346

See supra notes 137–138 and accompanying text.

347

Letter from Paul Eggers, Treasury General Counsel, to Chairman Mills, c.

1969, filed at the U.S. Tax Court in “79th–91st Cong.: Memoranda &

Correspondence.”

228 The United States Tax Court – An Historical Analysis

prior times had vociferously objected to permitting the court to prescribe

its own rules with respect to eligibility to practice.

H.R. 13494 was noncontroversial, and its major supporters in Congress,

chairmen Mills and Long, felt no need to hold public hearings on the

subject. The provisions of the bill were quietly inserted into the Tax

Reform Act of 1969 by the Senate Finance Committee in executive

session

348

and became law on December 30, 1969.

349

The only significant

departure the enacted provision made from H.R. 13494 was the proviso

that for a judge who was not reappointed to be eligible for retirement at full

pay, he would have to notify the President in writing of his willingness to

accept reappointment between nine and six months prior to the expiration

of his term.

350

D. Questions Concerning Constitutional Status of the Court’s Jurisdiction

Soon after the enactment of the 1969 legislation, the constitutional

propriety of the Tax Court was challenged by the taxpayer in Burns, Stix

Friedman & Co. v. Commissioner.

351

The taxpayer in Burns contended that the

creation of the Tax Court as a court of record that exercised the judicial

power of the United States violated the doctrine of separation of powers

because its judges were not afforded the protections of lifetime tenure and

undiminished salary required by article III.

Noting that several circuit courts had expressed approval of the

statutory creation of the Tax Court when the court remained an executive

agency,

352

the Tax Court posed the following question:

Did the provisions of the Tax Reform Act of 1969 so change the

status and function of the Tax Court that it is now exercising the

“judicial powers” referred to in article III and must be established as

an article III court with its judges having the tenure and

compensation protection provided in section 1 of article III?

353

The court resolved this question in the negative with relative ease, citing the

continuation of the court’s basic jurisdiction through the enactment of the

1969 legislation, the limitation of the court’s jurisdiction by statute, and the

348

See S. REP. NO. 91-552, at 301–05 (1969).

349

Tax Reform Act of 1969, Pub. L. No. 91-172, §§ 951–962, 83 Stat. 730.

350

Id. § 954(a), adding I.R.C. § 7447(b)(3).

351

57 T.C. 392 (1971).

352

See id. at 395 (citing Nash Miami Motors, Inc. v. Commissioner, 358 F.2d

636 (5th Cir. 1966); Martin v. Commissioner, 358 F.2d 63 (7th Cir. 1966); Willmut

Gas & Oil Co. v. Fly, 322 F.2d 301 (5th Cir. 1963); Standard Hosiery Mills v.

Commissioner, 249 F.2d 469 (4th Cir. 1957)).

353

Id.

The Board Becomes a Court 229

court’s lack of jurisdiction to exercise the broad common law concept of

“judicial power.”

354

The court then buttressed its affirmation of its

constitutional legitimacy on a series of Supreme Court decisions approving

the broad authority of Congress to create non-article III tribunals to

adjudicate disputes involving the Government as a party.

355

Although

concluding that the cases supported the authority of Congress to establish

the Tax Court as a legislative court outside of article III, the Tax Court

nonetheless acknowledged that the cases did not do so unequivocally:

“[U]nfortunately, rather than being conclusive of the issue before us, [the

cases] reveal the diversity of opinion that still exists on the subject.”

356

The Burns decision was reviewed by the court without dissent. A

concurring opinion filed by Judge Raum and joined by four other judges

was more vigorous in its defense of the Tax Court’s constitutionality:

Nothing in the 1969 legislation made unconstitutional that which

was valid prior thereto. . . . [T]he action of Congress in describing

the Court as being established as a legislative court under article I

and in endowing it with some comparatively minor additional

powers was not of such nature as to alter the basic character of the

Court as it existed prior thereto. . . . The Court was a constitutional

judicial body prior to the 1969 Act and the validity of its continued

existence was not affected by the Act.

357

The decision of the Tax Court in Burns was not appealed. For that

matter, it is doubtful that the constitutional authority of the Tax Court to

adjudicate cases within its statutory jurisdiction would be questioned by the

circuit courts or the Supreme Court. Nonetheless, commentators have

continued to explore whether the scope of the Tax Court’s article I

jurisdiction impermissibly encroaches on the independence of the Judiciary

as protected by article III.

358

More recent examinations of this

354

See id. at 396. The Tax Court did not view its judicial character as

mandating that it be chartered under article III:

The fact that the Tax Court has characteristics of a court and performs its

functions in a judicial manner, as we think it does, . . . and has no legislative

administrative, or advisory powers, does not necessarily mean that it must

be established under Article III of the Constitution.

Id.

355

See id. at 396–400 (citing and analyzing Glidden Co. v. Zdanok, 370 U.S.

530 (1962); Williams v. United States, 289 U.S. 553 (1933); Ex parte Bakelite Corp.,

279 U.S. 438 (1929)).

356

Id. at 397.

357

Id. at 402 (Raum, J., concurring).

358

These questions typically have been raised in the context of examinations of

the expansions of the Tax Court’s statutory jurisdiction or in connection with the

230 The United States Tax Court – An Historical Analysis

constitutional issue focus on a trio of cases issued by the Supreme Court in

the 1980’s,

the first of which held that ancillary jurisdiction over state law

claims afforded to federal bankruptcy courts established under article I was

unconstitutional.

359

In general terms, these cases evidenced the Court’s

intention to move away from a rigid set of disputes that could be

adjudicated before a non-article III tribunal

360

and toward an analysis that

balanced the institutional interests of an independent Judiciary against the

interests of Congress in providing innovative dispute resolution fora.

361

consideration of reforms that would further elevate that primacy of the Tax Court

in the tax adjudication process. See, e.g., Diane L. Fahey, The Tax Court’s Jurisdiction

Over Due Process Collection Appeals: Is it Constitutional?, 55 B

AYLOR L. REV. 453

(2003); Deborah L. Geier, The Tax Court, Article III, and the Proposal Advanced by the

Federal Courts Study Committee: A Study in Applied Constitutional Theory, 76 C

ORNELL

L. REV. 985 (1991).

359

Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50

(1982); Thomas v. Union Carbide Agric. Products Co., 473 U.S. 568 (1985);

Commodity Futures Trading Commission v. Schor, 478 U.S. 833 (1986).

360

In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50

(1982), the Supreme Court addressed a challenge to the constitutionality of the

portion of the Bankruptcy Act of 1978 that conferred upon federal bankruptcy

judges (who are appointed to serve terms of 14 years) jurisdiction over state law

claims that related to a title 11 proceeding. Stressing the “fundamental principle”

that the judicial power of the United States is vested in article III courts, a plurality

opinion authored by Justice Brennan and joined by three other Justices recognized

three historical exceptions in which judicial power could be constitutionally

exercised outside of the article III realm: (1) territorial courts; (2) courts-martial;

and (3) cases involving the adjudication of “public rights.” Id. at 63–70. This third

exception, as the Court explained, applies to matters between the Government and

third parties that could be resolved exclusively within either the executive or

legislative branch. That being the case, there can be no constitutional objection to

those branches establishing court-like tribunals for purposes of resolving such

disputes. See id. at 68. The plurality opinion contrasted public rights cases from

disputes concerning private rights, the latter of which the opinion described as

resting “at the core of the historically recognized judicial power.” Id. at 70.

Accordingly, the Court concluded that such private right disputes could not be

adjudicated by bankruptcy judges who lacked lifetime tenure and salary protection.

Id. at 71–72.

361

In Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985), the

Supreme Court upheld a binding arbitration provision under federal law against an

article III challenge. While the Court could have justified its holding on the public-

rights doctrine outlined in the plurality opinion in Northern Pipeline, the Court in

Thomas explained that the application of article III should be informed by “practical

attention to substance rather than doctrinaire reliance on formal categories.” Id. at

568. Focusing on the right at issue and the congressional motivation in granting it,

the Court upheld the arbitration regime on grounds that it did not threaten “the

independent role of the Judiciary in our constitutional scheme.” Id. at 590.

The Board Becomes a Court 231

Commodity Futures Tradition Commissioner v. Schor,

362

the last in the

aforementioned trio, the Supreme Court articulated the balancing test in the

following terms:

In determining the extent to which a given congressional decision to

authorize the adjudication of Article III business in a non-Article III

tribunal impermissibly threatens the institutional integrity of the

Judicial Branch, the Court has declined to adopt formalistic and

unbending rules. Although such rules might lend a greater degree of

coherence to this area of law, they might also unduly constrict

Congress’ ability to take needed and innovative action pursuant to its

Article I powers. Thus, in reviewing Article III challenges, we have

weighed a number of factors, none of which has been deemed

determinative, with an eye to the practical effect that the

congressional action will have on the constitutionally assigned role of

the federal judiciary. Among the factors upon which we have

focused are the extent to which the “essential attributes of judicial

power” are reserved to Article III courts and, conversely, the extent

to which the non-Article III forum exercises the range of jurisdiction

and powers normally vested only in Article III courts, the origins and

importance of the right to be adjudicated, and the concerns that

drove Congress to depart from the requirements of Article III.

363

Tasked with determining whether Congress could permissibly confer

jurisdiction to the Commodity Futures Tradition Commission to adjudicate

state law counterclaims raised in connection with a claim for reparations

brought against a professional broker (pursuant to a statutory dispute-

resolution regime), the Court in Schor determined that the balancing of

interests weighed in favor of Congress.

364

The balancing test articulated by the Supreme Court in Schor provides

sufficient grounds for a reviewing court to uphold the constitutionality of

the Tax Court’s jurisdiction if it were ever challenged. Factors weighing in

favor of the constitutionality of the Tax Court include the court’s limited

statutory jurisdiction to resolve disputes relating to federal taxation; the

availability of an article III refund forum at the trial level; and the prospect

of appellate review of its decisions by article III regional circuit courts.

365

362

478 U.S. 833 (1986).

363

Id. at 851 (citations omitted).

364

Specifically, the Court found that the agency’s exercise of jurisdiction over a

state law claim “as a necessary incident to the adjudication of federal claims

willingly submitted by the parties for initial agency adjudication [did] not

contravene separation of powers principles or Article III.” Id. at 857.

365

This last factor is not available for taxpayers who qualify for and elect to

proceed under the Tax Court’s small case procedures. See I.R.C. § 7463(b)

232 The United States Tax Court – An Historical Analysis

While countervailing points certainly can be made,

366

a reviewing court

would not likely decide the matter in a vacuum. Context is critical, and that

context includes a Tax Court that has exercised its statutory jurisdiction as

an article I tribunal for well over 40 years. Faced with a balancing test, it is

not likely that a reviewing court would interpret the scales in such a way as

to render decades’ worth of decisions from the Tax Court constitutionally

illegitimate. Hence, while the constitutional foundation of the Tax Court’s

jurisdiction may not be immutable, it is by no means precarious.

367

E. Proposals to Consolidate Tax Litigation Before the Tax Court

Of course, a straightforward means of eliminating any lingering

concerns over the constitutionality of the Tax Court’s jurisdiction is to

establish the court under article III of the Constitution. While there has

been no stand-alone proposal to afford the Tax Court article III status as it

is presently constituted, article III status was considered by the Federal

Courts Study Committee in 1990 as part of its proposal to restructure the

federal tax controversy landscape. The deliberations and recommendations

of this committee are discussed below.

As part of the Judicial Improvements and Access to Justice Act,

368

Congress in 1988 authorized Chief Justice Rehnquist to appoint a 15-

person committee to comprehensively investigate issues plaguing the

federal court system and to make recommendations for improvement.

369

The resulting Federal Courts Study Committee was comprised largely of

judges from the federal bench, attorneys in private practice, and members

(rendering Tax Court decisions in this setting final). Professor Geier has noted that

the constitutionality of the Tax Court’s jurisdiction is most vulnerable in this

setting, commenting that the preservation of this helpful portion of the Tax Court’s

jurisdiction may be the most compelling reason to grant article III status to the

court. See Geier, supra note 358, at 1025–32.

366

See Geier, supra note 358, at 989, 1016–25 (examining the Tax Court’s

jurisdiction in light of Schor and its companion cases, and finding that the court, as

currently constituted, does not survive a “principled application of article III

doctrine”). As one factor that would weigh against the Tax Court in the

application of the balancing test, Congress’ departure from article III in this setting

appears to be largely a product of political expediency in the broader goal of

moving the Tax Court out of the Executive Branch.

367

That said, it is not only appropriate but wise to consider the limitations on

non-article III adjudication when considering expansions of the Tax Court’s

precedent or the elimination of alternative article III fora. See, e.g., Fahey, supra note

358; Geier, supra note 358.

368

Pub. L. No. 100-702, 102 Stat. 4642 (1988).

369

Id. at §§ 102, 103, 102 Stat. at 4644.

The Board Becomes a Court 233

of Congress.

370

After receiving testimony and conducting public hearings

for roughly a year, the committee released tentative recommendations near

the end of 1989.

One of the committee’s proposals would have restructured the

prevailing federal tax controversy landscape by elevating the role of the Tax

Court. The committee was disturbed by the availability of three separate

trial-level fora in which to litigate a tax dispute, finding that such a regime

encouraged forum shopping and operated in a manner unfair to certain

taxpayers (presumably those who lacked the financial means to pay the

asserted deficiency to pursue refund litigation outside of the Tax Court).

371

The committee therefore proposed to make the Tax Court’s dominant

jurisdiction over the litigation of tax disputes nearly exclusive. Specifically,

the Tax Court would serve as the exclusive forum for the trial disputes

concerning tax liability, whether originating in the deficiency or refund

posture.

372

The proposal would have constrained the jurisdiction of the

federal district courts over tax matters considerably, leaving those courts

with jurisdiction over criminal tax cases and enforcement actions only.

373

By implication, the jurisdiction of the Court of Claims in the federal tax

arena would have been abolished altogether.

370

The committee was chaired by Judge Joseph F. Weis, Jr., of the Circuit

Court of Appeals for the Third Circuit. The remaining 14 committee members

included: J. Vincent Aprile II (General Counsel of the Kentucky State Dep’t of

Public Advocacy); Jose A. Cabranes (Judge, District Court for the District of

Connecticut); Keith M. Callow (Chief Justice, Supreme Court of Washington);

Levin H. Campbell (Chief Judge, Court of Appeals for the First Circuit); Edward

S.G. Dennis, Jr. (Assistant Attorney General, Criminal Division, United States

Dep’t of Justice); Charles E. Grassley (United States Senator); Morris Harrell

(attorney in private practice); Howell T. Heflin (United States Senator); Robert W.

Kastenmeier (member of the United States House of Representatives); Judith N.

Keep (Judge, District Court for the Southern District of California); Rex E. Lee, Jr.

(President, Brigham Young University); Carlos J. Moorhead (member of the United

States House of Representatives); Diana Gribbon Motz (attorney in private

practice); and Richard Posner (Judge, Court of Appeals for the Seventh Circuit).

Federal Courts Study Committee, Report of the Federal Courts Study Committee

app. B (Apr. 2, 1990) [hereinafter FCSC Final Report].

371

FCSC Final Report, supra note 370, at 69.

372

Id. at 70. The practical effect of the proposed expansion of the Tax Court’s

jurisdiction would have been modest from a macro perspective, as the committee

observed that the Tax Court already handled 95% of tax disputes. Federal Courts

Study Committee, Tentative Recommendations for Public Comment 30 n.20 (Dec.

22, 1989) [hereinafter FCSC Tentative Recommendations]. Accordingly, the

proposal envisioned the addition of only one or two additional Tax Court judges at

the trial level. FCSC Final Report, supra note 370, at 70.

373

Id.

234 The United States Tax Court – An Historical Analysis

The proposal from the Federal Court Study Committee did not stop

with a restructuring of tax adjudication at the trial level. The committee

was troubled by the sheer number of courts possessing intermediate

appellate jurisdiction over tax disputes, with appeals from the Tax Court

and federal district courts being heard by twelve regional courts of appeals

and appeals from the Court of Claims being heard by the Federal Circuit

Court of Appeals.

374

Finding this structure detrimental to the development

of a uniform body of tax law, the committee proposed the creation of an

appellate division within the Tax Court. This division would hear all

appeals from the trial division of the Tax Court, which would amount to

the majority of all intermediate appeals, given the proposed expansion of

the Tax Court’s trial-level jurisdiction.

375

In this manner, the Federal Courts

Study committee endorsed the persistent calls for the creation of a national

court of tax appeals.

376

The Federal Court Study Committee originally proposed that the Tax

Court, with its expanded trial-level jurisdiction and its newly conferred

appellate jurisdiction, be constituted as an article III tribunal.

377

Interestingly, the committee tapped into the theme of perceived Treasury

Department influence over the court as a justification for the provision of

article III protections:

Article III status of the judges should insulate them from undue

influence by the Treasury Department and would thus eliminate the

need to provide taxpayers with “competitive” alternatives in the

federal district courts and in the Claims Court.

378

Perhaps seeking to avoid the turf battles that contributed to defeat of past

attempts to confer article III status on the Tax Court, the committee’s

tentative proposal contemplated the maintenance of a division of labor

among governmental agencies in the tax controversy setting. The Internal

Revenue Service would continue to represent the Government before the

374

Id. at 69–70; FCSC Tentative Recommendations, supra note 372, at 30.

375

The proposal contemplated the addition of five judges to staff the appellate

division. FCSC Final Report, supra note 370, at 70.

376

Indeed, the committee found the creation of an appellate division in the

Tax Court to hear all tax appeals to be the more important of the two proposals, as

the committee offered this proposal as an alternate, stand-alone provision in the

event Congress did not wish to pursue the suggested restructuring of the trial level

adjudication. Id.

377

FCSC Tentative Recommendations, supra note 372 at 30.

378

Id. at 31. Although not mentioned, article III status for the newly

envisioned Tax Court would have foreclosed constitutional objections resulting

from the elimination of the federal district court as a venue for the adjudication of

tax liability.

The Board Becomes a Court 235

trial division of the Tax Court, whereas the Department of Justice would

represent the Government before the appellate division.

379

Proposed article III status for the trial level division of the newly

conceived Tax Court was not included among the committee’s final

recommendations. Rather, only the judges of the appellate division were to

be afforded the protections of lifetime tenure and salary protection under

article III.

380

The apparent justification for the revision was concern raised

by members of the committee that the new article III Tax Court may be

asked to resolve federal issues beyond the federal taxation arena when

presented with cases involving related non-tax federal questions,

381

and that

a specialist court presumably would not be well-equipped to do so.

Conceding that its proposed restructuring of the federal tax adjudication

landscape would do little to ease the workload of federal district and

appellate courts,

382

the committee nonetheless found the reforms worth

pursuing. Of the various articulated benefits of the proposal, the

committee found the prospect of increasing the quality and uniformity of

tax adjudication most compelling.

383

The proposed reforms served as a

vote of confidence in the Tax Court. The committee observed that the Tax

Court was the only available forum that possessed the “the time and

sufficiently substantial volume of tax litigation to develop expertise in one

of the most specialized and technically demanding fields in American

jurisprudence.”

384

However, the committee’s proposed reform of the

federal tax adjudication landscape did not enjoy unanimous support. A

dissenting statement authored by Edward S.G. Dennis Jr. (of the

Department of Justice) and joined by four other committee members

379

Id.

380

FCSC Final Report, supra note 370, at 70.

381

FCSC Tentative Recommendations, supra note 372, at 31.

382

FCSC Final Report, supra note 370, at 70.

383

The committee touted the following benefits of the proposed reforms in

the following terms:

These changes . . . would rationalize federal tax adjudication, reduce forum-

shopping, relieve workload pressures on the existing Article III appellate

courts, and reduce the pressure on the Supreme Court to grant certiorari in

tax cases to resolve intercircuit conflicts. Above all, they would increase the

quality and uniformity of tax adjudication by shifting it form overworked

judges sitting in a large number of diverse courts to a single court of highly

trained specialists.

Id.

384

Id. The proposals of the Federal Courts Study Committee in this setting

and the articulated justifications for such proposals are remarkably consistent with

an article proposing restructuring of the civil tax litigation system published by Tax

Court Judge Dawson expressing his individual views. See Howard A. Dawson, Jr.,

Should the Federal Civil Tax Litigation System Be Restructured?, 40 T

AX NOTES 1427

(1988).

236 The United States Tax Court – An Historical Analysis

(including Senator Grassley and Congressman Moorhead) touted the

benefits of the existing regime. In particular, the dissenting group found

the “genius” of the existing regime to rest in the effective blending of

specialist and generalist elements, which it found to be efficient and

“perceptively fair.”

385

Indeed, this group of committee members appeared

heavily influenced by how the proposed reforms would be received by the

public, expressing their grave concern that the centralization of tax litigation

in a specialized court “would leave the American taxpayers with the

impression that the judicial system is remote and unresponsive.”

386

bolster its position, the dissenting group highlighted the opposition of

institutional segments of the tax bar to the proposals, including the Internal

Revenue Service, the Treasury Department, the Claims Court, and the

American Bar Association—and even the Tax Court itself.

387

The concerns articulated by the dissenting faction of the Federal Courts

Study Committee evidently prevailed. The implementing legislation

proposed by Congress did not include any of the committee’s proposals

concerning the litigation of federal civil tax disputes.

388

Accordingly, the

landscape of federal tax adjudication remains in central respects largely

consistent with the compromise reached by Congress in the Tax Reform

Act of 1969.

F. Subsequent Developments Consistent With Judicial Status

By chartering the United States Tax Court as a court of record

established under article I of the Constitution through the Tax Reform Act

of 1969, Congress supplied the court with a judicial form to match its long-

held character as a judicial arbiter. Although the true effect of the

legislation initially was subject to some doubt, the Supreme Court through

385

FCSC Final Report, supra note 370, at 72.

386

Id.

387

FCSC Final Report, supra note 370, at 71. The attribution of opposition to

the Tax Court as a body appears to have been an overstatement. To start, it is

doubtful that the Tax Court would have articulated an institutional position on the

matter. Furthermore, at the time, Judge Dawson had recently expressed his private

support for the consolidation of trial-level adjudication of tax disputes before the

Tax Court and for the creation of a national court of tax appeals. See Dawson,

supra note 384. However, around the same period, Judge Sterrett expressed his

disapproval of a national court of tax appeals. See Michael S. Moriarty & R. Eliot

Rosen, An Interview with Former Tax Court Chief Judge Sterrett, 41 T

AX NOTES 910

(1988).

388

See Federal Courts Study Group Implementation Act of 1990, H.R. 5381,

101st Cong. (1990). For that matter, none of the implementing legislation became

law. Although the bill passed the House of Representatives, the Senate failed to

take action on the legislation.

The Board Becomes a Court 237

its opinion in Freytag v. Commissioner

389

(detailed in Part V below) confirmed

that the Tax Court “exercises judicial, rather than executive, legislative, or

administrative power,”

390

and that the court stands “independent of the

Executive and Legislative Branches.”

391

Hence, following the 1969

legislation, the Tax Court emerged as a body no longer subject to, what in

the circumstances was, the demeaning characterization as an executive

agency. Judges of the court, although not guaranteed life tenure, can be

reasonably assured of reappointment until they reach retirement age (even if

the reappointment process has become protracted in recent years

392

), at

which time a judicial-type pension is available to them. Because the court is

a creature of the Internal Revenue Code rather than title 28 of the United

States Code, it is subject to the legislative jurisdiction of the congressional

tax-writing committees that are familiar with the work of the court. The

Tax Court submits its budget requests directly to Congress and has a

considerable amount of flexibility in establishing its internal administrative

procedures.

393

Many of these practical advantages would be lost if the Tax

Court were afforded article III status.

Through a combination of statutory enactments and actions taken by

the Tax Court, Congress and the court have steadily implemented policies

making the Court more closely resemble other federal courts. For instance,

soon after enactment of the 1969 provisions, the Tax Court determined

that its notices, orders, rules, and other public documents were no longer

required to be published in the Federal Register pursuant to the

389

501 U.S. 868 (1991).

390

Id. at 890–91

391

Id. at 891.

392

See Danshera Cords, Tax Court Appoints and Reappointments: Improving the

Process, 46 U.

RICH. L. REV. 501 (2012).

393

In the original edition of this text, Prof. Dubroff opened the sentence above

with the following clause: “As a legislative body performing judicial functions, . . .

.” However, that characterization came before the Supreme Court in Freytag v.

Commissioner, 501 U.S. 868, 891 (1991), described the Tax Court as being

“independent of the Executive and Legislative Branches.” Furthermore, as

reflected in the recent case of Kuretski v. Commissioner, – F.3d – (D.C. Cir. 2014)

(Docket No. 13-1090), the location of the Tax Court in the constitutional scheme

of government is subject to dispute. [The Freytag and Kuretski decisions are

discussed in Part V.] Nonetheless, given Prof. Dubroff’s contemporaneous

research of the 1969 Tax Reform Act and, in particular, its effect on the Tax Court,

Prof. Dubroff’s characterization of the Tax Court as a “legislative body” is

noteworthy.

In light of the insertion of this editorial comment and in the sake of

completeness, this footnote in the original text provided as follows: “The fact that,

despite efforts over many years, the court was only able to secure its own

courthouse after the 1969 changes is ample evidence of the benefit of its new

status.”

238 The United States Tax Court – An Historical Analysis

Administrative Procedure Act, and it ordered deletion of the provisions

dealing with the court from the Code of Federal Regulations.

394

recent developments in the transition of the Tax Court’s status to an article

I court are detailed below.

1. Court Security

In 2008 Congress amended § 7456(c) and 28 U.S.C. § 566 to make the

Tax Court a protectee of the United States Marshals Service (USMS) to an

extent equivalent to article III courts, and to provide that the USMS retains

final authority regarding security requirements for the Tax Court.

395

Section

7456(c) authorizes the Chief Judge of the Tax Court to request the United

States Marshal for any district in which the Tax Court is sitting to attend a

session of the Tax Court in that district. Legislative history underlying the

amendment to § 7456(c) states that enhanced security for the Tax Court

was warranted in the light of several acts of violence in 2005 and 2006 that

resulted in the deaths of employees, judges, and judicial family members of

courts other than the Tax Court.

396

2. Tax Court Personnel System

When the Board of Tax Appeals was established in 1924, its governing

statutes provided that its employees were subject to personnel provisions

primarily applicable to employees of the Executive Branch.

397

Section 7471

authorized the Tax Court to appoint, in accordance with provisions of title

5 governing appointment in the competitive service, employees as necessary

to operate the court. In 2010 Congress approved, and on January 4, 2011,

President Obama signed into law, amendments to § 7471(a) authorizing the

Tax Court to appoint employees, generally, without regard to title 5.

398

The

statute, as amended, authorized the court to establish an independent

personnel system

399

and directed the court, to the extent feasible, to align its

employees’ pay to that of similarly situated employees in article III courts.

400

394

See 35 Fed. Reg. 12462 (1970).

395

I.R.C. § 7456(c) and 28 U.S.C. § 566(a) were amended by the Court Security

Improvement Act of 2007, Pub. L. No. 110-177, §§ 101, 102, 121 Stat. 2534,

(signed into law on January 7, 2008).

396

H. REP. NO. 110-218, at 828 (2007).

397

Pub. L. No. 68-176, § 900(k). The same provision appears in the 1925

Statutes at Large as § 1222 of the Internal Revenue Code.

398

I.R.C. § 7471(a)(1)–(3); Pub. L. No. 111-366, § 1(a), 124 Stat. 4063 (2011).

399

See STAFF OF THE JOINT COMM. ON TAX’N, GENERAL EXPLANATION OF

TAX LEGISLATION ENACTED IN THE 111TH CONGRESS, pt. 20 (2011).

400

Id.; I.R.C. § 7471(a)(4).

The Board Becomes a Court 239

The provision became effective on October 9, 2011, when the Court

Conference of the Tax Court adopted the independent personnel system.

401

3. Codes of Conduct and Public Disclosures

On August 29, 1985, the Court Conference adopted resolutions that the

Court would follow the Code of Conduct for United States Judges as the

basis for the ethical standards applicable to all Tax Court judges and be

guided by the rulings of the Judicial Conference of the United States

applying the ethical standards. On June 21, 1991, then Chief Judge Arthur

L. Nims, III wrote to Judge Walter K. Stapleton, chair of the Committee on

Codes of Conduct of the Judicial Conference of the United States, stating

that Tax Court judges wished to have the Committee on Codes of Conduct

act as their “supervising ethics office” within the meaning of titles III and

IV of the Ethics Reform Act of 1989.

402

That request was subsequently

granted. Effective January 1, 2007, the Tax Court made the Code of

Conduct for Judicial Employees applicable to all the court’s employees. On

July 16, 2009, the Court Conference clarified that the Codes of Conduct for

Judges and Judicial Employees apply “as amended as then in effect”,

making revisions in these Codes automatically apply to Tax Court judges

and employees.

On April 26, 2007, the Court Conference adopted the private seminars

disclosure policy established in September 2006 by the Judicial Conference

of the United States.

403

As a result, the public may obtain information from

the Tax Court’s website about nongovernmental education programs

attended by the court’s judges for which the seminar provider pays or

reimburses judges’ expenses.

404

These reports are available for 3 years on

the Tax Court’s website.

4. E-Government Act

The E-Government Act,

405

enacted in 2002, does not expressly apply to

the Tax Court. In 2006, however, the Tax Court voluntarily began to meet

the standards set by the E-Government Act for other federal entities.

406

401

See Pub. L. No. 111-366, § 1; Tax Court Personnel Manual (adopted on

October 9, 2011).

402

Pub. L. 101-194, 92 Stat. 1824.

403

See http://www.uscourts.gov/Press_Releases/judbrappc906c.pdf.

404

See http://www.ustaxcourt.gov/press/042607.pdf.

405

Pub. L. 107–347, 116 Stat. 2899 (2002).

406

See Rules Comm. Note, TAX CT. R. 27, 135 T.C. 395, 396 (2008). For a

detailed discussion of the subject, see Appendix G.

240 The United States Tax Court – An Historical Analysis

Notwithstanding the developments by which the operation of the Tax

Court has become more consistent with that of other federal courts, the

Tax Court remains unique with respect to ability of non-attorneys to

represent taxpayers before it. Nonetheless, the Tax Court has adopted

more formal procedures for admissions to practice before the court and for

disciplining members of the Tax Court bar for professional misconduct.

After reviewing allegations of professional misconduct by members of the

court’s Bar, the Admissions Committee submits recommendations to the

Chief Judge regarding the proper course of action in individual cases.

407

The court issues periodic press releases on its Web site announcing its

disciplinary actions. No less than every two years, the Admissions

Committee conducts the court’s written examination for non-attorneys

seeking admission to the court’s bar.

408

407

See TAX CT. R. 201(a) (July 6, 2012 ed.) (stating that practitioners before the

Court shall carry on their practice in accordance with the letter and spirit of the

Model Rules of Professional Conduct of the American Bar Association).

408

See TAX CT. R. 200(a)(3) (July 6, 2012 ed.).

5. Admissions and Discipline

The

Freytag

Case 241

ART V

A JUDICIAL EXAMINATION OF THE TAX COURT’S

CONSTITUTIONAL NATURE:

FREYTAG V. COMMISSIONER

In Freytag v. Commissioner,

the Supreme Court addressed a challenge to

the constitutional validity of the appointment of special trial judges of the

Tax Court. The taxpayers, whose cases had been selected as test cases in

wide-ranging litigation concerning the same tax shelter transaction,

challenged the validity of the assignment of their cases to a special trial

judge for hearing and preparation of a preliminary report. In addition to

contending that the assignment was not authorized by statute, the taxpayers

argued that the Chief Judge’s statutory authority to appoint special trial

judges failed to comply with the Appointments Clause of the Constitution.

After dispensing with the taxpayers’ statutory argument, the Court

unanimously held that the appointment of special trial judges complied with

the constitutional limitations on the appointment power. Hence, from a

narrow perspective, the decision clarifies that the Tax Court’s use of special

trial judges

does not suffer from constitutional infirmity.

The Freytag decision, however, has significance to the Tax Court far

beyond its relatively narrow holding. Resolution of the Appointments

Clause challenge required the Supreme Court to examine the role of the

Tax Court in the constitutional structure of government. On this issue, the

Supreme Court was sharply divided. A five-Justice majority of the Court

upheld the appointment on grounds that the Tax Court constituted one of

“the Courts of Law” under the Constitution. In reaching this

determination, the Court stressed the exclusively judicial nature of the Tax

Court and declared that the court exercises a portion of the judicial power

of the United States. The Supreme Court’s affirmation of the Tax Court’s

status within the federal judicial scheme in Freytag later would lead the Tax

Court to revisit the scope of its ancillary equitable jurisdiction. For

instance, in Estate of Branson v. Commissioner, the Tax Court rejected prior

case law interpreting its equitable powers narrowly, citing Freytag to support

its determination that the Tax Court “should be properly viewed as

exercising full judicial power within its limited subject matter jurisdiction.”

501 U.S. 868 (1991).

The office of the special trial judge is discussed in Part XII.

113 T.C. 6, 11 (1999). The invocation of Freytag as supporting the Tax Court’s

equitable powers first appeared in Judge Halpern’s concurring opinion in Estate of

Mueller v. Commissioner, 101 T.C. 551 (1993). The Tax Court’s equitable jurisdiction

is discussed in Part VI.D.

242 The United States Tax Court – An Historical Analysis

In determining that the Tax Court constituted a “Court of Law” for

constitutional purposes, the Supreme Court in Freytag laid to rest any

lingering ambiguity concerning the Tax Court’s relationship with the

Executive Branch following its establishment as an article I court through

the Tax Reform Act of 1969. The Court confirmed that Congress

accomplished what it set out to do in the legislation—to terminate the

court’s status as an executive agency sitting in judgment of another. In so

doing, the Court rejected the determination of the Second Circuit Court of

Appeals in the companion case of Samuels, Kramer & Co. v. Commissioner

that the Tax Court’s designation as an article I court of record in the 1969

legislation accomplished nothing apart from changing the label used to refer

to the institution.

This part explores the litigation in Freytag and Samuels, Kramer that

culminated in the Supreme Court’s decision in Freytag. The full landscape

of the litigation reveals a number of interesting developments, including a

complete reversal of the Government’s position once the Solicitor General

assumed responsibility for litigating the cases on behalf of the

Commissioner. Additionally, neither party to the case endorsed the

rationale adopted by the majority of the Supreme Court. Rather, the Tax

Court’s inclusion in “the Courts of Law” under the Appointments Clause

was advanced only through an amicus brief submitted by Erwin N.

Griswold, ostensibly acting in his individual capacity.

A. Developments Before the Tax Court

The Freytag litigation concerned the tax consequences of straddle

investments in futures contracts pertaining to government-backed mortgage

securities. All told, the litigation relating to this shelter transaction involved

roughly 3,000 taxpayers against whom approximately $3 billion in

deficiencies had been asserted.

The Freytag litigation before the Tax Court,

however, concerned ten test cases that had been selected for consolidated

discovery, briefing, trial, and opinion. Trial of the test cases began before

Judge Richard C. Wilbur in November of 1984, but the trial was

periodically postponed on account of Judge Wilbur’s illness. In November

of 1985, Chief Judge Samuel Sterrett of the Tax Court assigned Special Trial

Judge Carlton D. Powell to preside over the trial as an evidentiary referee.

The proceedings were videotaped for the benefit of Judge Wilbur,

permitting him to observe the proceedings from his home. At this point in

the case, Judge Wilbur anticipated that he would prepare the factual

findings and opinion in the case when he recovered. However, Judge

930 F.2d 975 (2d Cir. 1991).

See Brief for Petitioner at 11 & 24, Freytag v. Commissioner, 501 U.S. 868

(1991).

The

Freytag

Case 243

Wilbur’s continued illness eventually forced him to retire from his full-time

position as judge in April of 1986, whereupon he assumed senior status. In

July of 1986, Chief Judge Sterrett notified the parties that he intended to

assign the case to Special Trial Judge Powell pursuant to what was then

§ 7443A(b)(4) for the preparation of findings of fact and opinion,

unless

the parties objected. All but one of the taxpayers (whose case was severed)

consented to the assignment, on the condition that either Judge Wilbur or

Chief Judge Sterrett would bear responsibility for entering the decision in

the case.

Trial of the consolidated cases before the Tax Court in Freytag was fairly

complex. The trial lasted 14 weeks, yielding 9,000 pages of transcripts and

over 3,000 exhibits.

Special Trial Judge Powell, who already had presided

over nine weeks of the trial in his capacity as evidentiary referee before

being formally assigned the case, prepared a report that eviscerated the

straddle investment strategy at issue on the merits. Special Trial Judge

Powell determined that the component transactions of the shelter did not

constitute bona fide transactions for federal income tax purposes; rather,

the transactions were properly disregarded as illusory.

Alternatively,

Special Trial Judge Powell found that even had the transactions at issue

been economically meaningful, the taxpayers nonetheless would not be

entitled to claimed losses because the taxpayers lacked the requisite profit

motive.

In addition to sustaining the deficiencies, Special Trial Judge

Powell upheld the imposition of a negligence penalty.

Judge Powell

concluded his report by issuing a reminder to future counsel concerning the

standards imposed by the Tax Court Rules of Practice and Procedure for

At that time, § 7443A(b)(4) permitted the chief judge of the Tax Court to

assign “any other proceeding which the chief judge may designate” to a special trial

judge, in addition to the types of cases enumerated in prior portions of § 7443A(b).

However, pursuant to § 7443A(c), the special trial judge lacked authority to enter

the final decision in a § 7443A(b)(4) case. Hence, the special trial judge’s report

had to be submitted to a presidentially appointed judge of the Tax Court for

proposed adoption.

See Freytag v. Commissioner, 904 F.2d 1011, 1014 (5th Cir. 1990); Brief for

Petitioner at 8, Freytag v. Commissioner, 501 U.S. 868 (1991).

Freytag v. Commissioner, 501 U.S. 868, 871 n.1 (1991) (citing statements of

taxpayers’ counsel at oral argument).

Freytag v. Commissioner, 89 T.C. 849, 875 (1987). In describing the claimed

economic consequences of the underlying straddle transactions, the report

commented that “[t]he wearing of judicial robes does not require that we take leave

of common sense.” Id. at 878.

Id. at 876.

See id. at 887–89.

244 The United States Tax Court – An Historical Analysis

signing a pleading, as well as the broader duty that counsel owe the court to

decline to litigate unmeritorious claims.

On October 21, 1987, Chief Judge Sterrett issued an order assigning the

case to himself for disposition. On the same day, Chief Judge Sterrett

adopted the report of Special Trial Judge Powell in full.

The same shelter transaction arrived before the Tax Court a few years

later in First Western Government Securities, Inc. v. Commissioner,

a case

concerning the promoter of the straddle investment strategy. Chief Judge

Arthur L. Nims, III assigned the case to Special Trial Judge Powell pursuant

to then § 7443A(b)(4) to hear the case and to prepare a preliminary report.

Having the benefit of Special Trial Judge Powell’s prior report in Freytag, the

taxpayers in First Western understandably moved to vacate the assignment of

their cases. In addition to contending that the assignment was not

permitted under then § 7443A(b)(4) (which the Court rejected as

inconsistent with the statutory text and congressional intent),

the

taxpayers objected to the assignment on constitutional grounds.

Specifically, the taxpayers contended that assignment of their case to a

special trial judge was not permissible because the appointment of special

trial judges by the Chief Judge of the Tax Court failed to comply with the

Appointments Clause of article II of the Constitution. That provision

provides as follows:

[The President] . . . shall nominate, and by and with the Advice

and Consent of the Senate, shall appoint Ambassadors, other public

Ministers and Consuls, Judges of the Supreme Court, and all other

Officers of the United States, whose Appointments are not herein

otherwise provided for, and which shall be established by Law; but

the Congress may by Law vest the Appointment of such inferior

Officers as they think proper, in the President alone, in the Courts of

Law, or in the Heads of Departments.

The taxpayers in First Western focused on the first half of the

Appointments Clause, contending that a special trial judge of the Tax Court

constituted a principal officer of the United States. Because special trial

judges were appointed by the chief judge of the Tax Court instead of by the

President (with the advice and consent of the Senate), their appointments

were invalid, or so the argument went. The Service argued from the

opposite side of the spectrum, contending that the Appointments Clause

See id. at 890–91 (quoting Tax Court Rule 33(b) and citing Rule 3.1 of the

ABA Model Rules of Professional Conduct (1983 ed.)).

94 T.C. 549 (1990).

See id. at 553–56. The taxpayers’ narrow interpretation of § 7443A(b)(4) and

its rejection by the Tax Court and other appellate courts is addressed in Part XII.C.

U.S. CONST. art. II, § 2, cl. 2.

The

Freytag

Case 245

had no application whatsoever to the appointment of special trial judges.

Drawing on the Tax Court’s prior practice of appointing attorneys from its

legal staff to perform the functions of commissioners (who were later

designated as special trial judges), the Service contended that special trial

judges constituted “lesser functionaries subordinate to officers of the

United States” in the parlance of the Appointments Clause.

In other

words, the Service contended that the special trial judges merely assisted the

court in an employee capacity when hearing cases assigned to them

pursuant to § 7443A(b)(4). In the Service’s view, special trial judges in this

setting were not officers of any sort for purposes of the Constitution.

The Tax Court rejected the positions of both parties and resolved the

matter in the space between the two. The court first determined that

special trial judges constituted officers of the United States rather than

employees, citing the significant authority that special trial judges possess to

enter final decisions in certain cases and to hear any case assigned to them.

However, the Tax Court did not believe that special trial judges rose to the

level of principal officers, citing the following limitations on the position:

the chief judge possesses authority to appoint and remove special trial

judges; the duties of special trial judges are defined by the order issued by

the chief judge assigning a particular case to them; and special trial judges

may enter final decisions only in a narrow, statutorily defined range of

cases.

These limitations—not to mention the unstated but inescapable

practical consequences of finding special trial judges to be principal officers

under the Appointments Clause—led the Tax Court to conclude that

special trial judges constituted inferior officers for this purpose. As such,

their appointment would comply with the Appointments Clause so long as

(1) the Tax Court constituted one of “the Courts of Law” under the Clause

that acted through its chief judge, or (2) the Tax Court constituted a

“Department” with the chief judge as its “Head.”

Both the taxpayers and the Commissioner in First Western recognized

that an article III court constituted one of the “Courts of Law” for

purposes of the Appointments Clause. The issue was whether the two were

Respondent’s Objection to Petitioner’s Motion for the Assignment of This

Case to a Presidentially Appointed Judge of the United States Tax Court, at 11–14

(Jan. 16, 1990) [hereinafter “Respondent’s Objection”]. Alternatively, the Service

argued that if the special trial judges were officers for Appointments Clause

purposes, their appointments were valid on grounds that (a) the Tax Court

constituted one of the Courts of Law capable of appointing inferior officers, or (b)

the chief judge of the Tax Court constituted the Head of a Department capable of

appointing inferior officers. See id. at 15–22 (Court of Law argument), 22–24 (Head

of Department argument).

First Western, 94 T.C. at 557.

See id. at 558.

246 The United States Tax Court – An Historical Analysis

synonymous. The Tax Court observed that the question constituted one of

first impression.

The taxpayers contended that “the Courts of Law” under the

Appointments Clause stood as a reference to the Judicial Branch, which is

limited to courts established under article III of the Constitution. The

Commissioner, on the other hand, contended that the scope of “the Courts

of Law” under the Appointments Clause was broad enough to include

article I courts that performed exclusively judicial functions. The Tax

Court was clearly troubled by the narrow interpretation offered by the

taxpayers. Citing its prior history as an independent agency within the

Executive Branch, the court noted that its ability to appoint special trial

judges previously stood unquestioned. However, if congressional

establishment of the Tax Court as an article I court through the Tax

Reform Act of 1969 did not bring the Tax Court within one of “the Courts

of Law” for Appointments Clause purposes, then the 1969 legislation

would have had the anomalous effect of rendering the court powerless to

appoint special trial judges or, for that matter, its own clerk of court.

The

Tax Court found this conclusion “untenable.”

Citing the Supreme

Court’s prior explanation in Williams v. United States that legislative courts

“possess and exercise judicial power—as distinguished from legislative,

executive, or administrative power—although not conferred in virtue of the

third article of the Constitution,”

the Tax Court in First Western

determined that it constituted one of “the Courts of Law” under the

Appointments Clause based on its judicial nature.

The decision of the Tax Court in First Western was reviewed by the entire

court without a single dissent or separate opinion. Nonetheless, noting the

importance of the resolution of the Appointments Clause issue to its

operations, the court certified the matter for interlocutory appeal. Less

than a year later, the Second Circuit Court of Appeals would affirm the Tax

Court in Samuels, Kramer & Co. v. Commissioner,

but only pursuant to a

See id. at 560.

See id. at 563.

Id. Interestingly, the Tax Court in First Western never appeared to give any

consideration to the possibility that the Tax Court could continue to serve as a

department within the Executive Branch. Perhaps the court viewed the intent of

Congress to terminate the Tax Court’s status as an independent administrative

agency through the Tax Reform Act of 1969 as so obvious as to not warrant

further comment.

289 U.S. 553, 566–67 (1933).

First Western, 94 T.C. at 564 (“Because the powers exercised by the Tax Court

are judicial powers, not legislative powers, Tax Court judges are judicial officers,

not legislative officers.”).

930 F.2d 975 (2d Cir. 1991).

The

Freytag

Case 247

widely disparate interpretation of the Tax Court’s standing in the

Appointments Clause framework.

B. Decisions at the Courts of Appeals

Before the Second Circuit could weigh in on the matter, the Fifth

Circuit Court of Appeals issued its decision in the appeal of the Freytag

case.

There, the taxpayers raised an Appointments Clause challenge to the

referral of their cases to a special trial judge for the first time. The Fifth

Circuit refused to entertain this argument, holding that the taxpayers had

waived any constitutional objection to the assignment of their cases to the

special trial judge when they consented to the assignment.

The Fifth

Circuit then proceeded to sustain the Tax Court’s decision on the merits.

After the Fifth Circuit issued its decision in Freytag in which it avoided

addressing the Appointments Clause issue on the merits, the Second Circuit

heard oral argument in the appeal of the Tax Court’s decision in First

Western. The appeal before the Second Circuit was captioned Samuels,

Kramer & Co. v. Commissioner.

In terms of placing the Second Circuit’s

decision in Samuels, Kramer in the context of the Freytag litigation that would

proceed to the Supreme Court, the Supreme Court granted the taxpayers’

writ of certiorari in Freytag after the Second Circuit heard oral argument in

Samuels, Kramer. The Second Circuit issued its opinion months later, in

advance of the Supreme Court’s definitive opinion in Freytag.

Before turning to the substance of the Second Circuit’s decision in

Samuels, Kramer, it is worth highlighting the individuals primarily responsible

for litigating the appeal. The taxpayers were represented by Kathleen

Sullivan, a constitutional law expert who at the time was a professor at

Harvard Law School (and who would later become Dean of Stanford Law

School). On the other side, the Government was represented by Kenneth

W. Starr in his capacity as Solicitor General. Among others assisting the

Solicitor General was John G. Roberts, Jr., Deputy Solicitor General and

future Supreme Court Chief Justice. Yet perhaps the most intriguing

participant in the Samuels, Kramer appeal was Erwin N. Griswold, former

Solicitor General and a former long-serving Dean of Harvard Law School.

Dean Griswold filed an amicus brief in his individual capacity.

Dean Griswold initially attempted to appear in a representative capacity

on behalf of the chief judge, the judges, and the senior judges of the Tax

Court. These judges sought leave to participate in the appeal as amici curiae

after being informed by individuals in the Department of Justice that the

Government would seek to have the Tax Court’s decision in Samuels, Kramer

See 904 F.2d 1011 (5th Cir. 1991).

See id. at 1015 n.9.

930 F.2d 975 (2d Cir. 1991).

248 The United States Tax Court – An Historical Analysis

affirmed solely on the basis that the chief judge constituted the “Head” of a

“Department” under the Appointments Clause.

Although the

Government had prevailed at the Tax Court on the basis that the Tax Court

constituted one of the Courts of Law under the Appointments Clause

capable of appointing inferior officers, the Government intended to

abandon this rationale on appeal. The various judges of the Tax Court

therefore sought to participate in the appeal to preserve the argument that

the Tax Court constituted one of the Courts of Law. The Department of

Justice objected to the request, contending that the Attorney General and

officers of the Department of Justice were the only parties authorized to

conduct litigation in which the United States, an agency, or officer thereof

was interested.

However, the Government did not oppose the

participation of Dean Griswold in the case altogether; the Government

stated that it would not object to the filing of an amicus brief by Dean

Griswold in his individual capacity, whether on his own accord or at the

invitation of the court.

Dean Griswold thereafter moved to file a brief as

amicus curiae on his own behalf, which was granted.

The basis for the interest of the judges of the Tax Court in participating

in the appeal of the Samuels, Kramer decision turned out to be well founded.

The Commissioner—no longer represented by the IRS Office of Chief

Counsel but instead by the Solicitor General on behalf of the Department

of Justice—modified its position considerably. For the first time, the

Commissioner endorsed the taxpayers’ position that “the Courts of Law”

under the Appointments Clause referred exclusively to the article III courts

that make up the Judicial Branch. The Government thereby abandoned the

basis on which it had prevailed before the Tax Court below. Dean

Griswold, in his position as amici curiae, supplied the lone voice contending

that the Tax Court constituted a Court of Law capable of appointing its

See Affidavit in Support of Motion For Leave to File A Brief As Amici Curiae

and For an Extension of Time at 2, Samuels, Kramer & Co. v. Commissioner, Nos.

90-4060 and 90-4064 (2d Cir. Aug. 10, 1990).

See Letter from Shirley D. Peterson, Assistant Attorney General (Tax

Division) to Elaine B. Goldsmith, Clerk, U.S. Court of Appeals for the Second

Circuit at 1–2, Samuels, Kramer & Co. v. Commissioner, No. 90-4060 (2d Cir. Aug.

17, 1990). [Dean Griswold privately complained about the Government’s position,

contending that it reflected the Department of Justice’s “current mechanical state

of mind.” Letter from Erwin N. Griswold to Professor Laurence H. Tribe, May

31, 1991.] The taxpayer objected as well, contending that the participation of the

judges of the Tax Court in an appeal of a decision issued by the Tax Court was not

appropriate. See Memorandum in Opposition to Motion of the Judges of the

United States Tax Court for Leave to File Brief as Amici Curiae, For Extension of

Time, and For Permission to Participate in Oral Argument, Samuels, Kramer & Co.

v. Commissioner, Nos. 90-4060 and 90-4064 (2d Cir. Aug. 15, 1990).

See Letter from Shirley D. Peterson, supra note 29, at 2.

The

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Case 249

inferior officers. As discussed below, the Second Circuit favored the

Commissioner’s newly minted position.

The Second Circuit in Samuels, Kramer began its Appointments Clause

analysis by agreeing with the Tax Court’s determination that special trial

judges constituted inferior officers under the provision. The court was not

troubled by the limitations imposed on special trial judges hearing cases

pursuant to § 7443A(b)(4). Rather, the court stressed the considerable

authority that the special trial judge exerts in that capacity: conducting

trials, receiving testimony, making evidentiary rulings, and enforcing

compliance with discovery orders. The court found this level of

responsibility and discretion to be inconsistent with employee

classification.

Given the status of special trial judges as inferior officers of the United

States, their appointment would be constitutional only if the chief judge of

the Tax Court constituted the “Head” of a “Department” under the Clause,

or if the Tax Court constituted one of “the Courts of Law” that acted

through its chief judge. The Second Circuit rejected the amicus’ arguments

in favor of the latter. The court found no indication that the Framers

contemplated any courts other than those created under article III when it

identified “the Courts of Law” as a potential repository of appointment

power.

And although no precedent existed addressing whether “the

Courts of Law” under the Appointments Clause could encompass an article

I court, the Second Circuit noted that its article III-exclusive interpretation

had the benefit of complying with the Supreme Court’s prior paraphrasing

of the provision. In Buckley v. Valeo,

the Supreme Court examined the

authority of Congress to designate commissioners to the Federal Elections

Commission. In the course of its analysis, the Court described the

operation of the Appointments Clause as follows: “Inferior officers

Congress may allow to be appointed by the President alone, by the heads of

departments, or by the Judiciary.”

Noting that “the Judiciary” had been

consistently interpreted as referring to judges who enjoyed the political

protections of article III, the Second Circuit concluded that only courts that

possessed the article III attributes could exercise the judicial power of the

United States.

Dean Griswold as amicus curiae argued against the maintenance of a

formal distinction between article I and article III courts. He contended

that “the Courts of Law” for purposes of the Appointments Clause should

encompass any court of record authorized by Congress to adjudicate

Samuels, Kramer, 930 F.2d at 985–86.

See id. at 989.

424 U.S. 1 (1976).

Id. at 132 (emphasis added).

Samuels, Kramer, 930 F.2d at 989.

250 The United States Tax Court – An Historical Analysis

cases.

On that note, he emphasized the Tax Court’s exclusively judicial

role—a characterization the Second Circuit did not dispute.

Instead, the

court rejected the notion that adjudicatory function alone sufficed to render

a body a Court of Law. The Second Circuit explained that a purely

functional analysis could disturb the Constitution’s separation of powers

framework, an approach the court believed could lead to “untenable

results,”

even if threat to the constitutional scheme posed in the present

case were “minimal.”

The Second Circuit’s refusal to treat the Tax Court as a Court of Law

under the Appointments Clause did not portend victory for the taxpayer.

The court went on to adopt the Commissioner’s position that the Tax

Court constituted a “Department” under the Clause that acted through the

chief judge as its “Head.” The Second Circuit opened its explanation by

noting the Tax Court’s origins as the Board of Tax Appeals, an independent

agency within the Executive Branch. That status did not change when

Congress renamed the Board the “Tax Court of the United States” in 1942.

Although Congress established the Tax Court as a court of record under

article I of the Constitution as part of the Tax Reform Act of 1969, the

Second Circuit did not view the legislation as effecting meaningful change

to the Tax Court’s constitutional status. The Second Circuit found nothing

in the legislation itself that necessitated a determination that Congress had

removed the court from the Executive Branch. Additionally, the court read

the Senate report accompanying the 1969 legislation as failing to

demonstrate congressional intent to cease the Tax Court’s classification as

an administrative agency.

In the Second Circuit’s view, the practical effect

of the Tax Reform Act of 1969 on the Tax Court was paltry. The

legislation merely changed the name of the Tax Court once again, this time

from the Tax Court of the United States to the United States Tax Court.

See id. at 988.

The Second Circuit conceded the amicus’ premise in the following terms:

We do not dispute Amicus’ factual assertions. Indeed, we acknowledge that

the Tax Court performs many functions similar to those performed by

Article III courts. The judges of the Tax Court hear evidence, make rulings,

review briefs, and render opinions that are binding on the parties and

appealable to the Courts of Appeals.

Id. at 990.

Id.

Id. at 987–88.

See id. at 991. On this point, it bears observing that the Senate report

explained the effect of the legislation as establishing the Tax Court as “an Article I

court rather than an executive agency.” S.

REP. NO. 91-552, at 303 (1969) (emphasis

supplied).

See Samuels, Kramer, 930 F.2d at 991 (characterizing the legislation as

“renaming this adjudicatory body”).

The

Freytag

Case 251

The court bolstered its determination that Congress “did little more than

change the label to be used” when referring to the Tax Court by citing the

congressional directive that the reconstituted Tax Court represented a

continuation of the court as it existed prior to the legislation.

The Second Circuit supported its conclusion that the Tax Court

constituted a department “associated”

with the Executive Branch by citing

several connections between the two. Perhaps the most persuasive

connection rested in the President’s ability not only to appoint judges of the

Tax Court, but also to remove them pursuant to § 7443(f). Even though

the grounds for removal were limited to “inefficiency, neglect of duty, or

malfeasance in office,” and even though the targeted judge would possess

the right to notice and a public hearing before being removed, the Second

Circuit concluded the judges of the Tax Court “ultimately remain

answerable to the President and are not wholly divorced from his

oversight.”

To the extent the Appointments Clause is intended not only

to divest Congress of the power to appoint officers to positions it creates,

but, from a larger perspective, to maintain a balance of power between the

three branches of government,

the President’s continuing oversight of the

Tax Court judges provided the strongest justification for treating the Tax

Court as continuing to reside within the Executive Branch.

Although recognizing that the Appointments Clause question before it

was “not susceptible to easy analysis,” the Second Circuit in Samuels, Kramer

provided a thorough brief for why the Tax Court should be regarded as

continuing to reside in the Executive Branch notwithstanding its

establishment as an article I court. To the extent the Tax Court possessed

an institutional desire to be regarded as part of the federal judicial regime,

the Second Circuit’s determination that the Tax Reform Act of 1969

accomplished “little more than chang[ing] the label” used to refer to the

court had to come as a dispiriting blow.

Yet, to the extent the Tax Court

preferred to be slotted alongside article III courts for purposes of

determining its appointment power, it possessed a second, more definitive

See id. (citing the Tax Reform Act of 1969, Pub. L. No. 91-172, § 961, 83 Stat.

487, 735).

Id.

Id. at 993.

See id. at 988 (“The provisions of Article II incorporate the principle of

separation of powers . . . .”).

As a final matter, the Second Circuit seized on the source of the power to

appoint special trial judges to support its position. The court interpreted Congress’

decision to vest the power in the chief judge of the Tax Court, as opposed to the

Tax Court as a body, as evidencing Congress’ apparent belief that the chief judge

constituted the head of his department for Appointments Clause purposes. See id.

at 993.

Id. at 991.

252 The United States Tax Court – An Historical Analysis

opportunity to obtain this characterization when the Supreme Court heard

the taxpayers’ appeal in the Freytag case.

C. The Supreme Court Decision

The principal advocates before the Supreme Court when it considered

the appeal of the Fifth Circuit’s decision in Freytag were identical to those

before the Second Circuit in Samuels, Kramer. Kathleen Sullivan represented

the taxpayers, Kenneth Starr represented the Government in his capacity as

Solicitor General (with John G. Roberts, Jr., arguing the case as Deputy

Solicitor), and Erwin Griswold submitted a brief as amicus curiae on his own

behalf.

Due to the participation of Sullivan, Roberts, and Griswold, the

litigation before the Supreme Court in Freytag has been characterized as a

“three-way clash of the titans.”

The case provided the Supreme Court the opportunity to address the

taxpayers’ challenge to the constitutional validity of the Tax Court’s use of

special trial judges, an issue that no court had addressed in the Freytag line of

cases. The taxpayers in Freytag raised the Appointments Clause challenge

for the first time on appeal of the Tax Court decision, and the Fifth Circuit

determined that the taxpayers had waived any constitutional objection by

consenting to the assignment of their cases to the special trial judge. Based

on the posture of the case, the Supreme Court could have easily avoided the

constitutional question as well. However, the Second Circuit’s intervening

decision in Samuels, Kramer effectively negated that option—that is, unless

the Court largely agreed with the Second Circuit’s analysis of the issue.

The case was argued by Kathleen Sullivan, on behalf of the taxpayer, and

John Roberts, Jr., who represented the Solicitor General’s office as Assistant

Solicitor. Erwin Griswold sought leave to participate in oral argument of the case

in his capacity as amicus curiae, but his request was denied. Dean Griswold did not

take the denial lightly. In a letter to Justice Blackmun following the decision in

Freytag, he expressed his frustration in the following manner:

The latter [motion to participate in oral argument] was denied, despite the

clear precedent of the appearance to present argument some thirty years ago

in the cases involving the Court of Claims and the Court of Customs and

Patent Appeals. I must confess that I was rather annoyed with this, since it

meant that there was no one who would present argument in support of

what I call the “classical” position. The British, I think, have long

maintained a relationship between bench and bar which would have

welcomed my appearance.

Letter to the Honorable Harry A. Blackmun from Erwin N. Griswold at 3, Dec. 20,

1991. [Copy of letter on file with author; original in Harvard Law Library.]

See Tuan Samahon, Blackmun (and Scalia) at the Bat: The Court’s Separation of

Powers Strike Out in Freytag, 12 N

EV. L.J. 691, 693 (2012).

Indeed, the four-Justice concurring opinion in the case favored passing on the

constitutional question by affirming the Fifth Circuit’s decision on the issue of

The

Freytag

Case 253

Had the Court affirmed the Fifth Circuit on the waiver issue, the Second

Circuit’s decision in Samuels, Kramer would have served as the definitive

interpretation of the Tax Court’s status within the constitutional

framework.

The Supreme Court therefore first had to decide if it would entertain the

taxpayers’ Appointments Clause challenge on the merits. The majority of

the Court did so in fairly short order. The Court noted that the

constitutional challenge questioned the validity of the underlying Tax Court

proceeding in the case. Additionally, the Court observed that the case

implicated the interests of the judiciary in “‘maintaining the constitutional

plan of separation of powers.’”

These considerations, coupled with its

characterization of the taxpayers’ challenge as a serious one,

prompted the

Court to declare the proceeding “one of those rare cases” in which it would

consider a matter that had not been raised below.

Turning to the merits of the alleged Appointments Clause violation, the

Court first addressed whether the appointment of special trial judges

implicated the Constitution in the first place. Noting that the special trial

judges in the Tax Court first took the form of staff attorneys who were

appointed to assist the judge in the disposition of cases, the Commissioner

contended that special trial judges hearing cases pursuant to § 7443A(b)(4)

constituted employees whose hiring fell outside the scope of the

Appointments Clause. Because the special trial judge could not enter a

decision in these cases, the judge constituted a mere assistant to the Tax

Court judge in hearing evidence and preparing a proposed opinion, or so

the argument went.

Like every court before it, the Supreme Court refused to treat special

trial judges as mere employees. The Court explained that the

characterization ignored the significant duties performed and considerable

discretion exercised by special trial judges in § 7443A(b)(4) cases, which

included conducting a trial, ruling on admissibility of evidence, evaluating

the credibility of witnesses, and preparing the initial proposed report in the

case.

Additionally, the Commissioner’s argument produced the

disconcerting prospect of special trial judges having dual status—officers

when they heard cases in which they could enter the final decision under

§ 7443A(b)(1)–(3), but employees when hearing cases under § 7443A(b)(4).

The Court concluded that if special trial judges constituted officers for any

purpose, their appointment had to comply with the Appointments Clause.

waiver. See Freytag, 501 U.S. at 892–93 (Scalia, J., concurring). As discussed below,

the concurring opinion then proceeded to endorse an analysis of the constitutional

issue consistent with that of the Second Circuit.

Id. at 880 (quoting Glidden Co. v. Zdanok, 370 U.S. 530, 536 (1962)).

See id. at 883.

Id. at 880.

Id. at 881–82.

254 The United States Tax Court – An Historical Analysis

Accordingly, the Court determined that special trial judges constituted

“inferior Officers” whose appointment was subject to the restrictions of the

Appointments Clause.

Having found the Appointments Clause implicated, the text of the

provision presented two options for compliance: (1) the chief judge could

constitute the “Head” of a “Department” within the executive branch; or

(2) the Tax Court could constitute one of “the Courts of Law.” If neither

of these characterizations were appropriate, the taxpayers would prevail on

their claim that the appointment of the special trial judge was

constitutionally infirm.

Reversing course from its position before the Fifth Circuit,

the

Commissioner advanced the executive branch approach for compliance

with the Appointments Clause. The Commissioner arrived at this position

through a process of elimination. The Tax Court clearly was not a

legislative body under article I. And because the Tax Court was not an

article III court whose judges enjoyed lifetime tenure and salary protection,

the Commissioner contended that it did not constitute one of “the Courts

of Law” under the Appointments Clause. Accordingly, the Commissioner

contended that the Tax Court continued to reside within the Executive

Branch of article II where it originated, even though it conceded that the

Tax Court’s fit there “may not be a perfect one.”

Having settled on the

article II approach, the Commissioner interpreted the scope of a

“Department” under the Appointments Clause as including any

independent component of the Executive Branch. Because the Tax Court

stood as an independent body, the Commissioner contended that it

constituted a department under the Appointments Clause with the chief

judge as its head.

The taxpayers were less concerned with identifying the Tax Court’s

position in the tripartite governmental structure and more interested in

articulating what the Tax Court was not. The taxpayers agreed with the

Commissioner that “the Courts of Law” under the Appointments Clause

were limited to article III courts—the only courts mentioned in the

Constitution. However, they disagreed that the Tax Court remained within

the Executive Branch. The legislative history accompanying the Tax

Reform Act of 1969 provided plenty of support for this position. In

particular, Congress commented that the Tax Court’s status as an executive

agency, “no matter how independent, raises questions in the minds of some

as to whether it is appropriate for one executive agency to be sitting in

Although the Fifth Circuit did not address the taxpayers’ Appointments

Clause challenge, the Commissioner on brief took the position that the Tax Court

constituted a “Court of Law” under the Appointments Clause. See Brief for Erwin

N. Griswold as Amicus Curiae at 11 n.8, Freytag v. Commissioner, 501 U.S. 868

(1991) (citing briefs before the Fifth Circuit).

Brief for Respondent at 41, Freytag v. Commissioner, 501 U.S. 868 (1991).

The

Freytag

Case 255

judgment on the determinations of another executive agency.”

Finding it

“anomalous to continue to classify it with quasi-executive agencies that

have rulemaking and investigatory functions,”

Congress viewed the

legislation as rendering the Tax Court “an article I court rather than an

executive agency.”

Accordingly, to conclude that the Tax Court

continued to reside in the Executive Branch following the Tax Reform Act

of 1969 would be tantamount to characterizing this portion of the

legislation as wholly ineffectual.

After arguing that the Tax Court was not part of the Executive Branch

and not part of the Judiciary, counsel for the taxpayers was pressed on

where the Tax Court fit within the federal structure. Taxpayers’ counsel did

not provide an affirmative answer. Instead, she reiterated that the Tax

Court was neither legislative, executive, nor judicial, and she concluded her

response by positing that “perhaps Congress should not create entities that

are outside the tripartite structure of government.”

Erwin Griswold, arguing on brief as amicus curiae, challenged the point of

agreement between the taxpayers and the Commissioner: that “the Courts

of Law” under the Appointments Clause were limited to those courts

established under article III of the Constitution. Noting that no such

express limitation appeared in the relevant text, Griswold contended that

the phrase should be afforded a “fair and natural construction” that would

encompass all courts that “administer, interpret, and apply the laws of the

United States.”

From this perspective, the Tax Court possessed the

requisite judicial nature. As noted by Griswold, the Tax Court exercised

judicial power in resolving disputes between taxpayers and the

Government; its decisions were not subject to intermediate review by

Federal district courts but, instead, were appealable to the courts of appeals

in the same manner as a district court decision; and Congress supplied the

court with power to enforce its orders and punish contempt. In this

manner, Griswold advocated a functional interpretation of “the Courts of

Law” under the Appointments Clause, one that did not turn on the

derivation of the court’s charter.

With these three approaches on the table, the Supreme Court began its

analysis of the Appointments Clause issue by dismissing the

Commissioner’s position that the chief judge of the Tax Court served as the

head of a department within the Executive Branch. The Court noted that

for the Commissioner’s argument to prevail, it was incumbent upon the

Commissioner to demonstrate not only that the Tax Court was part of the

S. REP. NO. 91-552, at 302 (1969).

Id.

Id. at 303 (emphasis supplied).

Transcript of Oral Argument at 27, Freytag v. Commissioner, 501 U.S. 868

(1991).

Brief of Amicus Curiae at 7, Freytag v. Commissioner, 501 U.S. 868 (1991).

256 The United States Tax Court – An Historical Analysis

Executive Branch but also that the court rose to the level of a Department

therein.

Having framed the argument in these terms, the Court opened its

analysis by simply stating “We are not so persuaded.”

The Court did not identify at the outset whether it found only one or

both of the conjunctive elements of the Commissioner’s argument to be

lacking. Yet the Court began its analysis by examining the more narrow

point—the scope of a “Department” for purposes of the Appointments

Clause. The Court began its explanation by exploring the definition of a

“Department” for this purpose. The Court explained that interpreting

“Department” as including any independent component of the federal

administrative regime would permit wide dissemination of the appointment

power that the Appointments Clause was intended to foreclose. Yet

drawing a precise boundary on the scope of a “Department” proved

difficult. The Court viewed the term as referring to Cabinet-level agencies

and, in addition, “Cabinet-like” departments within the Executive Branch

that Congress designated as departments.

The Court’s analysis of the scope of a “Department” under the

Appointments Clause in Freytag was somewhat curious, as that issue

required resolution only if the Court determined that the Tax Court

continued to reside in the Executive Branch. After concluding its

discussion of the more narrow element of the Commissioner’s argument

(whether the Tax Court could qualify as a Department), the Court in Freytag

appeared to turn its attention to the broader premise—that is, whether the

Tax Court remained in the Executive Branch in any capacity. The Court

explained that, even if it were not persuaded that the Commissioner’s

suggested interpretation of the scope of a Department under the

Appointments Clause did not contravene the intended meaning of the term

and did not threaten to diffuse the appointment power (in other words,

even if the Court were to accept the Commissioner’s contention that the

definition of a Department could encompass the Tax Court),

the Court

explained that it “still could not accept [the Commissioner’s] treatment of

the intent of Congress . . . .” At this point in the opinion, the Court did not

specifically identify the Commissioner’s treatment of the intent of Congress

that it was rejecting. Nonetheless, at the outset of its discussion of this

issue, the Court characterized the Commissioner’s position in the following

Freytag, 501 U.S. at 885–86.

Id. at 886.

Id. at 885. Years later, the Supreme Court interpreted a “Department” under

the Appointments Clause as including the Securities and Exchange Commission on

grounds that the commission constituted “a freestanding component of the

Executive Branch,” that was “not subordinate to or contained within any other

such component.” Free Enterprise Fund v. Public Co. Accounting Oversight Bd.,

130 S. Ct. 3138, 3163 (2010).

See Freytag, 501 U.S.at 887.

The

Freytag

Case 257

terms: “[T]he Commissioner argues that § 7441 simply changed the status

of the Tax Court within [the Executive Branch]. It did not remove the

body to a different branch or change its substantive duties.”

The

Commissioner’s treatment of the intent of Congress that the Court declared

it could not accept therefore appears to be that Congress did not remove

the Tax Court from the Exectuive Branch through the Tax Reform Act of

1969. The Court’s subsequent explanation supports this interpretation.

Quoting the Senate Report that accompanied the 1969 legislation, the Court

noted that Congress enacted the legislation “with the express purpose of

‘making the Tax Court an Article I court rather than an executive

agency.’”

Additionally, the Court recounted that Congress found it

“‘anomalous to continue to classify’ the Tax Court with executive

agencies,”

in light of the dubious propriety of “‘one executive agency’ [the

pre-1969 tribunal] to be sitting in judgment on the determinations of

another executive agency [the IRS].’”

The Court in Freytag evidently viewed its references to the legislative

materials accompanying the Tax Reform Act of 1969 as self-explanatory.

The Court never expressly declared that Congress removed the Tax Court

from the Executive Branch, nor did it offer a concluding sentence of any

sort to this paragraph. Rather, in the subsequent paragraph, the Court in

Freytag concluded its entire discussion of the Commissioner’s two-pronged

argument by returning to the more narrow ground: “The Tax Court is not

a ‘Department[t].’”

Nothwithstanding the absence of an express

resolution of the Executive Branch issue, it is difficult to faithfully read the

Freytag Court’s rejection of the Commissioner’s interpretation of

congressional intent as not indicating its view that Congress removed the

Tax Court from the Executive Branch when it “transform[ed]” the Tax

Court into a court of record established under article I.

After concluding that the Tax Court was not a Department within the

Executive Branch—effectively overruling the Second Circuit’s decision in

Samuels, Kramer in the process—the Court in Freytag next turned to the

Id. at 885.

Id. at 887 (quoting S. REP. NO. 91-552, at 303 (1969)).

Id. at 887–88 (quoting S. REP. NO. 91-552, at 303 (1969)).

Id.at 888.

See id. (referring to the “clear intent of Congress to transform the Tax Court

into an Article I legislative court”).

Indeed, the only way to read this portion of the Freytag opinion otherwise

would be to interpret the Tax Court as constituting a body within the Executive

Branch that was not an agency. However, the Court in Freytag never attempted to

make such a distinction. Additionally, such an interpretation—that Congress

changed the status of the Tax Court within the Executive Branch—would have

represented an endorsement of the Commissioner’s interpretation of congressional

intent, rather than a refusal to accept it.

258 The United States Tax Court – An Historical Analysis

second avenue for finding that the appointment of special trial judges was

constitutionally permissible: that the chief judge of the Tax Court acted on

behalf of one of “the Courts of Law” under the Appointments Clause. The

Court dispensed with the contention that this term was limited to courts

chartered under article III, noting the absence of any express limitation to

that effect. Additionally, the Court found its prior paraphrasing of the

Appointments Clause in Buckley v. Valeo, wherein the Court stated that the

Appointments Clause permitted appointment of inferior officers by “the

President alone, by the heads of departments, or by the Judiciary,”

to be

non-binding. The Buckley case did not purport to resolve the scope of “the

Courts of Law” under the Appointments Clause; rather, the Court in

Buckley examined the Appointments Clause to determine whether Congress

could appoint commissioners to the Federal Elections Commission.

Hence, the scope of judicial exercise of the appointment power was not at

issue. Having eschewed any implicit article III limitation on “the Courts of

Law,” the Court in Freytag interpreted the term as referring to any court that

exercised the judicial power of the United States—power that Congress

could choose to confer upon a legislative court.

At this stage in the analysis, the only question remaining was whether

the Tax Court exercised the judicial power of the United States. Focusing

on the nature of the Tax Court and its functions (as suggested by Dean

Griswold as amicus), the Court in Freytag unequivocally resolved this

question in the affirmative:

The Tax Court exercises judicial, rather than executive, legislative, or

administrative, power. It was established by Congress to interpret

and apply the Internal Revenue Code in disputes between taxpayers

and the Government. By resolving these disputes, the court

exercises a portion of the judicial power of the United States.

The Tax Court exercises judicial power to the exclusion of any

other function. It is neither advocate nor rulemaker. As an

adjudicative body, it construes statutes passed by Congress and

regulations promulgated by the Internal Revenue Service. It does

not make political decisions.

The Tax Court’s functions and role in the federal judicial scheme

closely resemble those of the federal district courts, which

indisputably are “Courts of Law.” Furthermore the Tax Court

exercises its judicial power in much the same way as the federal

district courts exercise theirs. It has authority to punish contempt by

fine or imprisonment, 26 U.S.C. § 7456(c); to grant certain injunctive

relief, § 6213(a); to order the Secretary of the Treasury to refund an

Id. at 890 (quoting Buckley v. Valeo, 424 U.S. 1, 132 (1976)).

See id. at 888–90.

The

Freytag

Case 259

overpayment determined by the court, § 6512(b); and to subpoena

and examine witnesses, order production of documents, and

administer oaths, § 7456(a). All these powers are quintessentially

judicial in nature.

The Tax Court remains independent of the Executive and

Legislative Branches. Its decisions are not subject to review by either

the Congress or the President. Nor has Congress made Tax Court

decisions subject to review in the federal district courts. Rather, like

the judgments of the district courts, the decisions of the Tax Court

are appealable only to the regional United States courts of appeals,

with ultimate review in this Court. The courts of appeals, moreover,

review those decisions “in the same manner and to the same extent

as decisions of the district courts in civil actions tried without a jury”.

§ 7482(a). This standard of review contrasts with the standard

applied to agency rulemaking by the courts of appeals under . . . the

Administrative Procedures Act, 5 U.S.C. § 706(2)(A).

Given the Tax Court’s exclusively judicial role in the federal system, the

Court in Freytag held that it constituted a “Court of Law” under the

Appointments Clause. Accordingly, the chief judge’s appointment of

special trial judges on behalf of the Tax Court complied with the

constitutional limitations on the dissemination of the appointment power.

The concurring opinion, authored by Justice Scalia and joined by three

other Justices, also would have upheld the validity of the appointment of

special trial judges against the taxpayers’ Appointments Clause challenge if

pressed to address the issue on the merits (which the concurrence was

disinclined to do).

However, the concurring Justices would have done so

under the Executive Branch approach advocated by the Commissioner.

Although the concurrence would have selected a different rationale to

achieve the same result, the concurrence did not view the matter as an

inconsequential parsing of obscure constitutional doctrine. Rather, the

Id. at 890–91.

By determining that the Tax Court constituted one of “the Courts of Law”

for purposes of the Appointments Clause rather than a “Department” within the

Executive Branch, the Supreme Court in Freytag created a legitimate constitutional

objection to the President’s authority to remove Judges of the Tax Court pursuant

to § 7443(f). If the Tax Court is no longer an executive agency, then the

President’s removal power may well be viewed as unconstitutional on separation-

of-powers grounds. See Tuan Samahon, Blackmun (and Scalia) at the Bat: The Court’s

Separation of Powers Strike Out in Freytag, 12 N

EV. L.J. 691, 693 (2012) (suggesting

that, following Freytag, § 7443(f) is subject to constitutional challenge on separation-

of-powers grounds).

Id. at 892–901 (Scalia, J., concurring).

Id. at 901.

260 The United States Tax Court – An Historical Analysis

concurring opinion characterized the majority’s willingness to treat an

article I court as one of “the Courts of Law” under the Appointments

Clause as being “both wrong and full of danger for the future of our system

of separate and coequal powers.”

Beyond the textual interpretation of “the Courts of Law” as including

only those courts envisioned and referenced in the Constitution (that is,

those chartered under article III), the concurring opinion found support for

this contextual interpretation in the purpose of the Appointments Clause

itself. The Appointments Clause was chiefly designed to preclude Congress

from exercising the power to appoint officers to the governmental bodies it

created. In the view of the concurrence, only judges of article III courts

possessed the requisite protections—that is, lifetime tenure and salary

protection—to resist congressional encroachment on its appointment

power.

The concurring Justices charged that interpreting “Courts of Law”

under the Appointments Clause to include courts that lack these

protections “utterly destroys this carefully constructed scheme.”

Not surprisingly, the concurring Justices were not enamored with the

functional approach to determining the constitutional status of an

adjudicative body. Believing that “the judicial power of the United

States”—the identical phrase that appears at the outset of article III—could

be exercised only by those judges who enjoyed the political protections of

article III status, the concurrence eschewed function in favor of identity of

the adjudicator.

Accordingly, the concurring Justices had no trouble

viewing the Tax Court as a purely adjudicative body. They simply were not

willing to admit this group of “adjudicative decisionmakers” into the

judicial circle.

It is worth noting that the interpretation of the Appointments Clause

favored by the concurring opinion offered the path of least resistance for

the Supreme Court in Freytag. After all, none of the actual parties to the

litigation contended that the Tax Court constituted a Court of Law for

purposes of the Appointments Clause, and the Second Circuit Court of

Appeals had already adopted the position that the chief judge served as the

head of a “Department” within the Executive Branch. A resolution on

these grounds by the Supreme Court therefore would not have come as a

Id.

Id. at 907–08. In contrast, the Second Circuit had described the “potential for

disruption to our constitutional scheme” posed by the issue in this context as

“minimal.” Samuels, Kramer & Co. v. Commissioner, 930 F.2d 975, 988 (2d Cir.

1991).

Freytag, 501 U.S. at 908.

Id. at 911.

Id. at 911 (“Where adjudicative decisionmakers do not possess life tenure and

a permanent salary, they are ‘incapable of exercising any portion of the judicial

power.’”).

The

Freytag

Case 261

surprise, and had the majority adopted this rationale, the Supreme Court’s

decision in the case would have proved unanimous. It is therefore

interesting that a five-Justice majority eschewed this approach in favor of

characterizing the Tax Court as one of “the Courts of Law” for

constitutional purposes. Perhaps a majority of the Supreme Court was

reluctant to adopt an exclusionary stance with respect to legislative courts—

that a court of record established by Congress to perform exclusively

adjudicative functions nonetheless did not rise to the level of a “Court of

Law” under the Constitution simply because its judges lacked preferred

article III status.

However, questioning of the Commissioner’s counsel at oral argument

suggests that a more practical consideration may have been at play. The

Court appeared keenly interested in the ramifications on the status of the

Tax Court’s chief judge if the Tax Court were regarded as a department

within the Executive Branch:

QUESTION: May I ask how is the chief judge of this court

appointed?

MR. ROBERTS: The chief judge is elected by the regular judges on a

QUESTION: And is that -- is that a valid method of appointing a

head of a department in the executive branch?

MR. ROBERTS: No challenge has been raised to that --

QUESTION: Well, I know no challenge has been raised, but under

your argument it is clearly invalid, is it not, because the appointment

was not made by the head of a department?

MR. ROBERTS: Well, it would have to be considered, not only a

separate office, but what the chief -- the -- the attributes of the chief

judge that are different from --

QUESTION: Well, surely the chief judge is an officer of the United

States.

MR. ROBERTS: The chief judge is an officer of the United States.

The question is is the difference between the chief judge and a

regular judge, does that require a --

QUESTION: Well, it gives him the authority to appoint assistant

trial judges.

262 The United States Tax Court – An Historical Analysis

MR. ROBERTS: Yes.

QUESTION: That’s a pretty importance difference, I guess.

MR. ROBERTS: Well, it is -- it is a difference. It is not, as I say -- it

has not been presented or briefed --

QUESTION: But under your argument it is clear that the present

appointment of the chief judge of the court is invalid I think?

MR. ROBERTS: Well, with respect, Your Honor, I’m not sure that

that is clear. It’s an issue that has not --

QUESTION: I know it hasn’t been raised, but I’m trying to think of

the implications of accepting your argument.

MR. ROBERTS: Well, we would have to look at all the added

authority --

QUESTION: Can you give me a reason why, consistent with your

argument, that the appointment could be valid -- the appointment by

his colleagues as chief judge?

MR. ROBERTS: Well, one question would be is whether or not his

additional authorities are such as require a separate appointment.

QUESTION: I see.

MR. ROBERTS: And it may be, for example, that the head of a

collegial body does not have to have a separate appointment

particularly here where the collegial body acts together in electing

him. He may be more in the nature of a -- I don’t know if it’s a

chairman or -- or a --

QUESTION: But not a head of a department with authority to

appoint assistant trial judges?

MR. ROBERTS: Well, he is clearly the head of this -- of this

department. There’s no question about that. He doesn’t --

QUESTION: He became head by collegial action that did not have

to comply with the appointments clause?

The

Freytag

Case 263

MR. ROBERTS: Well, it’s a complicated question -- answer, but

perhaps -- and I’m thinking --

QUESTION: A question we can entirely avoid if we assume it’s a

court of law.

If the chief judge of the Tax Court, as the head of a Department within

the Executive Branch, had not been properly appointed,

it would follow

that the validity of all action taken in the name of the Tax Court by any one

of its chief judges could be called into question. Hence, the issue

implicated much more than the validity of the appointments of special trial

judges. The challenge to the appointment of the chief judge of the Tax

Court was not raised in the Freytag litigation, but such a challenge would

remain around the corner.

The majority of the Court in Freytag apparently

anticipated the next shoe to drop under the Executive Branch approach,

and wished to avoid it altogether.

D. Postscript

Not surprisingly, the Supreme Court’s decision in Freytag characterizing

the Tax Court as one of the “Courts of Law” under the Constitution was

warmly received by the Tax Court. The judges were imminently grateful to

Dean Griswold for his role in the litigation. Chief Judge Arthur Nims,

author of the Tax Court’s decision in First Western, invited Dean Griswold

and his wife to a luncheon at the court in his honor. Chief Judge Nims

opened the invitation with the following acknowledgement:

Transcript of Oral Argument at 52–55, Freytag v. Commissioner, 501 U.S.

868 (1991). The transcript of the oral argument in the case does not reveal which

Justice undertook this line of questioning, but the audio recording suggests that it

was Justice Stevens (who joined the majority opinion in the case).

If the Tax Court were a “Department” within the Executive Branch,

presumably the appointment of the chief judge as its “Head” would have to be

made by the President with the advice and consent of the Senate. See U.S.

CONST.

art. II. § 2, cl. 2.

Subsequent case law suggests that a challenge to the validity of the election of

a duly appointed judge of the Tax Court to the position of chief judge of the court

may not have been fruitful. In Weiss v. United States, 510 U.S. 163 (1994), the

Supreme Court addressed whether the Appointments Clause required a

commissioned military officer to receive a second appointment as a military judge

before assuming judicial duties at the trial or appellate level in such capacity. The

Court held that the additional appointment was not required on constitutional

grounds, reasoning that the role of a military judge is sufficiently germane to that of

a military officer. Id. at 176. Under a standard of germaneness, one would expect

that the role of chief judge of the Tax Court is sufficiently similar to that of a

regular judge of the Tax Court to not require a separate appointment.

264 The United States Tax Court – An Historical Analysis

I wanted to formally thank you personally and on behalf of the Tax

Court for giving us the benefit of your knowledge, wisdom, and

prestige in connection with our travails in Samuels, Kramer in the

Second Circuit and Freytag in the Supreme Court. I, for one, am

certain that we would not ultimately have prevailed but for your

superlative efforts.

After attending the event, Dean Griswold expressed lament for the narrow

breadth of the “victory” in a letter thanking Chief Judge Nims for hosting

the affair:

It [the decision] was too close for comfort, and I am chagrined

that I was not able to attract more than five votes for a proposition

which it seems to me was well settled long ago, and then again in the

cases some forty or fifty years ago involving the Court of Claims, the

Court of Customs and Patent Appeals, and the Federal Courts in the

District of Columbia.

. . .

It was a real pleasure to have the opportunity to support the Tax

Court in these cases. I particularly appreciate the help you gave in

your thorough and careful opinion, and in your conversation while

the case was making its way to the Supreme Court.

Dean Griswold later conveyed his dismay at the margin of the Supreme

Court’s majority decision directly to Justice Harry Blackmun who, as the

author of the majority decision, likely provided a friendly audience. Dean

Griswold remarked as follows:

Of course, I liked the opinion, and the result, even though it was

by such a slim margin. As one reads your opinion, it is hard to

escape the thought that it was prepared as a dissenting opinion, and

that you must have been so persuasive that you won over one or

more votes after your opinion was circulated. If so, I join with the

judges of the Tax Court in appreciation. They are a fine group of

people, who work hard, and judicially. They are, indeed, in my view,

Letter from Arthur L. Nims, III, Chief Judge of the United States Tax Court

to Dean Erwin N. Griswold, June 28, 1991. The author gratefully acknowledges

Professor Tuan Samahon, who shared this letter and other documents referenced

below that he obtained in connection with his research on an article on the Freytag

decision. See Tuan Samahon, Blackmun (and Scalia) at the Bat: The Court’s Separation of

Powers Strike Out in Freytag, 12 N

EV. L.J. 691 (2012).

Letter from Erwin N. Griswold to the Honorable Arthur L. Nims, III, July

10, 1991.

The

Freytag

Case 265

one of the better judicial tribunals in the country. It seems odd to

me that they should have had to go through this proceeding more

than twenty years after Congress had done its best to establish the

court as an Article I court, pursuant to long-standing decisions of

your Court. (I could hear Felix moaning in his grave. He was the

one who introduced me to this general area of the law.)

I have doubtless said too much. I will say no more.

E. Conclusion

The Freytag litigation may have technically concerned the constitutional

validity of the appointment of special trial judges by the Chief Judge of the

Tax Court, but the Supreme Court’s resolution of this issue turned on its

interpretation of the Tax Court’s role in the federal system. Although the

Court did not articulate a home for the Tax Court within the tripartite

governmental structure,

the strong implication from the Court’s rejection

of the Commissioner’s argument in the case and the Court’s recitation of

the legislative history accompanying the Tax Reform Act of 1969 is that

Congress effectively removed the Tax Court from the Executive Branch by

chartering the institution as a court of record under article I of the

Constitution.

While the Supreme Court in Freytag was not prepared to

Letter to the Honorable Harry A. Blackmun from Erwin N. Griswold at 3,

Dec. 20, 1991. [Copy of letter on file with author; original in Harvard Law

Library.]

Indeed, the Tax Court may have no such home. See Leandra Lederman, Tax

Appeal: A Proposal to Make the United States Tax Court More Judicial, 85 W

ASH. U. L.

REV. 1195, 1199 (2008) (observing that the Tax Court “is ‘neither fish nor fowl’—it

is no longer an agency, but it is not a member of the judicial branch of

government”).

This aspect of the Freytag decision has not been universally embraced by later

serving Justices of the Supreme Court. In a 2005 case concerning the Tax Court’s

procedures for reviewing a report issued by a special trial judge, Justice Breyer

made the following remarks at oral argument:

JUSTICE BREYER: What -- what is -- can I ask you a really esoteric

administrative law question, which I have never been able to figure out? It’s

probably relevant, but I -- this [the Tax Court] is an agency. That’s what --

my great tax professor -- Ernie Brown, used to say there is no Tax Court.

He says, the Board of Tax Appeals shall be known as the Tax Court. What

he meant by that is it’s not -- it isn’t the Tax Court, just known as. So -- so

this is an agency, an administrative agency.

Transcript of Oral Argument at 25, Ballard v. Commissioner, 544 U.S. 40 (2005).

While it is worth noting that Justice Breyer graduated from Harvard Law School in

1964 (several years before Congress established the Tax Court as an article I court

through the Tax Reform Act of 1969), Justice Breyer’s understanding that the Tax

Court constitutes an executive agency appears intentional rather than anachronistic.

266 The United States Tax Court – An Historical Analysis

include the Tax Court in the federal Judiciary,

the Court declared that the

Tax Court is independent of the Executive and Legislative Branches and

that it exercises a portion of the judicial power of the United States. The

Freytag decision therefore provided a powerful affirmation of the Tax

Court’s judicial character.

F. Subsequent Development: Kuretski v. Commissioner

Just prior to the publication of the second edition of this text, the D.C.

Circuit Court of Appeals had reason to examine the constitutional nature of

the Tax Court in Kuretski v. Commissioner.

The taxpayers in Kuretski

invoked the Tax Court’s jurisdiction to review an adverse determination in

the collection due process setting, and the Tax Court largely sustained the

Service’s determination.

In addition to appealing the merits of the Tax

Court’s decision, the taxpayers in Kuretski raised a constitutional objection

to the Tax Court proceedings below. Specifically, the taxpayers contended

that the authority of the President to remove a Tax Court judge for

“inefficiency, neglect of duty, or malfeasance in office” pursuant to

§ 7443(f) violated the principle of separation of powers embedded in the

Constitution. The Supreme Court’s decision in Freytag served as the

foundation for their argument: Because the Tax Court exercises a “portion

of the judicial power of the United States,”

the taxpayers contended that

the President’s authority under § 7443(f) impermissibly subordinated the

In Federal Marine Commissioner v. South Carolina State Ports Authority, 535 U.S. 743

(2002), the Supreme Court held that the doctrine of sovereign immunity precluded

a federal agency from adjudicating a complaint lodged by a private party against a

nonconsenting State for violations of federal law, basing its decision in part on the

similarity between the administrative adjudication regime at issue and civil litigation

in federal courts. See id. at 757–59 (“[T]he similarities between FMC proceedings

and civil litigation are overwhelming.”). In his dissenting opinion, Justice Breyer

explained that administrative agencies, even so-called “independent” agencies, are

not part of the Legislative or Judicial Branches of government; rather, such bodies

“are more appropriately considered to be part of the Executive Branch.” Id. at 773

(Breyer, J., dissenting). Justice Breyer supported this point with the first of several

favorable citations to Justice Scalia’s dissenting opinion in Freytag. Justice Breyer

was not alone in this view. His dissenting opinion was joined by Justices Stevens,

Souter, and Ginsburg.

Indeed, such a characterization would have transgressed the longstanding

interpretation of the “Judiciary” as synonymous with courts that enjoy the political

protections provided by article III.

-- F.3d -- (D.C. Cir. 2014) (Docket No. 13-1090).

See T.C. Memo. 2012-262, 104 T.C.M. (CCH) 295.

Freytag v. Commissioner, 501 U.S. 868, 891 (1991).

The

Freytag

Case 267

Tax Court’s exercise of judicial power to an executive officer.

The

taxpayers therefore sought a remand of their case to the Tax Court with

instructions for new proceedings to be conducted before an adjudicator no

longer subject to the removal power.

In a case of first impression, the D.C. Circuit Court of Appeals held that

§ 7443(f) did not infringe the constitutional separation of powers. While

the court’s reluctance to undermine the legitimacy of every Tax Court

decision issued since the Tax Reform Act of 1969 may have been

understandable, the court’s rationale for its holding was somewhat

surprising. Rather than addressing whether an “interbranch” removal

power of the qualified sort contained in § 7443(f) raised constitutional

concerns, the D.C. Circuit instead rejected the premise of the taxpayers’

argument—that is, that the President’s removal power under § 7443(f)

implicated two branches of government. The court did so by asserting that

the Tax Court “exercises Executive authority as part of the Executive

Branch.”

Having thus characterized the removal power at issue as of the

“intrabranch” variety, the separation of powers argument fell by the

wayside.

The D.C. Circuit in Kuretski recognized that the Supreme Court’s

decision in Freytag posed something of an obstacle to its holding, noting

that the Freytag case “adds a wrinkle to what otherwise would be a

straightforward analysis.”

Conceding that the Court in Freytag declared

that the Tax Court exercises a portion of the judicial power of the United

States, the D.C. Circuit in Kuretski determined that the Court had employed

the concept of judicial power in an enlarged, “overarching” sense to refer to

adjudication through adversarial proceedings by any unit of the federal

government.

Similarly, the D.C. Circuit was not troubled by the Supreme

The prospect that § 7443(f) violated the separation of powers doctrine was

raised by Prof. Tuan Samahon, as part of his article criticizing the Supreme Court’s

decision in Freytag. See Samahon, supra note 49, at 695–96. Interestingly, Prof.

Samahon served as counsel to the Kuretskis before the D.C. Circuit, and he argued

their case on appeal.

Id. slip op. at 2. The Fourth Circuit Court of Appeals has similarly

characterized the Tax Court as part of the Executive Branch following the Freytag

decision, indeed citing Freytag for the proposition that the Tax Court “is a Court of

Law despite being part of the Executive Branch.” South Carolina State Ports Auth.

v. Federal Maritime Com’n, 243 F.3d 165, 171 (4th Cir. 2001). The Executive

Branch characterization, however, was not repeated when then case proceeded to

the Supreme Court. See Federal Maritime Com’n v. South Carolina State Ports

Auth., 535 U.S. 743 (2002).

Kuretski, slip op. at 18.

Id. slip op. at 19–20. This is consistent with Justice Scalia’s interpretation of

the majority opinion in Freytag: “‘The judicial power,’ as the Court uses it, bears no

resemblance to the constitutional term of art we are all familiar with, but means

268 The United States Tax Court – An Historical Analysis

Court’s statement in Freytag that the Tax Court remained “independent of

the Executive . . . Branch[].”

Rather, the D.C. Circuit understood the

Supreme Court to have made this statement to describe the Tax Court’s

functional independence, rather than speaking to the court’s constitutional

status.

100

In addition to addressing what appeared to be contradictory guidance

from the Supreme Court in Freytag, the D.C. Circuit analogized the Tax

Court to the Court of Appeals for the Armed Forces. Both courts were

created by Congress pursuant to its article I powers, and Congress cited the

then Court of Military Appeals as an example when chartering the Tax

Court as a court of record under article I through the Tax Reform Act of

1969. The D.C. Circuit in Kuretski then cited the Supreme Court’s

observation in the 1997 case of Edmond v. United States

101

that “it is clear that

[the Court of Appeals for the Armed Forces] is within the Executive

Branch.”

102

The determination of the D.C. Circuit Court of Appeals in Kuretski that

the Tax Court exercises executive authority as part of the Executive Branch

of government stands in considerable tension with the Supreme Court’s

decision in Freytag. Indeed, the Kuretski decision aligns more closely with

the rationale of the concurring opinion in Freytag authored by Justice Scalia

and joined by three other Justices.

103

The Kuretski case therefore may

present the Supreme Court with an opportunity to clarify its decision in

Freytag and, in the process, once again examine the constitutional nature of

the Tax Court.

only ‘the power to adjudicate in the manner of courts.’” Freytag, 501 U.S. at 908

(Scalia, J., concurring in part).

Id. at 891.

100

See Kuretski, slip op. at 24.

101

520 U.S. 651 (1997).

102

Id. at 664–65 n.2.

103

See Freytag, 501 U.S. at 908 (Scalia, J. concurring in part and concurring in

judgment) (“Despite this unequivocal text [introduction to Article III], the Court

sets forth the startling proposition that ‘the judicial power of the United States is

not limited to the judicial power defined in Article III.’”). As discussed in supra

note 9085, other Justices continue to appear sympathetic to Justice Scalia’s minority

position in Freytag.

Foundational Parameters of the Court’s Jurisdiction 269

ART VI

FOUNDATIONAL PARAMETERS OF

TAX COURT JURISDICTION

The major jurisdiction of the Tax Court, since its creation in 1924 as the

Board of Tax Appeals,

has involved the redetermination of tax deficiency

assertions by the Commissioner of Internal Revenue.

Since then, the court

has remained the primary judicial body in which a taxpayer may litigate the

question of liability in advance of having to pay the disputed tax.

general, the procedure is for a taxpayer who has received a deficiency notice

to file a petition with the court within a prescribed time period for review

of the deficiency determination.

During the pendency of the Tax Court

proceeding, the Commissioner is forbidden to assess or collect, without the

taxpayer’s permission, any additional tax.

If the taxpayer does not file the

requisite petition with the court, or if a petition is filed but the court finds

in favor of the Commissioner, the tax will be assessed and steps then may

be taken by the Commissioner to collect the assessed amount.

Measured by number of cases, the most important element of the

court’s deficiency jurisdiction has, since 1924, involved deficiencies with

respect to income taxes.

Of less numerical significance have been

Revenue Act of 1924, ch. 234, § 900(a), 43 Stat. 336.

Id. §§ 274(a), 308(a), 43 Stat. 297, 308 (now codified at I.R.C. § 6213(a)).

See I.R.C. § 7421(a). Federal bankruptcy courts possess concurrent

jurisdiction with the Tax Court to review unadjudicated determinations of tax

deficiencies asserted against a debtor who has sought federal bankruptcy

protection. See 11 U.S.C. § 505(a)(1), (2) (providing that the bankruptcy court “may

determine the amount or legality of any tax, any fine or penalty relating to a tax, or

any addition to tax, whether or not previously assessed, whether or not paid,”

provided the matter was not adjudicated prior to the commencement of the

bankruptcy proceeding); see also Stephen W. Sather, Tax Issues in Bankruptcy, 25 S

MARY’S L.J. 1364, 1397–1401 (1994) (describing the concurrent jurisdiction of the

bankruptcy court and the Tax Court in this context and, in particular, the

bankruptcy court’s power to determine the venue in which the proceeding will go

forward).

Under the 1924 Act, the period for filing a petition was 60 days. Revenue Act

of 1924, ch. 234, § 274(a), 43 Stat. 297. Present law requires filing within 90 days,

unless the notice is addressed to someone outside the United States, in which case

the filing period is extended to 150 days. I.R.C. § 6213(a).

Revenue Act of 1924, ch. 234, § 274(a)–(c), 43 Stat. 297 (now codified at

I.R.C. § 6213(a)).

Id. § 274(b)–(c).

Id. § 274(a).

270 The United States Tax Court – An Historical Analysis

controversies involving deficiencies in excess profits, estate, and gift taxes.

The court has also had jurisdiction of these matters since 1924.

Although jurisdiction to redetermine deficiencies has been the most

important aspect of the business of the Tax Court, its jurisdiction has, from

time to time, included other subjects.

Since 1926, the court has had the

power to determine overpayments of tax and therefore a taxpayer’s

entitlement to a refund with respect to those tax years properly before the

court in connection with a deficiency dispute.

Some efforts have been

made to expand the court’s refund jurisdiction, but these have not been

successful.

From the time of its inception, the court also could review

disputes arising as a result of jeopardy assessments.

This arena witnessed

significant change, occasioned as a result of both decisional

and statutory

law.

This Part will review the history and development of the foregoing

jurisdictional matters, which make up the foundation of the Tax Court’s

modern jurisdiction. Additionally, attention will be given to certain

quasi-jurisdictional questions that have arisen by virtue of the court’s

unusual status, first as an agency of the executive branch and, since 1969, as

a legislative court. These involve the authority of the court to enforce its

judgments and process, and to punish contempt; the power of the court to

determine the constitutionality of the tax laws; and the applicability in Tax

Court proceedings of doctrines rooted in equitable principles.

Id. §§ 280, 308(a), 324, 43 Stat. 301, 308, 316.

Id.

For example, in 1943, the court was given jurisdiction to redetermine

excessive profits under the renegotiation acts applicable to government contractors.

Revenue Act of 1943, ch. 63, § 701(e), 58 Stat. 86. [This jurisdiction was

withdrawn from the Tax Court and given to the Court of Claims in 1971. Act of

July 1, 1971, Pub. L. No. 92-41, § 3, 85 Stat. 98.] Also in 1943, the Tax Court

succeeded to the jurisdiction of the United States Processing Tax Board of Review

to adjudicate controversies concerning the refund of amounts collected under the

depression-inspired processing tax, Revenue Act of 1942, ch. 619, § 510, 56 Stat.

967, which had been declared unconstitutional by the Supreme Court. See United

States v. Butler, 297 U.S. 1 (1936). These aspects of the Tax Court’s former

jurisdiction are detailed in Appendix C.

Revenue Act of 1926, ch. 27, § 284(e), 44 Stat. 67 (now I.R.C. § 6512(b)).

See infra notes 296–326 and accompanying text.

Revenue Act of 1924, ch. 234, §§ 274(d), 279, 43 Stat. 297, 300 (now codified

at I.R.C. §§ 6861–6864).

Laing v. United States, 423 U.S. 161 (1976).

Tax Reform Act of 1976, Pub. L. No. 94-455, § 1204(a), 90 Stat. 1695;

Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 6237,

102 Stat. 3741–43.

Foundational Parameters of the Court’s Jurisdiction 271

A. Deficiency Jurisdiction

Three principal factors were important in shaping the 1924 provisions

dealing with the Board of Tax Appeals. The first of these was the

recognition of the necessity for expert and impartial review of tax disputes.

This recognition led to the creation of the Board as an independent agency

of the executive branch rather than as part of the Treasury Department.

The second factor was the desire for procedural rules that would tend to

assure accurate decisions and would lead to the creation of a uniform body

of precedents that would aid in future interpretations of the tax laws. As a

result, Board proceedings were required to be conducted publicly in

accordance with judicial-type procedures.

The third major factor, which

was largely responsible for shaping the jurisdictional provisions dealing with

the Board, was the conviction that taxpayers should be given the

opportunity to litigate the question of tax liability in advance of the time

when the disputed tax had to be paid.

Before 1924, taxpayers could obtain administrative review of tax

disputes within the Bureau of Internal Revenue prior to the necessity for

payment.

However, judicial review of such disputes was restricted to

suits, originating in district court or the Court of Claims, for refund of taxes

erroneously collected.

To bring such suits, the taxpayer had to pay the full

amount of the tax in dispute

and then file a claim for refund with the

Bureau. The Bureau then either had to deny the claim or fail to act on the

claim within six months.

In the years following the end of World War I,

this limitation on access to independent review was particularly

troublesome. The income and profits taxes had generated a tremendous

amount of revenue for the war years,

but they were new and complex

provisions that the Bureau of Internal Revenue was ill-equipped to

administer.

As a result, audits took many years to conclude,

inconsistencies arose in the positions that the Bureau took on various

issues, and many disputes arose with taxpayers. These disputes frequently

involved taxpayers who had suffered financial reverses since the end of the

war, and, for them, the necessity of paying high taxes based on wartime

revenue was ruinous.

Pre-assessment review might not relieve the

See Part II, notes 55–76 and accompanying text.

See infra notes 79–96 and accompanying text.

See Part I, notes 197–265 and accompanying text.

See Part I, notes 142–197 and accompanying text.

See Part I, notes 182–193 and accompanying text.

Revenue Act of 1921, ch. 136, § 1318, 42 Stat. 314.

See Part I, notes 23–36 and accompanying text.

See Part I, notes 93–195 and accompanying text

Bolon B. Turner, The Tax Court of the United States, Its Origins and Functions, in

HE HISTORY AND PHILOSOPHY OF TAXATION 31, 32–33 (1955).

272 The United States Tax Court – An Historical Analysis

ultimate necessity of payment, but it would at least afford taxpayers

protection against ill-advised Bureau action based on erroneous

interpretations of the law. As a consequence of this concern, the

jurisdiction of the Board was framed to provide for the availability of an

independent, judicial-type review between the initial determination by the

Bureau that additional tax was due, and the time of assessment of such tax.

The Board’s jurisdiction and its procedure for reviewing deficiency

determinations were immediately successful, and few modifications have

proved necessary.

1. Taxes Subject to the Tax Court’s Deficiency Jurisdiction

The taxes subject to the deficiency jurisdiction of the Board/Tax Court

have never included the entire gamut of federal taxes. Even in 1924, when

the federal tax system was less sophisticated than it is now, many types of

taxes were not covered by the Board’s deficiency jurisdiction. These

included all external taxes, as well as many internal excise taxes on specified

goods and activities. In fact, only four types of taxes were made subject to

the Board’s jurisdiction: the excess profits, income, estate, and gift taxes.

The reasons for so limiting the Board’s jurisdiction are not difficult to

identify. In the case of external taxes, exclusion from the Board’s

jurisdiction undoubtedly resulted from the fact that an elaborate system of

judicial review of such taxes had been established in specialized courts for

many years,

and there was no inclination to abolish such system. The

internal excise taxes excluded from the Board’s jurisdiction were relatively

simple and did not directly affect many taxpayers.

Moreover, the Bureau

had been administering these taxes for a relatively long period of time

without significant difficulty.

Certainly, whatever problems existed with

these taxes did not occasion the degree of public criticism associated with

the income and profits taxes. Finally, and most significantly, the subject

matter of the Board’s jurisdiction was influenced by the purpose of the

original Administration proposal from which the legislation creating the

Board originated. In proposing creation of the Board, Secretary of the

Treasury Mellon generally sought a mere continuation of the Committee on

Revenue Act of 1924, ch. 234, §§ 274(a), 280, 308(a), 324, 43 Stat. 297, 301,

308, 316.

The Board of General Appraisers (later to become the Customs Court and,

later hence, the United States Court of International Trade), established in 1890,

and the Court of Custom Appeals (later to become the Court of Custom and

Patent Appeals and, later hence, the United States Court of Appeals for the Federal

Circuit), established in 1909, were created to review the legality of customs

exactions. See Glidden v. Zdanok, 370 U.S. 530, 558 (1962).

Part II, notes 137–141 and accompanying text.

See Part I, notes 52–62 and accompanying text.

Foundational Parameters of the Court’s Jurisdiction 273

Appeals and Review, which had been operating as part of the Bureau of

Internal Revenue since 1919.

The only major changes sought by the

proposal were to change the name of the committee to the Board of Tax

Appeals; to remove the committee from within the organization of the

Bureau and make it a separate agency of the Treasury Department; to

provide higher salaries than those paid to members of the committee; and

to make the findings of the Board prima facie evidence in any subsequent

federal court proceeding involving the disputed tax.

Congress saw fit to modify the Administration proposal in several

respects to assure the Board’s independence and judicial character.

However, Congress gave no consideration to expanding the Board’s

jurisdiction from what was proposed. The Committee on Appeals and

Review only heard cases originating in the Income Tax Unit of the

Bureau.

The exclusive responsibility of this Unit was for income and

profits taxes. A body similar to the Committee on Appeals and Review was

established in 1922 to hear cases originating in the Estate Tax Unit and was

called the Committee on Review and Appeals.

This similarity likely

accounted for the proposal to include the estate tax within the Board’s

jurisdiction. The Administration did not propose to assign gift tax cases to

the Board, but this was due to the fact that prior to 1924 no gift tax existed.

The gift tax was enacted in 1924 only over the strenuous objections of the

Administration.

Including the gift tax within the Board’s jurisdiction was

natural given that the tax largely was designed to supplement the income

and estate taxes by preventing avoidance through inter vivos gifts.

Since 1924, there have been only limited changes in the taxes subject to

the Board/Tax Court’s deficiency jurisdiction. No part of the jurisdiction

originally given with respect to excess profits, income, estate, and gift taxes

has been withdrawn, except to the extent that the profits and gift taxes have

been, from time to time, repealed and reenacted.

On the other hand, the

1920 COMM’R OF INT. REV. REP. 14–15; Part II, notes 25–54 and

accompanying text.

See Part II, notes 55–97 and accompanying text.

1920 COMM’R OF INT. REV. REP. 14–15; Part I, notes 221–257 and

accompanying text.

1923 COMM’R OF INT. REV. REP. 11–12.

See Part II, notes 12–13 and accompanying text.

See, e.g., CHARLES L.B. LOWNDES, ROBERT KRAMER & JOHN H. MCCORD,

FEDERAL ESTATE AND GIFT TAXES 640 (3d ed. 1974).

The first excess profits tax was enacted in 1917 and eliminated in 1921. Act

of Mar. 3, 1917, ch. 159, § 201, 39 Stat. 1000; Revenue Act of 1921, ch. 136,

§§ 301(a), 1400(a), 42 Stat. 272, 320. A declared value excess profits tax, first

imposed as part of the National Industrial Recovery Act, was in effect from 1933

to 1946. Ch. 90, § 216(a), 48 Stat. 208 (1933); Revenue Act of 1945, ch. 453, § 202,

59 Stat. 574. From 1940 to 1946, an additional excess profits tax was imposed as a

274 The United States Tax Court – An Historical Analysis

passage of years has witnessed the addition of a number of separate and

alternative income taxes to the Board/Tax Court’s jurisdiction. This

expansion has been the result of the Board/Tax Court’s broad jurisdiction

over all types of income taxes.

Beyond this, the only other change has

been the addition to the court’s deficiency jurisdiction of certain excise

taxes imposed by chapters 41, 42, 43, and 44 of the Internal Revenue Code.

The first such tax, added by the Tax Reform Act of 1969,

provides for

certain taxes to be imposed on private foundations, both with respect to

their investment income and with respect to certain activities that Congress

deemed inconsistent with the tax preferences accorded such

organizations.

Five years later, as part of the Employee Retirement

Income Security Act of 1974,

Congress added a series of excise taxes to

assure compliance with greatly expanded regulation of employee benefit

plans and individual retirement accounts.

As was true with the taxes on

private foundations, these taxes were not primarily revenue raising devices,

but were designed to prevent the abuse of favorable tax treatment accorded

by other provisions of the Code. In the Tax Reform Act of 1976,

two

additional specialized excises were added, one on excessive lobbying

result of World War II. Second Revenue Act of 1940, ch. 757, § 710(a), 54 Stat.

975; Revenue Act of 1945, ch. 453, § 122(a), 59 Stat. 568. The Korean War gave

impetus for the enactment of a fourth excess profits tax in 1950; this tax was

eliminated for tax years beginning on or after Jan. 1, 1954. Excess Profits Tax Act

of 1950, ch. 1199, § 430(a), 64 Stat. 1137; Act Extending Excess Profits Tax Until

Dec. 3, 1953, ch. 202, 67 Stat. 175 (1953). The gift tax was originally enacted in

1924. Revenue Act of 1924, ch. 234, § 319, 43 Stat. 313. It was repealed by the

Revenue Act of 1926, ch. 27, § 1200(a), 44 Stat. 125, but was reenacted by the

Revenue Act of 1932, ch. 209, § 501(a), 47 Stat. 245 (now codified at I.R.C. § 2501),

and has been in effect since then.

The deficiency jurisdiction of the Board/Tax Court always has been stated

broadly enough to include all income taxes. Cf. Revenue Act of 1924, ch. 234,

§ 274(a), 43 Stat. 297 (“If . . . there is a deficiency in respect of the tax imposed by

this title. . . .”); I.R.C. § 6213(a) (“no assessment of a deficiency in respect of any

tax imposed by subtitle A. . . .”). Illustrations of income taxes added since 1924

are: minimum tax (Tax Reform Act of 1969, Pub. L. No. 91-172, § 301(a), 83 Stat.

580); maximum tax (id. § 804(a), 83 Stat. 685); “wringer tax” (id. § 101(a), 83 Stat.

492 (adding I.R.C. § 507(c))); personal holding company tax (Revenue Act of 1934,

ch. 277, § 351(a), 48 Stat. 751); net investment income tax (Health Care and

Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 1402, 124 Stat.

1060–63).

Pub. L. No. 91-172, 83 Stat. 487.

Id. § 101(b), 83 Stat. 498 (adding I.R.C. §§ 4940–4948).

Pub. L. No. 93-406, 88 Stat. 829.

Id. §§ 1013(b), 2001(f), 2002(d)–(e), 2003(a), 88 Stat. 920, 955, 966, 967, 971

(adding I.R.C. §§ 4971–4975).

Pub. L. No. 94-455, 90 Stat. 1520.

Foundational Parameters of the Court’s Jurisdiction 275

activities of public charities,

and the other on real estate investment trusts

that fail to distribute at least 75 percent of their income by the close of their

taxable year.

This limited set of excise taxes within the Tax Court’s

deficiency jurisdiction has grown considerably over time. Chapters 41

through 44 of the Code now encompass §§ 4911 through 4982, which

includes among other items an excise tax on black lung trust benefits, on

political expenditures of § 501(c)(3) organizations, and taxes on certain

distributions from donor-advised funds. The most recent addition to the

category of excise taxes within the Tax Court’s deficiency jurisdiction is the

tax imposed on high cost employer-sponsored health plans created as part

of the Patient Protection and Affordable Care Act of 2010.

As with the other taxes subject to Tax Court jurisdiction, disputes

involving these excise taxes can be litigated either in the Tax Court through

a deficiency proceeding

or in district court or the Court of Federal Claims

through a refund suit.

The legislative history accompanying the excise tax

legislation does not directly reveal congressional motivation in providing

Tax Court jurisdiction over these measures. Presumably, the same factors

present in 1924 were believed to apply; that is, the taxes are complex and

may involve substantial liability which, absent the opportunity for pre-

assessment review, would impose undue financial hardship. Given that the

primary purpose of these excise taxpayers is to channel taxpayer behavior,

the Tax Court’s deficiency jurisdiction in this setting is rarely invoked.

2. Deficiency Jurisdiction: Procedural Requirements

The procedure by which the Tax Court’s deficiency jurisdiction may be

invoked has remained generally unchanged since 1924. In essence, three

statutory requirements must be met: (1) determination by the

Commissioner of a deficiency,

(2) notification to the taxpayer of such

deficiency determination,

and (3) filing of a petition by the taxpayer with

the court for redetermination of the deficiency within the prescribed

period.

The first two requirements are intertwined in a practical sense, as

the requirement of a deficiency notice involves identification of a deficiency

in tax, determination thereof by the Commissioner, and notification to the

Id. § 1307(b), 90 Stat. 1722 (adding I.R.C. § 4911).

Id. § 1605(a), 90 Stat. 1754 (adding I.R.C. § 4981).

Pub. L. No. 111-148, § 9001, 124 Stat. 119, 847–53 (2010).

I.R.C. § 6213.

28 U.S.C. § 1346 (1970).

I.R.C. §§ 6211(a) (definition of “deficiency”), 6212(a) (phrasing the

“determination” of a deficiency as a prerequisite to the issuance of a statutory

notice).

I.R.C. § 6212(a)–(b).

I.R.C. § 6213(a).

276 The United States Tax Court – An Historical Analysis

taxpayer. Although the deficiency determination and notice are

prerequisites to jurisdiction, the taxpayer actually invokes deficiency

jurisdiction through the timely filing of a petition; the deficiency notice

alone cannot serve as the basis of jurisdiction.

a. Determination of a Deficiency

Jurisdiction of the Tax Court initially requires the determination of a

deficiency. “Deficiency” was first defined in the Revenue Act of 1924,

which created the Board of Tax Appeals.

Prior thereto there was no

necessity for such a term of art, and reference was made instead to the

difference between the amount paid and the amount that should have been

paid.

Following additional revisions in the Revenue Act of 1944,

the

statutory definition has remained virtually unchanged, representing the

expression of a simple formula: the excess of the sum of (1) tax liability

plus rebates over (2) the sum of the amount shown as due on the return

plus previously assessed deficiencies.

The term applies only to taxes that

may be the subject of Tax Court jurisdiction.

In the years since 1924, the

interpretation of the definition of a deficiency has posed little difficulty for

courts.

The fact that a deficiency exists is not equivalent to the determination of

a deficiency by the Commissioner. A deficiency exists as a definitional

matter in any situation in which taxes have been underassessed,

but only

the Commissioner’s determination of a deficiency provides the predicate

Commissioner v. Stewart, 186 F.2d 239, 241 (6th Cir. 1951).

Revenue Act of 1924, ch. 234, § 273, 43 Stat. 296.

The Revenue Act of 1918 employed a general phrase to convey the concept

of deficiency: “If the amount already paid is less than that which should have been

paid . . . .” Revenue Act of 1918, ch. 18, § 250(b), 40 Stat. 1083. The word

“deficiency” first appeared in the Revenue Act of 1921. Revenue Act of 1921, ch.

136, § 250(b), 42 Stat. 265.

Revenue Act of 1944, ch. 210, § 271(a), 58 Stat. 245.

I.R.C. § 6211(a).

Id. §§ 6211(a), 6213(a).

See Oesterlein Mach. Co., 1 B.T.A. 159, 161 (1924) (providing that the

definition of a deficiency makes no distinction between a deficiency “arising under

one section of the title and that arising under any other section of the title”);

Paccon, Inc. v. Commissioner, 45 T.C. 392, 396 (1966) (stating that “[i]t is the

existence of a deficiency at the date of the sending of the notice of deficiency that

confers jurisdiction” on the court); Murphree v. Commissioner, 87 T.C. 1309

(1986) (explaining that the disallowance of a refundable tax credit gives rise to a

deficiency); Spurlock v. Commissioner, 118 T.C. 155 (2002) (holding that the

amount of tax shown on substitute return prepared by the Service represents a

deficiency).

Moore v. Cleveland Ry. Co., 108 F.2d 656, 659 (6th Cir. 1940).

Foundational Parameters of the Court’s Jurisdiction 277

for Tax Court jurisdiction.

The function of the court is to decide whether

the deficiency as determined is correct; a finding that the Commissioner

erred in computing a deficiency does not negate the court’s jurisdiction.

In the early years of the Board, considerable attention was directed to

the question of what constitutes a “determination” of a deficiency by the

Commissioner.

In general, the issue has been viewed as a question of fact

that turns on the existence of a communication from the Commissioner to

the taxpayer setting forth a final administrative determination.

Thus, it

has been held that the determination of a deficiency is the Commissioner’s

final decision as to the amount of tax owed. From the Commissioner’s

viewpoint, it is the termination of an existing administrative controversy

with the taxpayer.

The 15-day and the 30-day letters, tentative statements

of Service opinion during the course of administrative consideration, do not

represent final determinations by the Commissioner. They merely notify

the taxpayer of a proposed deficiency.

Explanatory letters or letters

acknowledging receipt of communications from the taxpayer do not

constitute determinations.

Similarly, jurisdiction cannot be conferred by a

Hannan v. Commissioner, 52 T.C. 787, 791 (1969).

H. Milgrim & Bros., Inc. v. Commissioner, 24 B.T.A. 853, 854 (1931);

O’Meard v. Commissioner, 11 B.T.A. 101 (1928), rev’d on other grounds, 34 F.2d 390

(10th Cir. 1929).

Dana Latham, Jurisdiction of the United States Board of Tax Appeals Under the

Revenue Act of 1926, 15 C

AL. L. REV. 199, 210 (1927) [hereinafter cited as Latham];

Willis W. Ritter, Jurisdiction of The United States Board of Tax Appeals, 3 N

AT’L INC.

TAX MAG. 133 (1925) [hereinafter cited as Ritter]. In Couzens v. Commissioner, 11

B.T.A. 1040 (1928), the Board of Tax Appeals described the “determination”

requirement in the following terms:

[T]he statute clearly contemplates that before notifying the taxpayer of a

deficiency and hence before the Board can be concerned, a determination

must be made by the Commissioner. This must mean a thoughtful and

considered determination that the United States is entitled to an amount not

yet paid. If the notice of deficiency were other than the expression of a bona

fide official determination, and were, say, a mere formal demand or an

arbitrary amount as to which there were substantial doubt, the Board might

easily become merely an expensive tribunal to determine moot questions

and a burden might be imposed on taxpayers of litigating issues and

disproving allegations for which there had never been any substantial

foundation.

Id. at 1159–60 (quoted in Scar v. Commissioner, 814 F.2d 1363, 1369 (9th Cir.

1987)).

Latham, supra note 60, at 210; Ritter, supra note 60, at 137.

Terminal Wine Co., 1 B.T.A. 697 (1935).

Mohawk Glove Corp., 2 B.T.A. 1247 (1925); Fidelity Ins. Agency, 1 B.T.A. 86

(1924).

Terminal Wine Co., 1 B.T.A. 697 (1925).

278 The United States Tax Court – An Historical Analysis

letter that merely advises the taxpayer of the right to appeal.

determination of a deficiency can be made even if no return for the

disputed tax is filed.

In accordance with the general rule of Tax Court

practice, the taxpayer has the burden of proving that the Commissioner has

determined a deficiency and that the court has jurisdiction.

For a considerable period of time, the jurisdictional requirement that the

Commissioner “determine” a deficiency appeared to have been subsumed

into the requirement that the Commissioner notify the taxpayer of the

asserted deficiency. This unified approach was aided in large part by the

Tax Court’s explanation in Greenberg’s Express v. Commissioner

that, as a

general rule, it would not “look behind a deficiency notice to examine the

evidence used or the propriety of the [Commissioner’s] motives or of the

administrative policy or procedure involved in making his

determinations.”

However, the Ninth Circuit Court of Appeals breathed

new life into the determination requirement through its 1987 decision in

Scar v. Commissioner.

The Service in Scar sent the taxpayers a notice of

deficiency that provided the taxpayers’ names and address, the taxable year

at issue, and the amount of the asserted deficiency. In addition, the Service

attached an explanation of the proposed changes to the notice that

identified a tax shelter transaction different from the shelter transaction in

which the taxpayers had actually participated (with the mistake apparently

resulting from an administrative coding error).

On these facts, the Ninth

Circuit reversed the court-reviewed opinion of the Tax Court below

upholding the validity of the notice.

Explaining that the determination

requirement has “substantive content,” the Ninth Circuit concluded that

the Commissioner’s mistaken basis for the deficiency identified in the

statutory notice precluded the requisite determination, which in turn

negated the Tax Court’s jurisdiction.

Rateau, Battu, Smoot Co., 1 B.T.A. 354 (1925) (A letter informed the taxpayer

of a decision of the Commissioner, not specifically a deficiency determination, and

mistakenly advised the taxpayer of the right to appeal.).

Hartman v. Commissioner, 65 T.C. 542 (1975); Muncaster v. Commissioner,

T.C. Memo. 1976-17, 35 T.C.M. (CCH) 61.

Page v. Commissioner, 297 F.2d 733, 734 (8th Cir. 1962).

62 T.C. 324 (1974).

Id. at 327–28. The Tax Court recognized an exception to not looking behind

the notice of deficiency in situations in which there existed “substantial evidence of

unconstitutional conduct” on the Government’s part. Id. at 328. However, even in

such instances, the notice of deficiency would not be rendered invalid; rather, the

appropriate remedy would entail a shifting of the burden of proof. See id. at 330.

814 F.2d 1363 (9th Cir. 1987).

Id. at 1364–65.

See Scar v. Commissioner, 81 T.C. 855 (1983).

Scar, 814 F.2d 1369–70.

Foundational Parameters of the Court’s Jurisdiction 279

Not long after the Ninth Circuit issued its decision in Scar, the Tax

Court interpreted the decision as applying only in instances in which the

notice of deficiency on its face contained evidence that the Commissioner

failed to make a determination of a deficiency with respect to the taxpayer.

The Ninth Circuit subsequently endorsed this circumscribed interpretation

of Scar.

Hence, the emphasis on the determination requirement in Scar

may be misleading, as the instances in which the notice of deficiency belies

a determination with respect to the taxpayer presumably will be few and far

between. Nonetheless, taxpayers have not been deterred from frequently

invoking the Scar decision as a basis for contending that a notice of

deficiency is invalid.

b. Deficiency Notice

Once the Commissioner determines a deficiency, the Code authorizes

the Commissioner to send a notice thereof to the taxpayer by either

certified or registered mail.

The notice advises the taxpayer that the

Commissioner intends to assess a deficiency against the taxpayer and

provides an opportunity to have the determination reviewed by the Tax

Court before assessment.

The notice of deficiency, frequently referred to

as a “90-day letter,” derives its popular name from two distinct attributes.

First, the taxpayer is allowed 90 days (unless the notice is addressed to a

taxpayer outside the United States)

after the notice is mailed to file a

petition with the Tax Court for redetermination of the deficiency.

Second, the Commissioner’s power to assess and collect an asserted tax

deficiency is suspended for the 90-day period or, if the taxpayer files suit,

until a final decision of the court with respect to the deficiency.

Thus, in

See Campbell v. Commissioner, 90 T.C. 110, 113 (1988).

Clapp v. Commissioner, 875 F.2d 1396, 1402 (9th Cir. 1989) (citing the Tax

Court’s opinion in Campbell for the proposition that “[o]nly where the notice of

deficiency reveals on its face that the Commissioner failed to make a determination

is the Commissioner required to prove that he did in fact make a determination”).

See, e.g., Bokum v. Commissioner, 992 F.2d 1136 (11th Cir. 1993); Cross v.

Commissioner, T.C. Memo. 2012-344, 104 T.C.M. (CCH) 750; Freedman v.

Commissioner, T.C. Memo. 2010-155, 100 T.C.M. (CCH) 43.

I.R.C. § 6212(a).

Bauer v. Foley, 404 F.2d 1215, 1220 (2d Cir. 1968), modified on other grounds,

408 F.2d 1331 (2d Cir. 1969); Commissioner v. Stewart, 186 F.2d 239, 240 (6th Cir.

1951).

In this situation the period is 150 days. I.R.C. § 6213(a).

Id.

Id. Shapiro v. Secretary of State, 499 F.2d 527, 531 (D.C. Cir. 1974), aff’d, 424

U.S. 614 (1976); S.

REP. NO. 69-52, at 26 (1926). But see I.R.C. § 7485(a).

280 The United States Tax Court – An Historical Analysis

general, the Commissioner cannot assess or collect a deficiency without first

issuing a notice of deficiency.

The statute does not describe the notice of deficiency in detail. This

vagueness has fostered litigation regarding the scope, form and content of

the notice, the address to which it must be mailed, and whether, to be valid,

the notice must be received by the taxpayer. With respect to the scope of

the notice, one problem that has arisen involves the combination in a single

notice of an over-assessment and a deficiency. Since enactment of the

Revenue Act of 1926, it has been clear that each taxable year is independent

so far as jurisdiction of the Tax Court is concerned.

Therefore, if the

Commissioner determines in a single notice a deficiency for one year and an

over-assessment of tax for another year, there is no offsetting of one

amount against the other, and the court has jurisdiction over the year for

which a deficiency is determined.

The problem is more complicated if a

notice of deficiency contains, for the same year, both an over-assessment

with respect to one tax and a deficiency with respect to another. In this

situation, determinations with respect to separate taxes of the same type

generally are offset and Tax Court jurisdiction is available only if a net

deficiency exists. In this regard, all income taxes are considered to be of the

same type and therefore subject to netting. For example, in one case

involving the Revenue Act of 1936, a deficiency of normal corporate tax

and an over-assessment of undistributed profits tax resulted in a net over-

assessment. Consequently, the Board had no deficiency jurisdiction with

respect to either tax.

Similarly, under the 1939 Code, an over-assessment

in income tax was netted against additions to tax determined as a result of

nonpayment, because both taxes were imposed under the income tax

chapter.

A net over-assessment resulted and Tax Court jurisdiction was

denied.

I.R.C. § 6213(a). The general rule does not, however, apply to jeopardy and

termination assessments. I.R.C. §§ 6851(b), 6861(b); see infra notes 339–540 and

accompanying text.

Cornelius Cotton Mills, 4 B.T.A. 255 (1926).

Id.

Union Tel. Co. v. Commissioner, 41 B.T.A. 152 (1940).

Myers v. Commissioner, 28 T.C. 12 (1957).

Organizational changes in the 1954 Code removed the additions to tax

provision from the income tax subtitle. However, a statutory provision required

continuation of this netting procedure with respect to a tax subject to deficiency

procedures. See I.R.C. § 6659 (prior to repeal in 1989); Granquist v. Hackleman,

264 F.2d 9 (9th Cir. 1959) (interpreting former I.R.C. § 6659). Section 6665

currently addresses this issue by providing that additions to tax, additional amounts,

and penalties imposed by Chapter 68 of the Internal Revenue Code generally shall

be assessed, collected, and paid in the same manner as taxes.

Foundational Parameters of the Court’s Jurisdiction 281

On the other hand, taxes of different types are treated independently,

and each may be the subject of Tax Court deficiency jurisdiction. For

example, the Revenue Act of 1934 subjected both income tax and excess

profits tax to Board deficiency jurisdiction;

yet, because these two taxes

were imposed by different titles of the Revenue Act, they were treated

separately for jurisdictional purposes. A single deficiency notice containing

both a deficiency determination with respect to one and an over-assessment

with respect to the other entitled the taxpayer to deficiency jurisdiction over

the one tax for which a deficiency had been determined regardless of the

net determination.

(1) Content of Notice

Because the statute provides no particular form for the deficiency

notice,

a second type of dispute has arisen involving the adequacy of a

communication from the Service as a basis for the filing of a petition. The

Commissioner occasionally seeks dismissal of a case on the ground that the

letter sent to the taxpayer was not a deficiency notice and consequently the

taxpayer was not entitled to invoke the jurisdiction of the Tax Court.

However, cases questioning the sufficiency of a notice do not always

involve attacks by the Commissioner on the notice. In early years, the

Board itself occasionally raised the issue and dismissed a case for lack of

jurisdiction.

In other cases, the taxpayer in effect challenges his right to

file a petition with the court. He may have any one of several motives.

These include a desire to invalidate the determination thereby avoiding an

Revenue Act of 1934, ch. 277, §§ 272, 702(b), 48 Stat. 741, 771.

Emeloid Co. v. Commissioner, 14 T.C. 1295 (1950), rev’d on other grounds, 189

F.2d 230 (3d Cir. 1951); Will County Title Co. v. Commissioner, 38 B.T.A. 1396

(1938).

I.R.C. § 6212(a).

Lerer v. Commissioner, 52 T.C. 358 (1969) (granting the Commissioner’s

motion to dismiss for lack of jurisdiction on the basis that a “Form 7900” letter

sent by ordinary mail to a bankrupt was not a deficiency notice); Estate of

Schmalstig v. Commissioner, 43 B.T.A. 433 (1941) (granting the Commissioner’s

motion to dismiss for lack of jurisdiction on the rationale that a letter sent to

executors of an estate advising that their claim for refund was rejected was not a

valid deficiency notice).

American Bag Co. v. Commissioner, 16 B.T.A. 774 (1929) (dismissing the

case on Board initiative on the rationale that a letter was not a statutory deficiency

notice); F. H. Moyer, 1 B.T.A. 75 (1924) (determining a letter received by the

taxpayer to be simply the results of a preliminary audit by the collector’s office and

not a valid deficiency notice).

282 The United States Tax Court – An Historical Analysis

immediate adjudication on the merits,

an attempt to escape the usual

burden of proof placed upon the petitioner,

and, frequently, an attempt to

negate the tolling of the statute of limitations otherwise occasioned by the

issuance of a valid notice of deficiency (which, if successful, often will result

in the expiration of the limitations period for assessing the disputed tax).

Because of the variety of forms the notice may take, its sufficiency

must be judicially determined on a case-by-case basis from the specific

language used in the letter.

To start, the letter need not be in a particular

form,

and no mention must be made of the right to appeal.

In the

absence of specific statutory requirements, courts were left to define the

minimum information necessary for a statutory notice of deficiency to be

valid. Case law established the following requirements: the communication

must identify the taxpayer and the taxable year or years involved, indicate

that a deficiency has been determined, and specify the amount of the

deficiency.

The minimal requirements of the statutory notice of deficiency often left

taxpayers without a sufficient understanding of the grounds for the

Commissioner’s adjustment, and this informational deficit rendered the

formulation of responsive strategies more difficult. As early as 1924, the

suggestion was made that the statute be amended to require the

Commissioner to set forth in the notice each adjustment and a

Brown v. Commissioner, 18 B.T.A. 859, 867 (1930) (rejecting taxpayers’

argument that the Commissioner’s notice was not a valid determination because

not sufficiently definite).

Mayerson v. Commissioner, 47 T.C. 340, 348–49 (1966) (rejecting taxpayer’s

contention “that the statutory notice of deficiency was so vague and indefinite that

it did not constitute a determination, and that therefore no burden of proof was

placed upon” the taxpayer).

See, e.g., Ventura Consol. Oil Fields v. Rogan, 86 F.2d 149, 153 (9th Cir. 1936)

(finding that, because the Commissioner’s letter was not a valid deficiency notice,

the period of limitations had expired and assessment of any deficiencies for the

period at issue was foreclosed).

Estate of Schmalstig v. Commissioner, 43 B.T.A. 433, 438 (1941).

Estate of Yaeger v. Commissioner, 889 F.2d 29, 35 (2d Cir. 1989) (“The

statute does not specify the form or content of the notice.”); Abrams v.

Commissioner, 787 F.2d 939, 941 (4th Cir. 1986); Ventura Consol. Oil Fields, 86 F.2d

at 153; see also Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir. 1937) (providing that

the purpose of the statutory notice “is only to advise the person who is to pay the

deficiency that the Commissioner means to assess him; anything that does this

unequivocally is good enough”).

Ventura Consol. Oil Fields, 86 F.2d at 153.

See Estate of Yaeger, 889 F.2d at 35; Donley v. Commissioner, 791 F.2d 383,

384 (5th Cir. 1986).

Foundational Parameters of the Court’s Jurisdiction 283

corresponding rationale.

100

Congress finally responded in 1988 by enacting

the predecessor to § 7522(a).

101

This provision, effective for notices issued

after January 1, 1990, requires the notice of deficiency not only to identify

the amounts of any tax, interest, additional amounts, additions to tax, and

penalties alleged to be due, but also to “describe the basis for” such

adjustments. The conference report accompanying the legislation indicated

the perhaps obvious intention of the provision to improve taxpayer

understanding of the Commissioner’s determinations: “The conferees

believe that all correspondence should be sufficiently clear to enable a

taxpayer to understand an IRS question about a tax return as well as any

adjustments or penalties applied to a tax return.”

102

Although Congress

directed the Service to be more descriptive in the notice, it failed to supply a

consequence for the Service’s failure to do so. Indeed, perhaps anticipating

routine challenges to the validity of statutory notices on these grounds,

Congress specifically provided that an inadequate description would not

operate to render a notice invalid.

103

The Tax Court, however, refused to

interpret the Government’s failure to comply with the § 7522(a) directive as

being devoid of consequence altogether. In the court-reviewed opinion of

Shea v. Commissioner,

104

the court held that if the notice of deficiency fails to

describe the basis for the deficiency determination and the basis for the

determination requires the admission of additional evidence (that is,

evidence different than that necessary to resolve the deficiency

determinations that were adequately described in the notice), the

Commissioner would bear the burden of proof with respect to the new

basis.

105

The court found the situation sufficiently analogous to the

Commissioner’s assertion of a new matter not initially raised in the notice

of deficiency to incorporate the same burden-shifting consequences under

Tax Court Rule 142(a)(1).

106

100

Milton W. Dobrzensky, Practitioners Criticize 30-Day and 90-Day Letters as

Vague and Non-Specific, 7 J.

TAX’N 34 (1957).

101

See Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,

§ 6233(a), 102 Stat. 3341, 3735.

102

H.R. REP. NO. 100-1104, at 219 (1988).

103

See I.R.C. 7522(a) (“An inadequate description . . . shall not invalidate the

notice.”).

104

112 T.C. 183 (1999).

105

Id. at 197. The Service issued a nonaquiescence to this aspect of the Shea

decision. I.R.S. Action on Decision 2000-08 (Oct. 30, 2000).

106

See id. at 190–97. This approach was earlier suggested by Judge Raum in

Ludwig v. Commissioner, T.C. Memo. 1994-518, 68 T.C.M. (CCH) 961. Raising the

question of what remained of the Commissioner’s obligation to describe the basis

for the deficiency determination under § 7522(a) in light of the statutory directive

that failure to do so would not invalidate the notice, the opinion posited the

following: “Perhaps this Court could fashion some sort of remedy for the

taxpayer, such as imposing the burden of proof, or at least the burden of going

284 The United States Tax Court – An Historical Analysis

Congress most recently addressed the content of the notice of

deficiency as part of the IRS Restructuring and Reform Act of 1998.

107

Concerned with the harsh consequences faced by taxpayers who failed to

file a petition for redetermination on a timely basis (namely, the Tax Court’s

absence of jurisdiction that generally foreclosed a pre-payment forum),

108

Congress directed the Service to assist the taxpayer with the calculation of

the petition filing deadline. Specifically, through an uncodified provision in

the broader legislation, Congress required the Service to specify in the

notice of deficiency the last day on which the taxpayer could file a timely

petition with the Tax Court.

109

Contemplating the possibility that the

Service could miscalculate such date, Congress permitted the taxpayer to

rely on the Service’s calculation. Through the addition of a fourth sentence

to § 6213(a), Congress provided that any petition filed by the taxpayer on or

before the date specified in the notice of deficiency as the last date for

timely filing would be treated as having been timely filed—even if that date

otherwise fell outside of the § 6213(a) filing window.

110

Although Congress addressed the consequences of a miscalculation of

the last date for filing a petition with the Tax Court, it did not address the

consequences resulting from the Service’s failure to provide any filing date

on the notice of deficiency as statutorily directed.

111

Not surprisingly, the

Service issued notices of deficiency that simply failed to include the last date

for timely filing of the petition in the period immediately following the

forward, on the Government.” Id. at 963. However, because the disputed

adjustment favored the taxpayers, the opinion left the matter open for later

resolution.

107

Pub. L. No. 105-206, 112 Stat. 685 (1998).

108

See S. REP. NO. 105-174, at 90 (1998).

109

Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

No. 105-206, § 3463(a), 112 Stat. 685, 767 (1998). That provision reads as follows:

(a) I

N GENERAL.—The Secretary of the Treasury or the Secretary’s

delegate shall include on each notice of deficiency under section 6212 of the

Internal Revenue Code 1986 the date determined by such Secretary (or

delegate) as the last day on which the taxpayer may file a petition with the

Tax Court.

110

Id. § 3463(b), 112 Stat. at 767 (amending I.R.C. § 6213(a)). Note that this

provision operates only to the benefit of the taxpayer. If the Service miscalculates

the last date for filing a petition with the Tax Court by understating the term of the

filing period, that miscalculation does not serve to shorten the filing period

prescribed by law. See Burke v. Commissioner, T.C. Summ. Op. 2007-200.

111

On the other hand, Congress did not expressly state that the failure to

comply with the statutory mandate would not be a basis for invalidating the notice

of deficiency, as it did under § 7522 with respect to that statute’s requirement that

the notice of deficiency describe the basis for the deficiency. See I.R.C. § 7522(a)

(“An inadequate description under the preceding sentence shall not invalidate such

notice.”).

Foundational Parameters of the Court’s Jurisdiction 285

effective date of the 1998 legislation. Taxpayers attempted to seize upon

this defect as grounds for invalidating the notice, but to no avail. In the

first such case, Smith v. Commissioner,

112

the taxpayers filed their petition

within the 90-day period provided by § 6213(a) (as generally described in

the notice of deficiency) notwithstanding the Service’s failure to provide the

last possible filing date in the original notice.

113

The Tax Court rejected the

taxpayers’ contention that failure of the notice to include the filing date

rendered the notice invalid under these circumstances, citing the absence of

prejudice to the taxpayers.

114

The holding of the Smith case left open the question of whether the

Service’s failure to provide the last date for filing a Tax Court petition could

render a notice invalid where the taxpayer’s petition was not timely filed.

The Tax Court addressed this more difficult scenario through a reviewed

decision in Rochelle v. Commissioner.

115

The taxpayer in Rochelle filed his

petition 56 days after expiration of the 90-day period provided by § 6213(a).

In resolving the taxpayer’s first contention that the Service’s failure to

provide the filing date rendered the notice invalid, the court stressed that

Congress sought to address the severe consequences resulting from a

taxpayer’s miscalculation of the 90-day filing period when it required the

Service to include such date in the notice.

116

Because the taxpayer did not

contend that the filing of his petition over 50 days after the expiration of

the 90-day filing period resulted from a miscalculation thereof, the court

determined that the statutory directive provided in the 1998 legislation did

not require invalidating the notice under those circumstances.

The taxpayer in Rochelle alternatively argued that the amendment to

§ 6213(a)—treating as timely any petition filed on or before the date

specified by the Service in the notice of deficiency—operated to excuse his

late filing. Under the taxpayer’s theory, the failure of the notice to specify

the last date for filing a petition with the Tax Court would render any

petition timely, regardless of when filed. The court rejected this alternative

argument on both textual and policy grounds. As a textual matter, the

112

114 T.C. 489 (2000), aff’d, 275 F.3d 912 (10th Cir. 2001).

113

Although the original notice of deficiency left the date for filing the Tax

Court petition blank, the Service subsequently issued a notice to the taxpayers

providing the filing date approximately one month before expiration of the filing

period. Id. at 490.

114

Id. at 491–92; see also Smith v. Commissioner, 275 F.3d 912, 915 n.3 (10th

Cir. 2001) (stating that even in the absence of a petition date, “the relevant inquiry

is whether the error prejudiced the taxpayer.”); Elings v. Commissioner, 324 F.3d

1110 (9th Cir. 2003) (similarly refusing to invalidate a notice of deficiency that

failed to include the last date for filing a petition on grounds that the taxpayer, who

filed a timely petition, suffered no prejudice).

115

116 T.C. 356 (2001), aff’d, 293 F.3d 740 (5th Cir. 2002).

116

Id. at 360–61.

286 The United States Tax Court – An Historical Analysis

remedial amendment to § 6213(a) requires the actual specification of a filing

date with which the taxpayer complied, and the notice contained no such

date.

117

As a matter of policy, the amendment to § 6213(a) was intended to

protect taxpayers who detrimentally relied on misinformation provided by

the Service. Because the Service simply failed to provide the date for filing

the petition (as opposed to supplying an incorrect date), no prospect of

detrimental reliance existed.

118

Having found the last sentence of § 6213(a)

inapposite, the court dismissed the case for want of a timely filed petition.

The Service in Rochelle ultimately suffered no consequence from failing

to comply with its statutory obligation to calculate the last date for filing the

petition for redetermination. While this result may seem less than

satisfactory, the Fifth Circuit affirmed the decision by adopting the opinion

of the Tax Court majority below.

119

Nonetheless, because both the trial

level and appellate opinions stressed the length of the taxpayer’s

delinquency in filing the petition, these decisions do not necessarily

foreclose a taxpayer who genuinely miscalculates the last date of the filing

period in the absence of the statutorily required guidance from obtaining

some measure of relief.

120

Also as part of the IRS Restructuring and Reform Act of 1998, Congress

amended § 6212(a) to require the notice of deficiency to inform the

taxpayer of the taxpayer’s right to contact a local office of the taxpayer

advocate and to provide the location and phone number of such office.

121

As in the case of the required provision of the last date for timely filing a

Tax Court petition, the statute does not address the consequence of the

notice not containing the requisite information concerning the taxpayer

advocate. Hence, the Tax Court was left once again to address a taxpayer’s

argument that failure to provide statutorily required information rendered

the notice invalid. In John C. Hom & Associates, Inc.,

122

the notice of

deficiency at issue contained the requisite notice of the taxpayer’s right to

contact the local office of the taxpayer advocate. However, in lieu of

providing the location and phone number of such office, the notice of

deficiency instead directed the taxpayer to a website where such

information could be obtained. On these facts, the taxpayer contended that

the notice of deficiency was statutorily deficient. The Tax Court disagreed.

117

Id. at 362.

118

Id. at 363.

119

Rochelle v. Commissioner, 293 F.3d 740 (5th Cir. 2002).

120

See, e.g., Rochelle v. Commissioner, 116 T.C. at 360–61 (Chabot, J.,

dissenting) (“All this leaves for another day the question of what to do with the

case of a late filing pro se lay petitioner, who might be suffering from cognitive

deficit, dyscalculia, or other disability.”).

121

Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

No. 105-206, § 1102(b), 112 Stat. 685, 703 (1998).

122

140 T.C. 210 (2013).

Foundational Parameters of the Court’s Jurisdiction 287

In addition to stressing the “minor and technical” nature of the error at

issue,

123

the court emphasized the absence of prejudice to the taxpayer.

124

(2) Mailing of Notice

Another area of controversy concerns the mailing of the notice of

deficiency. The purpose of the mailing requirement is to prescribe a

procedure that will ordinarily result in the taxpayer’s timely receipt of the

notice. Nonetheless, the language of the statute sometimes precludes

disputes from being resolved in accord with this purpose.

Since 1958, the Code has authorized the notice to be mailed to the

taxpayer’s last known address by either registered or certified mai1.

125

Prior

thereto, the only authorized method was by registered mail. The Tax Court

considered registered mail a jurisdictional necessity and held letters invalid

that were sent by unregistered mail or delivered manually.

126

This view,

however, was not accepted by all the courts of appeals.

127

The last known address has been interpreted to mean the last address

known to the Treasury

128

—that is, the address that the Service reasonably

believes the taxpayer wishes it to use.

129

Ordinarily, the last known address

is that shown on the taxpayer’s return, even if it is erroneous, if the Service

has not been informed by the taxpayer in writing of another permanent

address or a temporary address of a definite duration to which all

communications should be sent.

130

123

Id. at 214.

124

The taxpayer never alleged that he attempted to contact the taxpayer

advocate, and the court determined that he easily could have obtained the

appropriate contact information through the website link. Id. at 215.

125

Technical Amendments Act of 1958, Pub. L. No. 85-866, § 89(b), 72 Stat.

1665 (amending I.R.C. § 6212(b)).

126

Hamilton v. Commissioner, 13 T.C. 747, 749 (1949); Roger J. Williams, 13

T.C. 257, 258–59 (1949); John A. Gebelein, Inc. v. Commissioner, 37 B.T.A. 605,

606 (1938); Day v. Commissioner, 12 B.T.A. 161, 163 (1928).

127

Berger v. Commissioner, 404 F.2d 668, 673 (3d Cir. 1968); Cohn v. United

States, 297 F.2d 760, 772 (9th Cir. 1962); Boren v. Riddell, 241 F.2d 670 (9th Cir.

1957).

128

Berafeld v. Campbell, 188 F. Supp. 505 (N.D. Tex. 1959), aff’d, 290 F.2d

475 (5th Cir. 1961).

129

Sorrentino v. Ross, 425 F.2d 213, 215 (5th Cir. 1970); Butler v. District

Director, 409 F. Supp. 853, 856 (S.D. Tex. 1975); Kennedy v. United States, 403

F. Supp. 619, 623 (W.D. Mich. 1975), aff’d mem., 556 F.2d 581 (6th Cir. 1977).

130

In Abeles v. Commissioner, 91 T.C. 1019 (1988), the Tax Court held that “a

taxpayer’s last known address is that address which appears on the taxpayer’s most

recently filed return, unless [the Commissioner] has been given clear and concise

notification of a different address.” Id. at 1035; see also Delman v. Commissioner,

384 F.2d 929, 933 (3d Cir. 1967); De Welles v. United States, 378 F.2d 37, 40 (9th

288 The United States Tax Court – An Historical Analysis

In most cases, the concept of last known address is construed strictly

against the taxpayer. Thus, a properly addressed 90-day letter sent by

registered or certified mail is valid even though never received or returned

unclaimed.

131

In this regard, it is important to note that there is no

statutory requirement that the notice actually be received by the taxpayer.

132

Conversely, an improperly addressed notice that never reaches the taxpayer

or is not timely received is clearly invalid.

133

However, a deficiency notice

that is actually received by the taxpayer without prejudicial delay generally

will be valid even though the address used by the Service was not exactly

the last known address.

134

Thus, 90-day letters that were actually received

by taxpayers have been held valid despite the fact that they were mailed to

the wrong house number or wrong street address, or were sent without

specific authorization to the taxpayer’s attorney instead of to the taxpayer’s

Cir. 1967); Clodfelter v. Commissioner, 57 T.C. 102, 106 (1971), aff’d, 527 F.2d

754 (9th Cir. 1975); McCormick v. Commissioner, 55 T.C. 138, 141–42 (1970).

Revenue Procedure 2010-16, 2010-19 I.R.B. 664, provides guidance on how the

Service determines a taxpayer’s last known address and what notices are sufficient

to change it. As a general rule, the Service determines the taxpayer’s last known

address by reference to the address reflected on the most recently filed and

properly processed return. Rev. Proc. 2010-16, § 2.02. A taxpayer may change

this address by providing “clear and concise notification of a different address,” see

id., and the Service has promulgated Form 8822 for this purpose.

131

Pfeffer v. Commissioner, 272 F.2d 383 (2d Cir. 1959); Cataldo v.

Commissioner, 60 T.C. 522, 524 (1973), aff’d per curiam, 490 F.2d 550 (2d Cir.

1974); Helfrich v. Commissioner, 25 T.C. 404 (1955).

132

I.R.C. § 6212; Bauer v. Foley, 287 F. Supp. 343 (W.D.N.Y.), rev’d on other

grounds, 404 F.2d 1215 (2d Cir. 1968), opinion supplemented, 408 F.2d 1331 (2d Cir.

1969).

133

Kennedy v. United States, 403 F. Supp. 619 (W.D. Mich. 1975), aff’d mem.,

556 F.2d 581 (6th Cir. 1977); O’Brien v. Commissioner, 62 T.C. 543, 549–50

(1974); Wilson v. Commissioner, 16 B.T.A. 1280, 1288 (1929); Walter G. Morgan,

5 B.T.A. 1035, 1038 (1927).

134

See Patmon & Young Prof’l Corp. v. Commissioner, 55 F.3d 216, 217 (6th

Cir. 1995); Borgman v. Commissioner, 888 F.2d 916, 917 (1st Cir. 1989); Pugsley v.

Commissioner, 749 F.2d 691, 692–93 (11th Cir. 1985); Clodfelter v. Commissioner,

527 F.2d 754, 757 (9th Cir. 1975); Commissioner v. Stewart, 186 F.2d 239, 241 (6th

Cir. 1951); Lifter v. Commissioner, 59 T.C. 818, 823 (1973). In these instances,

courts are divided on whether the 90-day period for filing a petition for

redetermination with the Tax Court commences with the mailing of the notice of

deficiency or the date on which the taxpayer obtains actual notice of the deficiency

determination. See, e.g., Delman v. Commissioner, 384 F.2d 929 (3d Cir. 1967)

(determining that the period for filing a petition runs from the time of the date of

mailing); Gaw v. Commissioner, 45 F.3d 461 (D.C. Cir. 1995) (determining that the

period for filing a petition runs from the date taxpayer receives actual notice of the

determination); see also Terrell v. Commissioner, 625 F.3d 254 (5th Cir. 2010)

(describing the circuit split on this issue).

Foundational Parameters of the Court’s Jurisdiction 289

last known address.

135

In this regard, it also should be noted that other

types of errors that do not result in prejudice to the taxpayer do not

generally result in invalidating the notice. Thus, taxpayers have lost

challenges to 90-day letters based on an incorrect spelling of the taxpayer’s

name and on an issuance of the notice by an Internal Revenue Service

official other than the appropriate district director.

136

(3) Rescission of Notice

Once a notice of deficiency has been issued, the Service may rescind the

notice with the consent of the taxpayer.

137

A formal rescission is required

for this purpose, meaning that the mutual consent of the parties to the

rescission must be objectively apparent.

138

Further consideration of the

taxpayer’s case, coupled with the Commissioner’s concession of a portion

of the previously determined deficiency, is not sufficient to effect a

rescission.

139

As a general matter, a rescinded notice of deficiency is treated as a

nullity by way of § 6212(d). A taxpayer may not petition the Tax Court for

a redetermination based on a rescinded notice; a rescinded notice does not

implicate the limitations regarding credits, refunds, and assessments

provided by §§ 6213(a) and 6512(a); and a rescinded notice does not

implicate the restrictions on the issuance of a subsequent notice under

§ 6212(c)(1). However, a rescinded notice of deficiency maintains

significance in one important respect: The running of the period of

limitations on assessment is suspended under § 6503 for the period during

135

Whitmer v. Lucas, 53 F.2d 1006 (7th Cir. 1931), vacated per curiam, 285 U.S.

529 (1932) (notice of deficiency addressed to incorrect house number but actually

delivered to correct address); Brzezinski v. Commissioner, 23 T.C. 192 (1954)

(notice of deficiency sent by registered mail to taxpayers in care of their attorney).

136

Wessel v. Commissioner, 65 T.C. 273 (1975); Pendola v. Commissioner, 50

T.C. 509 (1968); Perlmutter v. Commissioner, 44 T.C. 382 (1965), aff’d, 373 F.2d

45 (10th Cir. 1967).

137

See I.R.C. § 6212(d) (applicable to notices issued after December 31, 1986).

The Service announced its procedures for rescinding a notice of deficiency and the

instances in which it will do so in Revenue Procedure 98-54, 1998-2 C.B. 531.

138

See Powell v. Commissioner, T.C. Memo. 1998-108, 75 T.C.M. (CCH) 1994;

Hesse v. Commissioner, T.C. Memo. 1997-333, 74 T.C.M. (CCH) 180; Slattery v.

Commissioner, T.C. Memo. 1995-274, 69 T.C.M. (CCH) 2953. Parties generally

reflect their mutual consent to the rescission of a notice of deficiency through the

use of Form 8626, captioned “Agreement to Rescind Notice of Deficiency.”

139

See Hesse v. Commissioner, T.C. Memo. 1997-333, 74 T.C.M. (CCH) 180;

Powell v. Commissioner, T.C. Memo. 1998-108, 75 T.C.M. (CCH) 1994; Mullings

v. Commissioner, T.C. Memo. 1997-114, 73 T.C.M. (CCH) 2186.

290 The United States Tax Court – An Historical Analysis

which the rescinded notice

was outstanding.

140

Congress inserted this

express directive into § 6212(d) in 1988,

141

providing the following

example in the legislative record:

[A]ssume that six months remain to run on the statute of limitations

with respect to a return when the IRS issues a statutory notice of

deficiency. Issuance of this notice suspends the statute of limitations.

If the IRS and the taxpayer agree to rescind the statutory notice, then

as of the date the notice is rescinded, the statute of limitations again

begins to run and (in this example) six months remain until the

statute expires.

142

Accordingly, a rescinded notice of deficiency will not operate to the

detriment of the Commissioner.

c. Petition

Timely filing of a petition by the taxpayer is the third procedural

requisite of deficiency jurisdiction.

143

Evaluating this requirement

necessitates the determination of the following four important factors: (1)

the date that commences the filing period; (2) the date that terminates the

filing period; (3) whether the document is filed within the applicable period;

and (4) whether the document filed is adequate as a petition to initiate the

appeal. Little controversy has surrounded determination of the date that

commences the filing period. Since 1924, the statute has expressed this

date with reference to the date that the notice is mailed.

144

Utilization of

the word “received” in place of “mailed” was considered initially but was

rejected on the ground that it would have created a situation in which the

Bureau would be compelled to prove that the addressee actually received

the deficiency notice.

145

The definition of the word mailed was settled by

the Board in 1925 by reference to the dictionary meaning; accordingly, the

140

I.R.C. § 6212(d) (“Nothing in this subsection shall affect any suspension of

the running of any period of limitations during any period during which the

rescinded notice was outstanding.”).

141

Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,

§ 1015(m), 102 Stat. 3342, 3572 (1988), 1988-3 C.B. 1, 232.

142

H.R. REP. NO. 100-795, at 364–65 (1988).

143

I.R.C. § 6213(a).

144

Revenue Act of 1924, ch. 234, § 274(a), 43 Stat. 297 (now I.R.C. § 6213(a)).

145

65 CONG. REC. 2969 (1924). Today it is established that mailing of the

notice can be proved using evidence of standard mailing procedure combined

with evidence that such procedure was followed in the situation at issue. Cataldo

v. Commissioner, 60 T.C. 522, 524 (1973).

Foundational Parameters of the Court’s Jurisdiction 291

filing period commences on the actual date of mailing and not the postmark

that the letter bears.

146

Identification of the termination of the filing period has been more

controversial. Under the 1924 Revenue Act, the filing period expired 60

days after the mailing of the deficiency notice.

147

Almost immediately, cases

arose that tested the Board’s willingness to liberally construe the statute.

Taxpayers argued that if the sixtieth day fell on a Saturday, Sunday, or legal

holiday, then the period should be extended to compensate for the

contraction of the filing period.

148

The statute, however, did not expressly

extend the filing period in such an event, and the Board strictly construed

the statute to preclude such a result.

149

The harshness of these holdings was

called to the attention of Congress, and the Revenue Act of 1926 provided

for a one-day extension if the filing period terminated on a Sunday.

150

Eight years later, at the urging of the American Bar Association,

151

Congress granted a similar one-day extension in the case of legal holidays.

152

Additionally, the basic filing period was expanded to 90 days.

153

The extra

30 days was considered necessary to accommodate taxpayers who resided

long distances from Washington. Moreover, Congress hoped that the

longer period would reduce the number of litigated cases, as the parties

146

United Tel. Co., 1 B.T.A. 450, 451 (1925).

147

Revenue Act of 1924, ch. 237, § 274(a), 43 Stat. 297; see also United Tel.

Co., 1 B.T.A. 450, 452 (1925); C

HARLES D. HAMEL, PRACTICE AND EVIDENCE

BEFORE THE U.S. BOARD OF TAX APPEALS 86 (1938) [hereinafter cited as

AMEL]; Willis W. Ritter, Pitfalls in Practice Before the Board of Tax Appeals, 3 NAT’L

INC. MAG. 297, 298 (1925) [hereinafter cited as Ritter].

148

E.g., Southern Cal. Loan Ass’n, 4 B.T.A. 223, 226 (1926); Sam Satousky, 1

B.T.A. 22, 24 (1924).

149

Revenue Act of 1924, ch. 234, § 274(a), 43 Stat. 297; Southern Cal. Loan

Ass’n, 4 B.T.A. 223, 226 (1926); Sam Satousky, 1 B.T.A. 22, 24 (1924).

150

Revenue Act of 1926, ch. 27, § 274(a), 44 Stat. 55; Hearings on Revenue

Revision, 1925, Before the House Comm. on Ways and Means, 69th Cong., 1st Sess. 82

(1925) (statement of the New York Society of C.P.A.’s). The Senate favored

excluding Sundays and legal holidays completely from the computation of the

filing period, but this proposal was rejected. See H.R.

REP. NO. 69-356, at 39

(1925).

151

A.B.A. Federal Tax Recommendations, 11 TAXES 340, 343 (1933).

152

Revenue Act of 1934, ch. 277, § 501, 48 Stat. 755. To extend the statutory

period, the legal holiday had to be a legal holiday in the District of Columbia. The

current list of such holidays includes the following: New Year’s Day, Birthday of

Martin Luther King, Jr., Inauguration Day, Washington’s Birthday, District of

Columbia Emancipation Day, Memorial Day, Independence Day, Labor Day,

Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. See T

CT. R. 25(b).

153

Revenue Act of 1934, ch. 277, § 501, 48 Stat. 755.

292 The United States Tax Court – An Historical Analysis

would have more time to reconcile their differences.

154

The 90-day period

remained intact until 1942, when Congress extended the period to 150 days

if the deficiency notice was addressed to a taxpayer located outside the

United States.

155

The exigencies of World War II, especially with respect to

taxpayers in Hawaii, supplied the rationale for the 60-day extension, which

was deemed necessary to afford all taxpayers an equivalent opportunity to

invoke the Tax Court’s jurisdiction.

156

In 1945, Congress once again

liberalized the filing period by providing an extension if the filing period

154

H.R. REP. NO. 73-704, at 34 (1933).

155

Revenue Act of 1942, ch. 619, § 168, 56 Stat. 876. The Tax Court initially

gave a very limited interpretation of the phrase, “[i]f the notice is addressed to a

person outside the States of the Union,” by holding that the 150-day filing period

would only apply to individuals “who were so outside the area designated on some

settled business and residential basis, and not on a temporary basis.” Hamilton v.

Commissioner, 13 T.C. 747, 753 (1949). The Second Circuit, in Mindell v.

Commissioner, 200 F.2d 38, 39 (2d Cir. 1952), disagreed with the Tax Court and

held that temporary absence outside the designated area was sufficient to obtain

the benefit of the extended filing period. Subsequently, the Tax Court, in Estate of

Krueger v. Commissioner, 33 T.C. 667, 668 (1960), modified its earlier holding in

Hamilton and followed the approach of the Second Circuit. See generally Jim R.

Carrigan, Tax Crimes–Statute of Limitations–Tolling Provision, 11 T

AX L. REV. 137, 148

(1956).

156

See S. REP. NO. 77-1631, at 154 (1941); Letter from E.R. Cameron to

Board of Tax Appeals, Aug. 3, 1942, filed at the U.S. Tax Court in “Jurisdiction:

Memoranda & Correspondence;” Letter from Presiding Judge Murdock to

Randolph Paul, Aug. 18, 1942, filed at the U.S. Tax Court in “Jurisdiction:

Memoranda & Correspondence;” Letter from Presiding Judge Murdock to Colin

Stam, Aug. 18, 1942, filed at the U.S. Tax Court in “Jurisdiction: Memoranda &

Correspondence.” Now that Hawaii and Alaska are states, taxpayers there are no

longer allowed the extra 60 days as previously allowed under Treas. Reg.

§ 301.6213-1(a)(1) (1959).

The Revenue Act of 1942 also provided relief for Americans who were

involved in the war effort, by providing a continuous extension of the filing

period for persons outside the Americas. They were given 90 days from the date

when they were no longer considered to be continuously outside the Americas to

file a petition. Revenue Act of 1942, ch. 619, § 507(a), 56 Stat. 961. See S.

REP.

NO. 77-1631, at 252 (1941); see also Report of the Special Comm. on Taxpayers

Affected by Enemy Activities, ABA T

AXATION SECTION 79, 80 (1942). Prior to

passage of the Revenue Act of 1942, the Board of Tax Appeals had been

considering numerous proposals for preserving the rights of these taxpayers to file

a petition. See Memorandum from Bolon B. Turner, Rules Comm. Chairman, to

the Rules Comm., c. 1942, filed at the U.S. Tax Court in “Petitions: Memoranda &

Correspondence” [hereinafter cited as Turner, 1942]; Memorandum from Bolon

B. Turner, Rules Comm. Chairman, to the Rules Comm., Dec. 15, 1942, filed at

the U.S. Tax Court in “Petitions: Memoranda & Correspondence.”

Foundational Parameters of the Court’s Jurisdiction 293

terminated on a Saturday.

157

The Board’s hesitancy to extend, without

specific statutory authorization, the filing period when the last day fell on a

weekend or holiday was mirrored by its reluctance to treat the timely

mailing of a petition as the equivalent of timely filing. In this regard, the

Board soon adopted a rule requiring that a petition actually be received

during business hours on or before the final day of the filing period to be

considered timely.

158

As a result, petitions not actually received within the

jurisdictional period would be dismissed even though the taxpayer could

show that they had been mailed in adequate time to reach the Board within

the prescribed period.

159

The harsh results in these cases occasionally led

appellate courts to reverse dismissals for lack of jurisdiction. These

reversals generally were based on a presumption that petitions timely mailed

were received by the addressee in the ordinary course of the mail.

160

This

presumption enabled the appellate courts to examine the reason for the

untimely receipt of the petition. If the untimely receipt could be attributed

to the employees of either the Board/Tax Court or the Postal Service, then

the appellate courts were more willing to find a timely filing. In the few

cases that held the Board/Tax Court had improperly dismissed the petition,

the usual explanations of the result were either that the negligence of

governmental employees could not deprive taxpayers of their right to file a

petition,

161

or that there was a constructive filing because the governmental

employees were acting as agents of the Board/Tax Court.

162

The relief afforded by the appellate decisions was sporadic, and petitions

generally would be considered filed only on receipt. This result was

criticized on policy grounds as creating risks that were beyond taxpayers’

control and as discriminating against those located long distances from

Washington.

163

Accordingly, recommendations that Congress provide a

157

Act of Dec. 29, 1945, ch. 652, § 203, 59 Stat. 673.

158

B.T.A. RULES 5–6 (July, 1924 ed.). See DiProspero v. Commissioner, 176

F.2d 76, 77 (9th Cir. 1949); Lewis-Hall Iron Works v. Blair, 23 F.2d 972, 974

(D.C. Cir. 1927); Estate of Stebbins v. Commissioner, 40 B.T.A. 613, 615 (1939),

aff’d, 121 F.2d 892 (D.C. Cir. 1941); Sam Satousky, 1 B.T.A. 22, 23 (1924).

159

Edward Barron Estate Co. v. Commissioner, 93 F.2d 751, 753 (9th Cir.

1937); Poyner v. Commissioner, 81 F.2d 521, 522 (5th Cir. 1936); Chambers v.

Lucas, 41 F.2d 299 (D.C. Cir. 1930); Estate of Stebbins v. Commissioner, 40

B.T.A. 613, 615 (1939), aff’d, 121 F.2d 892 (D.C. Cir. 1941).

160

Detroit Automotive Prod. Corp. v. Commissioner, 203 F.2d 785 (6th Cir.

1953); Central Paper Co. v. Commissioner, 199 F.2d 902, 904 (6th Cir. 1952);

Arkansas Motor Coaches v. Commissioner, 198 F.2d 189, 191 (8th Cir. 1952).

161

Central Paper Co. v. Commissioner, 199 F.2d 902, 904–05 (6th Cir. 1952);

Arkansas Motor Coaches v. Commissioner, 198 F.2d 189, 191 (8th Cir. 1952); see

also Palcar Real Estate Co. v. Commissioner, 131 F.2d 210, 213 (8th Cir. 1942).

162

McCord v. Commissioner, 123 F.2d 164, 165 (D.C. Cir. 1941).

163

Tobias Weiss, When is a Petition “Filed” in the Tax Court?, 8 TAX L. REV. 473

(1953).

294 The United States Tax Court – An Historical Analysis

uniform filing event that would eliminate the hazards of the mail were

advanced.

164

Congress responded in 1954 by declaring that the United

States postmark date stamped on the cover of the mailing envelope would

be deemed the date of filing if the petition was received at the Tax Court

subsequent to the statutory period.

165

Four years later Congress refined the

procedure to provide relief in two other situations.

166

If the petition was

lost in the mail, registration or certification was deemed prima facie

evidence of delivery.

167

If the envelope did not contain a postmark, the

date of registration or certification was deemed the postmark date.

168

Congress has since modernized these provisions. In 1996, Congress

directed that certain private delivery services shall be treated in the same

manner as United States mail, with the date recorded or marked by the

private delivery service being treated as a postmark by the United States

Postal Service.

169

Additionally, Congress authorized the Treasury to treat

delivery by private service carriers as equivalent to mailing by registered or

certified mail.

170

The strict approach of the Board/Tax Court to the question of when

the petition must be filed has not generally carried over into the area of

what constitutes a petition. The policy in the latter situation has been to

accept “almost any type of paper indicating a protest of or dissatisfaction

with the respondent’s determination that a deficiency is due.”

171

In cases in

which a petition is jurisdictionally adequate but otherwise defective, the

court generally issues an order to show cause directing the taxpayer to cure

the defects, usually within 60 days.

172

In the absence of such an order, an

164

Id. The American Bar Association formally recommended that Congress

amend the statute to provide that timely mailing by registered mail is equivalent to

timely filing. Report of the Comm. on Tax Court Procedure, ABA T

AXATION

SECTION 80 (1951). The ABA defended the proposal by claiming that because the

deficiency notice was sent by registered mail, the law should permit the taxpayer

to file a petition in the same manner. Id.

165

I.R.C. § 7502. In Cespedes v. Commissioner, 33 T.C. 214 (1959), the Tax

Court held that a foreign postmark would not satisfy the statutory standard.

166

Technical Amendments Act of 1958, Pub. L. No. 85-866, § 89, 72 Stat.

1665 (amending I.R.C. § 7502(c)).

167

I.R.C. § 7502(c)(1)(A).

168

I.R.C. § 7502(c)(1)(B).

169

I.R.C. § 7502(f)(1) (added by Taxpayer Bill of Rights 2, Pub. L. No. 104-

168, § 1210, 110 Stat. 1452, 1474 (1996)).

170

I.R.C. § 7502(f)(3) (added by Taxpayer Bill of Rights 2, Pub. L. No. 104-

168, § 1210, 110 Stat. 1452, 1474 (1996)).

171

Turner, 1942, supra note 156, at 4. See generally HAMEL, supra note 147, at

91; Ritter, supra note 147, at 297.

172

Carstenson v. Commissioner, 57 T.C. 542 (1972); Howard P. Locke,

Motions and Certain Other Procedures in the Tax Court of the United States, 41 T

AXES 391,

400–01 (1963). Board policy in this regard was expressed as follows: “after

Foundational Parameters of the Court’s Jurisdiction 295

amended petition may be filed as a matter of course any time prior to the

filing of the Commissioner’s answer.

173

After the answer is filed, however,

the taxpayer must obtain either the Commissioner’s consent or leave of the

court to file an amended petition.

174

The policy of accepting defective petitions for jurisdictional purposes

proved troublesome in two areas. In several cases the amended petition

raised issues that were not included in the original petition.

175

Few

difficulties arose in this connection if the amended petition was filed within

the original filing period.

176

The question was more difficult if the amended

petition was filed subsequent to the termination of the filing period.

177

The

Board/Tax Court accepted jurisdiction over these amended petitions on the

theory that the filing date of the amended petition related back to the filing

date of the original petition.

178

However, if the amended petition contained

advising the taxpayer or his counsel of the requirement as to form of a proper

petition, [the Board] has permitted the perfection of the petition long after the

expiration of the statutory period on which jurisdiction is based.” Turner, 1942,

supra note 156.

In the Board’s early years, petitions were divided into separate categories for

administrative purposes. Imperfect timely petitions were duly docketed, and the

taxpayer was given an opportunity to perfect. When an imperfect and untimely

petition was received, there was no “hard and fast rule” to be followed, but the

policy was to docket all questionable appeals and let the jurisdictional issue be

raised by motion. If an otherwise proper petition was addressed to the

Commissioner rather than the Board, and subsequently was delivered untimely to

the Board by the Commissioner, it was sent back to the Service “because the

burden of explaining to the taxpayer why papers may not have been filed on time

ought to be carried by the Commissioner and not the Board.” Finally, proper

petitions were docketed and filed. Memorandum from Chairman Hamel to Mrs.

Howard, Jan. 22, 1925, filed at the U.S. Tax Court in “Petitions: Memoranda &

Correspondence.”

173

Compare B.T.A. RULE 17 (Jan. 1, 1935 ed.) with TAX CT. R. 41(a) (July 6,

2012 ed.); see also Kruegar Broughton Lumber Co. v. Commissioner, 18 B.T.A.

1270 (1930); Peruna Co. v. Commissioner, 11 B.T.A. 1180 (1928).

174

Compare B.T.A. RULE 17 (Jan 1, 1935 ed.) with TAX CT. R. 41(a) (July 6,

2012 ed.).

175

E.g., Citizens Mut. Inv. Ass’n v. Commissioner, 46 B.T.A. 48 (1942);

Thompson v. Commissioner, 10 B.T.A. 57, 60–61 (1928); Wald v. Commissioner,

8 B.T.A. 1003, 1005 (1927).

176

If the amended petition was filed within the original filing period, any

issues raised in the amended petition were timely.

177

E.g., Fletcher Plastics, Inc. v. Commissioner, 64 T.C. 35, 39–41 (1975);

Estate of Archer v. Commissioner, 47 B.T.A. 228 (1942).

178

See Fletcher Plastics, Inc. v. Commissioner, 64 T.C. 35, 39–41 (1975);

Estate of Archer v. Commissioner, 47 B.T.A. 228 (1942); Citizens Mut. Inv. Ass’n

v. Commissioner, 46 B.T.A. 48 (1942).

296 The United States Tax Court – An Historical Analysis

allegations relating to taxes

179

or years

180

not assailed in the original petition,

the Board/Tax Court, although accepting jurisdiction generally, refused to

entertain the new issues.

181

The second difficulty involved the filing of eleventh hour telegraphic

and cable communications.

182

Although the members of the Board

generally did not question the basic policy of accepting defective petitions

for jurisdictional purposes, several favored a re-examination of the

application of the policy to these last-minute petitions.

183

The occasion for

re-examination was provided by the decision in McCord v. Commissioner,

184

which the Board’s dismissal of an untimely telegraphic petition was reversed

due to the Board’s customary method of handling such petitions. Western

Union had Board instructions to send all telegraphic petitions over the

government wire service. Because that service was occupied with higher

priority messages, the petition in McCord was not timely received. Under

these circumstances, the appellate court held the petition timely filed.

185

response, the Board discontinued accepting such petitions for even

jurisdictional purposes.

186

179

Estate Archer v. Commissioner, 47 B.T.A. 228 (1942); Citizens Mut. Inv.

Ass’n v. Commissioner, 46 B.T.A. 48 (1942).

180

O’Neil v. Commissioner, 66 T.C. 105 (1976): Fletcher Plastics, Inc. v.

Commissioner, 64 T.C. 35, 39 (1975); Krome v. Commissioner, 16 T.C.M. (CCH)

782 (1948), vacating Krome v. Commissioner, 7 T.C.M. (CCH) 413 (1948); I. Frank

Sons v. Commissioner, 22 B.T.A. 40, 41 (1931); Thompson v. Commissioner, 10

B.T.A. 57, 60–61 (1928); Wald v. Commissioner, 8 B.T.A. 1003, 1005 (1927); J. W.

Teasdale & Co. v. Commissioner, 5 B.T.A. 1244, 1246 (1927).

181

The 1974 rules expressly prohibited including years and taxes in the

amended petition which are different from those contested in the original petition.

AX CT. R. 41(a) and accompanying Rules Comm. Note (Jan. 1, 1974 ed.). The

current rule is stated more generally, providing that “[n]o amendment shall be

allowed after the expiration of the time for filing the petition . . . which would

involve conferring jurisdiction on the Court over a matter which otherwise would

not come within its jurisdiction under the petition as then on file.” T

AX CT. R.

41(a) (July 6, 2012 ed.)

182

See McCord v. Commissioner, 123 F.2d 164 (D.C. Cir. 1941); Estate of

Stebbins v. Commissioner, 40 B.T.A. 613 (1939), aff’d, 121 F.2d 892 (D.C. Cir.

1941); Edward Barron Estate Co. v. Commissioner, 34 B.T.A. 1256 (1936), aff’d

93 F.2d 751 (9th Cir. 1937); Rosenberg v. Commissioner, 32 B.T.A. 618 (1935);

Statler v. Commissioner, 27 B.T.A. 342 (1932).

183

Edward Barron Estate Co. v. Commissioner, 34 B.T.A. 1256, 1257 (1936)

(Leech concurring); id. at 1257 (Turner, dissenting).

184

123 F.2d 164 (D.C. Cir. 1941).

185

Id.

186

B.T.A. RULE 7 (June 1, 1942 ed.); Memorandum from Tracy, Board

Secretary, to Chairman Murdock, Feb. 17, 1942, filed at the U.S. Tax Court in

“Petitions: Memoranda & Correspondence.”

Foundational Parameters of the Court’s Jurisdiction 297

A problem that potentially implicates the issues surrounding validity of a

deficiency notice and those concerned with proper filing of the petition

arises when a taxpayer receives a seemingly defective 90-day letter. A

taxpayer who wishes to test the validity of a deficiency notice may do so by

utilizing one of three procedures. The first two procedures concern the

Tax Court. The taxpayer may file a petition with the Tax Court on a timely

basis and then move for dismissal for lack of jurisdiction.

187

This approach

carries the risk that the Tax Court will conclude that the taxpayer waived

any defects in the notice by filing a timely petition.

188

However, timely

filing does not operate as a blanket waiver of all defects in a statutory

notice; the taxpayer may obtain a dismissal for lack of jurisdiction upon a

showing that there is a defect of sufficient magnitude.

189

If the taxpayer

wishes to avoid the prospect of waiver, a second approach is to file the

petition after expiration of the relevant filing period and then move for

dismissal based on an invalid notice.

190

Although two grounds exist for

dismissal in this setting, the Tax Court will first address the validity of the

notice of deficiency and dismiss on that ground (in favor of the taxpayer) if

the notice is found to be defective.

191

This approach represents something

187

See, e.g., Lifter v. Commissioner, 59 T.C. 818 (1973).

188

See Commissioner v. Stewart, 186 F.2d 239 (6th Cir. 1951); Olsen v.

Helvering, 88 F.2d 650 (2d Cir. 1937); Lifter v. Commissioner, 59 T.C. 818 (1973);

Kay Mfg. Co. v. Commissioner, 18 B.T.A. 753 (1930), aff’d, 53 F.2d 1083 (2d Cir.

1931); Whiting v. Commissioner, T.C. Memo. 1984-142, 47 T.C.M. (CCH) 1334.

189

Bernie v. Commissioner, 16 T.C. 861, 862 (1951); Walter G. Morgan, 5

B.T.A. 1035 (1927).

190

See, e.g., Mulvania v. Commissioner, 769 F.2d 1376 (9th Cir. 1985). In

Mulvania, the Service mailed the taxpayer a notice of deficiency on the final day of

the period of limitations on assessment. The notice was not addressed properly,

and the notice was returned to the Service as undeliverable. On the same day the

Service mailed the notice of deficiency to the taxpayer, it mailed a copy to the

taxpayer’s accountant. The accountant informed the taxpayer of the notice within

the 90-day period for filing a petition for redetermination. However, believing the

notice to be invalid, the taxpayer did not originally seek to invoke the Tax Court’s

jurisdiction. Roughly two years later, the taxpayer reconsidered and filed a petition

for redetermination with the Tax Court, contesting that the Service failed to issue a

valid notice of deficiency prior to the expiration of the period of limitations on

assessment. The Ninth Circuit Court of Appeals affirmed the Tax Court’s

determination that the notice was invalid. The appellate court concluded that the

Service “is not forgiven for its clerical errors or for mailing notice to the wrong

address unless the taxpayer, through his own actions, renders the Commissioner’s

errors harmless.” Id. at 1380.

191

See Pietanza v. Commissioner, 92 T.C. 729, 735–36 (1989), aff’d without

published opinion, 935 F.2d 1282 (3d Cir. 1991) (explaining that, “if jurisdiction is

lacking because of respondent’s failure to issue a valid notice of deficiency, we will

dismiss the case on that ground, rather than for lack of a timely filed petition”).

298 The United States Tax Court – An Historical Analysis

of a gamble. If the defect in the notice does not warrant invalidation, the

taxpayer will be foreclosed from litigating on a prepayment basis. The third

approach is to wait for collection activity and then to seek an injunction in

district court against assessment and collection on the ground that no valid

deficiency notice has been issued.

192

If the taxpayer takes either of the latter

two options but is not successful, the taxpayer, having not invoked the

jurisdiction of the Tax Court, may sue for a refund in the Federal district

court or in the Court of Federal Claims after the deficiency has been

assessed and collected.

193

3. Jurisdiction to Restrain Premature Assessment and Collection

If a taxpayer invokes the jurisdiction of the Tax Court through the

timely filing of a petition for a redetermination of a deficiency in tax that is

subject to the procedures of § 6213(a), the Service may not assess the

deficiency or institute collection proceedings until the decision of the Tax

Court becomes final.

194

Although statutory exceptions exist to permit the

Service to assess the deficiency when collection of the underlying tax

appears in jeopardy,

195

the Service occasionally proceeds with assessment

and collection on a premature basis in instances where those statutory

exceptions are not implicated. Originally, a taxpayer aggrieved by the

Service’s violation of the prohibition on assessment and collection under

§ 6213(a) was forced to seek injunctive relief before the Federal district

court.

196

Depending on the reviewing court, a taxpayer may have been

required to establish more than a violation of § 6213(a) to obtain injunctive

relief. Certain courts required the taxpayer to establish additionally the

traditional prerequisites to injunctive relief—that is, the prospect of

irreparable injury and the absence of an adequate remedy at law.

197

192

Id.; 28 U.S.C. § 1346(a)(1). This approach also carries risk, as the district

court may not agree that the notice is defective. If the court finds the

notice to be valid and the taxpayer did not file a timely petition, access to

Tax Court deficiency jurisdiction will have been lost.

193

I.R.C. § 6213(a).

194

Id.

195

Specifically, § 6213(a) provides exceptions for termination assessments

under §§ 6851 and 6852, and jeopardy assessments under § 6861.

196

See Kamholz v. Commissioner, 94 T.C. 11, 15 (1990), action on dec., 1991-20

(Aug. 5, 1991), acq. in part, 1991-2 C.B. 1.

197

See Cool Fuel, Inc. v. Connett, 685 F.2d 309, 313–14 (9th Cir. 1982)

(showing of an irreparable injury necessary to avail injunctive relief under §

6213(a)); Gunn v. Mathis, 157 F. Supp. 169, 178 n.4 (W.D. Ark. 1957) (showing of

an irreparable injury unnecessary because § 6213(a) does not require it as a

prerequisite for injunctive relief).

Foundational Parameters of the Court’s Jurisdiction 299

Believing that both taxpayers and the Government would benefit from

litigating related issues in the same forum,

198

Congress amended § 6213(a)

in 1988 to provide the Tax Court with concurrent jurisdiction to enjoin the

premature assessment and collection of any tax that is the subject of a

timely filed petition pending before the Tax Court.

199

The penultimate

sentence of § 6213(a) establishes the limits of the Tax Court’s jurisdiction in

this context. The court is authorized to enjoin an assessment or collection

action only if a timely petition for the redetermination of a deficiency has

been filed. Even then, the deficiency that the Service has prematurely

assessed or attempted to collect must serve as the subject of the petition for

redetermination.

200

However, the statute is silent on the finer aspects of the

Tax Court’s exercise of jurisdiction in this setting. Specifically, the statute

does not designate which party bears the burden of establishing a violation

of § 6213(a) necessary for the court to restrain assessment or collection, nor

does the statute address the standard of proof that must be satisfied by the

party carrying the burden.

The Tax Court first addressed the exercise of its jurisdiction to restrain

assessment and collection of a deficiency under § 6213(a) in the 1990 case

of Kamholz v. Commissioner.

201

After noting the dearth of guidance

concerning the burden and standard of proof, the court set out to resolve

these issues even though they were not raised by the parties.

202

The court

declined to follow the general practice of placing the burden of proof on

the taxpayer, noting that two justifications for this approach were absent in

this setting. First, unlike the regular deficiency setting in which the taxpayer

possesses superior knowledge of facts relating to his tax liability, in this

setting the Service possessed superior access to the facts central to the

court’s determination. Specifically, the Service was in the best position to

198

S. REP. NO. 100-309, at 16 (1988).

199

Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,

§§ 6226, 6243(a), 102 Stat. 3342, 3730, 3749 (1988) (providing Tax Court

jurisdiction under § 6213(a) as part of the Omnibus Taxpayer Bill of Rights). The

Tax Court’s jurisdiction took effect on November 11, 1988. Id. § 6243(c), 102 Stat.

at 3750. The court’s ability to order a refund of any amount collected within the

prohibited period was provided by Congress a decade later, taking effect on July 22,

1998. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

No. 105-206, § 3464(a), (d), 112 Stat. 685, 767 (1998); see also S.

REP. NO. 105-174,

at 91 (1998).

200

I.R.C. § 6213(a); TAX CT. R. 55; see also Kamholz v. Commissioner, 94 T.C.

11, 15 (1990) (holding no jurisdiction over deficiencies for years that are not the

subject of timely filed petitions pending before the court).

201

94 T.C. 11 (1990). In so doing, the court relied heavily on its decision in

Williams v. Commissioner, 92 T.C. 920 (1989), in which the court examined these

issues in the context of the court’s expanded jurisdiction to review the Service’s

determination to sell seized property under § 6863(b)(3)(C).

202

Kamholz, 94 T.C. at 15–16.

300 The United States Tax Court – An Historical Analysis

determine if the deficiency it proposed to assess and collect served as the

subject of the deficiency proceeding before the court.

203

Second, the

Service was not operating under exigent circumstances, as the challenged

assessment was not made pursuant to the available jeopardy procedures.

204

Accordingly, the court determined that if the taxpayer’s motion to restrain

assessment and collection under § 6213(a) satisfies a minimal threshold of

establishing grounds that are “plausible and believable,” the Service bears

the burden of proving that the assessments it intends to collect are not the

subject of the deficiency proceedings before the court.

205

The Service must

carry this burden by a preponderance of the evidence.

206

With these ground

rules established, the court concluded that the Service failed to carry its

burden of establishing that the tax it prematurely assessed and intended to

collect did not serve as the subject of the relevant deficiency proceeding.

Having determined that the Service violated the prohibition on

assessment provided in § 6213(a), the Tax Court in Kamholz next addressed

whether the violation alone served as a sufficient basis to grant the

requested injunctive relief.

207

Specifically, the court considered whether the

taxpayer must also establish the prospect of irreparable injury and the

absence of an adequate legal remedy for the injunction to be issued.

Notwithstanding the permissive language employed by the statute,

208

the

court concluded that those traditional requirements for injunctive relief

were inapposite in this setting. Reasoning that the taxpayer selected a legal

remedy by virtue commencing an action with the court to redetermine the

asserted deficiencies, the court characterized the issue of whether the

taxpayer would suffer irreparable injury if collection were not enjoined as

“irrelevant.”

209

Emphasizing the unambiguous statutory directive

precluding collection actions until a decision of the Tax Court becomes

final, the court found the Service’s failure to prove that the assessments to

be collected were not the subject of cases pending before the court to be

“sufficient grounds” for issuing an injunction.

210

203

Id. at 16.

204

Id.

205

Id. at 16–17.

206

Id. at 17.

207

Id. at 19.

208

Id. (noting that § 6213(a) provides that the Tax Court “may” enjoin

assessment and collection).

209

Id.

210

Id. Because it believes that Congress did not intend for a taxpayer always to

be required to prove an irreparable injury and an absence of an adequate legal

remedy before the Tax Court could issue an injunction, the Service has

acknowledged the court’s discretion to grant injunctive relief under § 6213(a).

I.R.S. Action on Decision 1991-20 (Aug. 5, 1991).

Foundational Parameters of the Court’s Jurisdiction 301

B. Refund Jurisdiction

Under the 1924 Act, the jurisdiction of the Board of Tax Appeals

generally was restricted to redetermining deficiencies in tax.

211

provision was made for the Board to declare a taxpayer’s entitlement to a

refund of taxes already paid. Initially, this restriction seemed sensible in

view of the principal consideration that formed the basis of the Board’s

jurisdiction—providing an opportunity for independent review without

requiring payment of the disputed tax.

212

Because remedies already existed

for taxpayers who believed they had overpaid their taxes,

213

there was no

manifest necessity to provide refund jurisdiction to the Board.

With the beginning of operations by the Board, however, it became

apparent that strict adherence to the deficiency jurisdiction limitation

produced unfortunate results in at least two distinct situations. The first

resulted from a Board ruling that it lost jurisdiction of an appeal if the

asserted deficiency was paid prior to the rendition of its decision.

214

Payment of the disputed tax eliminated the deficiency. Because Board

jurisdiction was limited to redetermining deficiencies, such payment made

the controversy nonjusticiable. In one respect this ruling was advantageous

to the taxpayer, because it permitted the taxpayer to defeat unilaterally the

Board’s jurisdiction at any time prior to a decision. Thus, if a taxpayer

anticipated an unfavorable Board decision, which would be prima facie

evidence in further judicial proceedings to recover amounts paid pursuant

to the Board’s decision,

215

the taxpayer could pay the asserted deficiency

and thereby foreclose the prospect of an adverse ruling on the merits. On

the other hand, the ruling operated against the taxpayer who wished to

litigate before the Board but also desired to pay the deficiency to forestall

the running of interest. So long as the tax was paid before the decision of

the Board, the opportunity for Board review was lost, even if such payment

was made after the filing of a proper petition or after a Board hearing.

The second problem with strict limitation of deficiency jurisdiction was

that it prevented full resolution of tax disputes by the Board, even in cases

in which its jurisdiction was properly invoked. For example, the

Commissioner might determine a deficiency in tax based on excessive

depreciation deductions. The taxpayer, on the other hand, might believe

211

Revenue Act of 1924, ch. 234, §§ 274(a)–(b), 308(a)–(b), 900(e), 43 Stat.

297, 308, 337. In addition to its deficiency jurisdiction, the Board also had

jurisdiction under the 1924 Act to allow or disallow claims in abatement with

respect to jeopardy assessments. Id. §§ 279(b), 312(b), 900(e), 43 Stat. 300, 316,

337.

212

H.R. REP. NO 68-179, at 7–8 (1924); S. REP. NO. 68-398, at 8–9 (1924).

213

See Part I, notes 142–197 and accompanying text.

214

Northwestern Mut. Life Ins. Co., 1 B.T.A. 767 (1925).

215

Revenue Act of 1924, ch. 234, § 900(g), 43 Stat. 337.

302 The United States Tax Court – An Historical Analysis

that the depreciation he originally claimed for the year was too small.

Under the 1924 Act, if the taxpayer chose to petition the Board, he would

be entitled only to an adjudication as to whether the depreciation originally

claimed was excessive. Even if a necessary implication of the Board ruling

was that the taxpayer claimed too little depreciation, the Board could not

determine that there had been an overpayment of tax or that the taxpayer

was entitled to a refund.

216

To obtain such an adjudication, the taxpayer

would have to commence a separate refund proceeding. Thus, not

permitting the Board to consider fully the tax liability with respect to tax

years properly before it could have the dual effect of discouraging some

taxpayers from appealing to the Board, and requiring others, who did

choose to litigate before the Board, to bring separate proceedings to obtain

full relief.

Although early proposals to give the Board full refund jurisdiction

217

and

to restrict the availability of other forums to resolve tax disputes were

rejected,

218

the Revenue Act of 1926 did eliminate the major problems that

had resulted from strict limitation of the Board’s jurisdiction to deficiency

disputes. The two provisions were of major importance. First, the Act

provided for limited refund jurisdiction. If a taxpayer petitioned the Board

to redetermine a deficiency assertion, and the Board found that no

deficiency existed, it also could determine that the taxpayer had made an

overpayment of tax for the year in question.

219

In such a case, the statute

directed that, when the decision of the Board became final, the amount of

the overpayment “shall . . . be credited or refunded to the taxpayer . . . .”

220

Second, provision was made permitting a taxpayer to waive the restrictions

on assessment and collection that were imposed during the pendency of a

Board proceeding, and to pay all or any part of the asserted deficiency.

221

Such payment would stop the running of interest on any deficiencies

ultimately determined by the Board.

222

In combination, the two provisions were designed to permit the

payment of the deficiency assertion prior to the rendition of a Board

decision, without the loss of Board jurisdiction that had resulted under the

1924 Act. Although this purpose clearly emerges from the legislative

216

Everett Knitting Works, 1 B.T.A. 5 (1924).

217

Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and Means,

69th Cong., 1st Sess. 849 (1925) (testimony of D. A. Smith, American Paper and

Pulp Ass’n) [hereinafter cited as 1925 Hearings].

218

See Part III, notes 103–106 and accompanying text.

219

Revenue Act of 1926, ch. 27, §§ 284(e), 319(c), 44 Stat. 67, 84 (now

codified at I.R.C. § 6512(b)(1)).

220

Id.

221

Id. § 274(d), 44 Stat. 56 (now codified at I.R.C. § 6213(d)).

222

Id. § 274(j) (now codified at I.R.C. § 6601(a), (c))

Foundational Parameters of the Court’s Jurisdiction 303

history of the 1926 Act,

223

some confusion in the application of these

provisions arose during the ensuing decade with respect to payments made

by the taxpayer after the filing of the petition. Some members of the Board

believed that in such a case, if the Board ultimately determined that the

original deficiency was erroneous, a decision of overpayment would be

inappropriate because the overpayment did not exist at the time that the

petition was filed; in their view, only a decision of no deficiency would be

proper in such circumstances.

224

As a result, some taxpayers, who were

inclined to pay the deficiency during the pendency of the Board proceeding

failed to do so, fearing that, should they ultimately prevail, the Board

decision would not determine an overpayment.

225

Accordingly, in the

Revenue Act of 1938, Congress reaffirmed its original intention by adding

statutory language clearly indicating that a determination of overpayment

was proper even if the overpayment was made after the filing of the

petition to the Board.

226

The grant of overpayment jurisdiction was tied closely to the broader

purpose of the 1926 Act to provide the Board with plenary power to

redetermine tax liability for any tax year properly before it.

227

Thus, in

addition to giving the Board jurisdiction to determine an overpayment, the

1926 Act also provided it with the corollary power to determine a

deficiency greater than that originally asserted by the Government if a claim

for the increased amount was made by the Commissioner at or before the

Board hearing or rehearing.

228

Other 1926 amendments also served to

assure that the Board remedy, once invoked, would be exclusive. In this

connection, the Commissioner generally was barred from determining

additional deficiencies with respect to a tax over which the Board had

jurisdiction.

229

The Commissioner therefore could not issue further

deficiency notices but was limited to submitting a claim to the Board as

223

S. REP. NO. 69-52, at 27 (1926); H.R. REP. NO. 69-356, at 40 (1926).

224

H.R. REP. NO. 75-1860, at 49 (1938); Hearings on Revision of Revenue Laws,

1938, Before the House Comm. on Ways and Means, 75th Cong., 3d Sess. 449 (1938)

(statement of the American Bar Ass’n) [hereinafter cited as 1938 Hearings].

225

1938 Hearings, supra note 224, at 449.

226

Revenue Act of 1938, ch. 289, § 322(d), 52 Stat. 545.

227

See H.R. REP. NO. 73-704, at 37–38 (1934).

228

Revenue Act of 1926, ch. 27, §§ 274(e), 308(e), 44 Stat. 56, 75 (now

codified at I.R.C. § 6214(a)). There was some uncertainty as to whether the Board

had this power under the 1924 Act, which made no specific reference to the

problem. Compare H

AMEL, supra note 147, at 65 with Latham, supra note 60, at

217–18.

229

Revenue Act of 1926, ch. 27, § 274(f), 44 Stat. 56 (now codified at I.R.C.

§ 6212(c)). The only exceptions to this rule were in cases of fraud, of additional

deficiencies asserted to the Board at or before the hearing or rehearing, and of

jeopardy assessments. Id.

304 The United States Tax Court – An Historical Analysis

mentioned above.

230

Once the Board hearing or rehearing was complete,

no further deficiencies could be asserted.

231

Conversely, the taxpayer also

was bound by Board decisions by virtue of a provision that generally

precluded refunds, credits or suits therefor with respect to a tax over which

the Board had jurisdiction, except to the extent that the Board determined

an overpayment.

232

The provisions of the 1926 Act dealing with the jurisdiction of the

Board with respect to overpayments and additional deficiencies and with

regard to the exclusivity, once invoked, of the Board remedy provided a

generally equitable and workable framework for tax litigation. Nevertheless,

several aspects of this jurisdiction have attracted varying degrees of

attention over the years.

1. Statute of Limitations on Overpayment Determinations

Most of the legislative activity dealing with overpayment jurisdiction has

concerned the question of whether, if an overpayment exists, credit or

refund of such overpayment is barred by the statute of limitations. Two

statutory changes in this arena bear note. The 1926 Act mandated credit or

refund only if filing of claim therefor or filing of the petition to the Board

(whichever was first) occurred within the generally applicable statute of

limitations period for refunds.

233

In this connection, the Board soon held

that its jurisdiction was limited to determining overpayments; it could

neither order the Commissioner to credit or refund taxes, nor determine

whether the overpayment claim was timely.

234

Thus, even after the Board

had determined an overpayment, the taxpayer could not be assured of

receiving credit or refund. The Bureau could refuse credit or refund if it

concluded the credit or refund was time barred.

235

Moreover, even if no

230

See supra note 228.

231

See supra note 229 and the exceptions noted therein.

232

Revenue Act of 1926, ch. 27, § 284(d), 44 Stat. 67 (now codified at I.R.C.

§ 6512(a)). The only exceptions to this rule were in the cases of amounts collected

in excess of the determination of the Board and amounts collected after the

applicable period of limitations had expired. Id.

233

Id. § 284(e) (now codified at I.R.C. § 6512(b)(3)).

234

E.g., Dickerman & Englis, Inc., 5 B.T.A. 633 (1926). This implicit

limitation on the Tax Court’s jurisdiction proved longstanding. In Morse v. United

States, 494 F.2d 876 (9th Cir. 1974), the appellate court interpreted the absence of

express authority under § 6512(b)(1) to order payment of a refund as implying that

such authority did not exist. See id. at 879 (“[T]he Tax Court has no jurisdiction to

order or to deny a refund.”) (citing United States ex rel. Girard Trust Co. v.

Helvering, 301 U.S. 540, 542 (1937); Robbins Tire & Rubber Co. v.

Commissioner, 53 T.C. 275, 279 (1969); Rosenberg v. Commissioner, T.C. Memo.

1970-201, 29 T.C.M. (CCH) 888).

235

National Fire Ins. Co. v. United States, 52 F.2d 1011 (Ct. Cl. 1931).

Foundational Parameters of the Court’s Jurisdiction 305

time bar existed, refund could be denied if the taxpayer had outstanding

liabilities against which the overpayment would be credited.

236

In unusual

cases, both credit and refund might be denied by the Bureau on the basis of

equitable considerations.

237

The Board had no jurisdiction over any of

these matters, and if disputes arose between a taxpayer and the Bureau, the

taxpayer’s only recourse was to pursue a refund suit in district court or the

Court of Claims.

238

The Board’s lack of jurisdiction to determine questions

of time limitations with regard to overpayments was anomalous in light of

its ability to consider the effect of the statute of limitations on deficiency

questions. In hearings on the Revenue Bill of 1928, the Association of the

Bar of the City of New York called attention to this peculiarity in the law

and proposed that the statute be amended to extend Board jurisdiction to

determine whether the right to credit or refund was time barred.

239

The

1928 legislation did not adopt this proposal, but it later was incorporated

into the Revenue Act of 1934

240

when Treasury came out in favor of the

revision.

241

The amendment, however, made no change in the Board’s

inability to order a credit or refund. In this regard, the Board’s jurisdiction

remained limited to determining an overpayment that was not time

barred.

242

If the Commissioner insisted on crediting (rather than refunding)

an overpayment, or refused to do either on the basis of equitable

considerations, judicial review could be obtained only in the federal

courts.

243

Related to the question of the Board’s power to determine questions

under the statute of limitations was the more fundamental problem of

whether any limitation period should be applied to overpayment

236

Empire Ordinance Corp. v. Harrington, 249 F.2d 680 (D.C. Cir. 1957).

237

United States v. Helvering, 301 U.S. 540 (1937); Empire Ordinance Corp.

v. Harrington, 249 F.2d 680 (D.C. Cir. 1957).

238

In this connection, it has been held that an action for mandamus generally

will not be entertained, because a refund suit provides an adequate remedy. See

supra note 237.

239

Hearings on Revenue Revision, 1927–28, Before the House Comm. on Ways and

Means, Interim 69th–70th Cong. 468–69 (1927).

240

Ch. 277, § 322(d), 48 Stat. 751.

241

Hearings on Revenue Revision, 1934, Before the House Comm. on Ways and Means,

73d Cong., 2d Sess. 151 (1934) [hereinafter cited as 1934 Hearings].

242

Rosenberg v. Commissioner, T.C. Memo. 1970-201, 29 T.C.M. (CCH)

888, 891–92, aff’d, 450 F.2d 529 (l0th Cir. 1971); Robbins Tire & Rubber Co. v.

Commissioner, 53 T.C. 275, 279 (1969); Jones v. Commissioner, 34 B.T.A. 280

(1936).

243

See supra note 237; see also Morse v. United States, 494 F.2d 876, 879 (9th

Cir. 1974); Robbins Tire & Rubber Co. v. Commissioner, 53 T.C. 275, 279 (1969);

H.R.

REP. NO. 100-1104, at 231, 1988-3 C.B. 473, 721 (“[I]f the IRS fails to

refund or credit an overpayment determined by the Tax Court, the taxpayer must

seek relief in another court.”).

306 The United States Tax Court – An Historical Analysis

determinations. In congressional hearings in 1932 and 1934, the American

Bar Association argued that it was inequitable to condition the granting of a

credit or refund on any statutory period whatsoever.

244

Its reasoning was

based on a comparison to the additional deficiency provision that permitted

the Board to determine such additional amounts so long as a claim therefor

was asserted by the Commissioner at or before the Board hearing or

rehearing.

245

Because the statute of limitations on assessment and

collection of deficiencies tolled during the Board proceeding, if the original

deficiency notice were timely there would be no time bar applicable to any

additional deficiencies determined by the Board.

246

The ABA contended

that if no time bar existed on additional deficiencies, none should be placed

on credit or refund of overpayments; once the Board’s jurisdiction was

properly invoked, no statute of limitations should restrict its authority.

Congress proved to be unreceptive to this suggestion, and in time the

ABA position, as a result of later court decisions, evolved into a more

modest proposal. If a Board petition was filed before a claim for refund,

the time of filing the petition controlled the time bar.

247

Thus, in such

cases, a vital question was when the petition was filed, and in this regard the

courts had adopted a rule requiring reference to the time of filing of the

petition which first alleged an overpayment.

248

This interpretation of

“petition” for purposes of overpayment was predicated on a Supreme

Court decision holding that, for statute of limitations purposes, an amended

claim for refund asserting a new and unrelated ground did not relate back to

the date of filing of the original claim.

249

Thus, even if the taxpayer’s

original petition was filed within the statutory period for refund or credit,

no such allowance would be made if the assertion of an overpayment first

was made in an amended petition filed after the expiration of the limitations

period. Again reasoning from rules applicable to additional deficiencies, the

ABA argued that since the Commissioner could amend his pleadings to

claim more taxes through the time of trial, the taxpayer should have the

same privilege, with the overpayment claim relating back to the date of

filing of the original petition.

250

In 1942, Congress agreed with the ABA

244

Hearings on Revenue Revision, 1932, Before the House Comm. on Ways and Means,

72d Cong., 1st Sess. 354, 360, 362–63 (1932) (testimony of Richard Doyle)

[hereinafter cited as 1932 Hearings]; 1934 Hearings, supra note 241, at 194–95.

245

See supra note 228 and accompanying text.

246

Revenue Act of 1926, ch. 27, §§ 274(a), 277(b), 44 Stat. 55, 58.

247

Id. § 284(d), 44 Stat. 67.

248

E.g., Denholm & McKay Co. v. Commissioner, 41 B.T.A. 986 (1940), rev’d

on other grounds, 132 F.2d 243 (1st Cir. 1942).

249

United States v. Garbutt Oil Co., 302 U.S. 528 (1938); United States v.

Andrews, 302 U.S. 517 (1938).

250

Hearings on Revenue Revision, 1941, Before the House Comm. on Ways and Means,

77th Cong., 1st Sess. 466–67 (1941) (testimony of George Morris); Hearings on

Foundational Parameters of the Court’s Jurisdiction 307

objective, and the statute was amended to allow credit or refund if the

mailing of the deficiency notice that resulted in the Board proceeding was

within the statutory period of the overpayment.

251

Thus, whether or not

the original petition claimed an overpayment, a claim therefor would not be

time barred if such claim could have been validly made at the time of

mailing of the deficiency notice.

252

The overall goal of coordinating the limitations period on overpayment

claims in the Tax Court with that of other refund fora became problematic

in the context of late filed returns. In situations where the taxpayer does

not file a refund claim prior to the mailing of the notice of deficiency and

the taxpayer seeks an overpayment of tax paid before such date,

§ 6512(b)(3)(B) limits the amount of any overpayment determined by the

Tax Court to the amount the taxpayer could have obtained through

traditional refund litigation. Although the statute provides that the

overpayment is determined as if the taxpayer had filed a claim for refund on

the date of the mailing of the notice of deficiency, this rule begged the

question of what look-back period applied under § 6511—the amount of

tax paid three years prior to the hypothetical refund claim (assuming the

taxpayer subsequently filed a return) under § 6511(b)(2)(A), or the amount

of tax paid two years prior to the hypothetical refund claim under

§ 6511(b)(2)(B)? The Tax Court consistently held that the two-year

lookback period applied,

253

and most circuit courts of appeals agreed.

254

However, the Fourth Circuit Court of Appeals in Lundy v. Commissioner

255

reversed the Tax Court by holding that the three-year look-back period

applied because the taxpayer ultimately filed a tax return claiming the

refund. The Supreme Court granted certiorari to resolve the resulting

circuit court conflict, and it subsequently reversed the Fourth Circuit by

reinstating the Tax Court’s application of the two-year look-back period.

256

The Supreme Court grounded its decision in a textual analysis of § 6511(b).

If the taxpayer failed to file a tax return prior to the mailing of the notice of

deficiency, it was not possible to determine if the taxpayer’s hypothetical

Revenue Revision, 1942, Before the House Comm. on Ways and Means, 77th Cong., 2d

Sess. 168 (1942) (testimony of Morton Fisher) [hereinafter cited as 1942

Hearings].

251

Revenue Act of 1942, ch. 619, § 169(b), 56 Stat. 877.

252

I.R.C. § 6512(b)(3)(B).

253

See, e.g., Allen v. Commissioner, 99 T.C. 475 (1992); Galuska v.

Commissioner, 98 T.C. 661 (1992); Berry v. Commissioner, 97 T.C. 339 (1991).

254

Richards v. Commissioner, 37 F.3d 587 (10th Cir. 1994); Allen v.

Commissioner, 23 F.3d 406 (6th Cir. 1994); Davison v. Commissioner, 9 F.3d 1358

(2d Cir. 1993); Galuska v. Commissioner, 5 F.3d 195 (7th Cir. 1993).

255

45 F.3d 856 (4th Cir. 1995), rev’g, T.C. Memo. 1993-278, 65 T.C.M. (CCH)

3011.

256

Commissioner v. Lundy, 516 U.S. 235 (1996).

308 The United States Tax Court – An Historical Analysis

claim for refund (occurring upon the mailing of the notice of deficiency)

was filed within three years of the filing of the tax return so as to trigger the

three-year look-back period under § 6511(b)(2)(A). Simply put, there was

no reference point (filing of the return) for determining if the predicate to

the three-year look-back period had been satisfied. With the three-year

look-back period under § 6511(b)(2)(A) foreclosed, only the two-year look-

back period provided by § 6511(b)(2)(B) remained as an option.

The Supreme Court’s holding in Lundy had the unfortunate practical

effect of precluding a taxpayer invoking the Tax Court’s overpayment

jurisdiction from obtaining a refund of certain taxes (namely, those paid in

the third year preceding the mailing of the notice of deficiency) that the

taxpayer could have pursued by filing the return and then pursuing refund

litigation outside the Tax Court. As part of the Taxpayer Relief Act of

1997, Congress amended § 6512(b) by adding flush language to address the

Lundy anomaly. The statute now provides that if the taxpayer failed to file a

return prior to the mailing of the notice of deficiency and the notice of

deficiency is mailed during the third year after the due date of the tax

return, the look-back period for determining the amount of the

overpayment determination shall be three years.

257

2. Resolution of Potential Concurrent Overpayment Jurisdiction

Another problem occasioned by the Board’s power to determine

overpayments resulted from the overlapping jurisdiction of the Board with

that of the district courts and the Court of Claims. Because the district

courts and the Court of Claims also possessed authority to determine

overpayments of tax, it was theoretically possible for the same tax dispute

to be adjudicated by both the Board and a district court or the Court of

Claims. However, the problem of overlapping jurisdiction was limited.

Once a petition with respect to a tax was filed with the Board, no action

could thereafter be instituted for credit or refund except with respect to

overpayments determined by the Board.

258

Occasionally, however, the Commissioner issued a deficiency notice

with respect to a tax that was already the subject of refund litigation. No

provision of law barred the assertion of such deficiencies, and the statute

did not, in such cases, limit the taxpayer’s right to appeal to the Board.

259

fact, if the taxpayer did not appeal to the Board, the deficiency could be

assessed and collected after the expiration of the period for petitioning the

257

Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1282(a), 111 Stat. 788,

1037 (1997) (amending I.R.C. § 6512(b)).

258

Revenue Act of 1926, ch. 27, § 284(d), 44 Stat. 67. See supra note 232 and

accompanying text.

259

See id. § 274, 44 Stat. 55.

Foundational Parameters of the Court’s Jurisdiction 309

Board.

260

Moreover, until 1954, the statute did not limit the authority of the

Board, the district courts, or the Court of Claims to pursue the litigation to

its conclusion. As a result, it was theoretically possible for both the Board

and another court to render decisions not only with respect to the same tax,

but also, if an overpayment was alleged to the Board on the same basis as

the refund action, with respect to the same issue.

The potential for confusion resulting from this concurrent jurisdiction

was minimized by two factors. First, in the event of separate proceedings

with respect to the same tax liability, either tribunal could properly stay its

proceedings until the conclusion of proceedings in the other.

261

Second, it

was suggested that the decision of the tribunal to first decide the case

would, presumably on the basis of res judicata, bind the other.

262

However,

these factors were not a total solution to the problem. Although either

tribunal could stay its proceedings until the conclusion of proceedings in

the other, it was held that such stays were a matter within the discretion of

each body.

263

Thus, duplicative proceedings could be carried on

contemporaneously in both tribunals. Moreover, it was not clear whether

the first decision would control the second in all cases. Prior to 1942, the

courts had held that decisions in refund suits against collectors of internal

revenue were not res judicata in later proceedings involving either the

United States or the Commissioner.

264

Thus, if a refund suit against a

collector, involving a tax already the subject of a Board proceeding, was

decided first, the Board presumably would not be bound by the earlier

decision, and it was possible to have conflicting decisions by the Board and

the district court with respect to the same tax on the same taxpayer.

Congress corrected this situation in the Revenue Act of 1942, and res

judicata now applies to determinations involving the same tax regardless of

the technical difference of the party assuming the position of the

Government.

265

260

See id. § 274(a).

261

Camp v. United States, 44 F.2d 126 (4th Cir. 1930).

262

Id.

263

Morris Plan Indus. Bank of New York v. Commissioner, 151 F.2d 976 (2d

Cir. 1945); Ellis v. Commissioner, 14 T.C. 484 (1950).

264

United States v. Nunnally Inv. Co., 316 U.S. 258 (1942); Bankers

Pocahontas Coal Co. v. Burnet, 287 U.S. 308 (1932); Sage v. United States, 250

U.S. 33 (1919); see also William T. Plumb, Tax Refund Suits Against Collectors of

Internal Revenue, 60 H

ARV. L. REV. 685, 693 (1947). Curiously, if the case involving

the United States or the Commissioner was decided first, it would be res judicata

in later proceedings involving the collectors. Id.

265

Revenue Act of 1942, ch. 619, § 503, 56 Stat. 956 (now codified at I.R.C.

§ 7422(c)).

310 The United States Tax Court – An Historical Analysis

The possibility for concurrent jurisdiction problems to arise was

substantially reduced by a provision included in the 1954 Code revision.

266

The amendment applies only if a refund proceeding in district court or the

Court of Federal Claims is pending but has not yet proceeded to trial by the

time of issuance of a deficiency notice with respect to the same tax at issue

in the refund action. In such a case, the refund action is stayed upon

mailing of the notice of deficiency for the period of time in which the

taxpayer can petition the Tax Court and for 60 days thereafter. If the

taxpayer petitions the Tax Court, then the district court or the Court of

Federal Claims, as the case may be, automatically loses jurisdiction of the

refund action to the extent jurisdiction over that dispute is acquired by the

Tax Court. On the other hand, if no petition is filed with the Tax Court,

the Government is permitted to counterclaim in the refund action within

the period of the stay, even though the normal period for asserting a

counterclaim may have expired. In the event of such a counterclaim, the

taxpayer has the burden of proof on all issues except fraud.

Several features of the 1954 provision bear note. First, it applies only if

the refund action has not proceeded to trial by the time of issuance of the

notice of deficiency. Since the Commissioner may issue a deficiency notice

at any time during the course of the refund action, and since the taxpayer is

privileged to file a petition to the Tax Court in response thereto, the

possibility for concurrent jurisdiction still exists.

267

However, this

possibility is now far more limited, and with the application of res judicata

to the first judgment, should not prove troublesome. Second, whether or

not the Government counterclaims in the refund action, if the taxpayer fails

to petition the Tax Court, the deficiency may be assessed and collected.

268

Thus, the taxpayer’s exercise of his option to pursue a remedy in either the

refund action or the Tax Court will have an important effect on the

assessment and collection of the tax. Finally, in rare cases, different burden

of proof rules may apply depending on whether the taxpayer takes the case

to the Tax Court or continues the refund proceeding. The statute provides

that in the event that the Government interposes a counterclaim, the

burden of proof on the issues raised will be on the taxpayer, “except as to

the issue of whether the taxpayer has been guilty of fraud with intent to

evade tax.”

269

The 1954 committee reports indicate a congressional

intention to provide the same burden of proof rules in the refund

proceeding as would have applied had the taxpayer petitioned the Tax

Court.

270

However, at least two types of issues, other than fraud, exist with

266

I.R.C. § 7422(e).

267

See Zeeman v. United States, 395 F.2d 861, 865–66 (2d Cir. 1968).

268

Bar L Ranch, Inc. v. Phinney, 400 F.2d 90 (5th Cir. 1968).

269

I.R.C. § 7422(e).

270

H.R. REP. NO. 83-1337, at A431 (1954); S. REP. NO. 83-1622, at 610–11

(1954).

Foundational Parameters of the Court’s Jurisdiction 311

respect to which the Government normally bears the burden of proof in

both Tax Court and refund proceedings. These are the issue of the illegality

of bribes, kickbacks, or other payments for purposes of denying deductions

for payments against public policy,

271

and the issue of whether a foundation

manager has “knowingly” participated in activities subjecting him to certain

taxes applicable to private foundations.

272

Additionally, both of these

special burden of proof rules were introduced after 1954,

273

and a difficult

question of statutory interpretation would be presented by a counterclaim

raising these issues in circumstances to which the special concurrent

jurisdiction statute is applicable.

274

3. Authority to Order Refund of Overpayment

Recognizing the additional burden faced by taxpayers who were required

to seek enforcement of Tax Court overpayment determinations in alternate

fora,

275

Congress remedied the shortcoming in the Tax Court’s jurisdiction

as part of the Technical and Miscellaneous Revenue Act of 1988.

276

Through the enactment of § 6512(b)(2),

277

Congress supplied the Tax Court

with supplemental jurisdiction to order the refund of an overpayment,

together with interest thereon.

278

The court’s jurisdiction to order payment

271

I.R.C. § 162(c)(1)–(2).

272

I.R.C. § 7454(b).

273

The special burden of proof rules for nondeductible illegal payments

resulted from amendments made by the Tax Reform Act of 1969 and the Revenue

Act of 1971. Tax Reform Act of 1969, Pub. L. No. 91-172, § 902(b), 83 Stat. 710;

Revenue Act of 1971, Pub. L. No. 92-178, § 310(a), 85 Stat. 525. The foundation

manager provision originated in the Tax Reform Act of 1969. Tax Reform Act of

1969, Pub. L. No. 91-172, § 101(j)(57), 83 Stat. 532.

274

Section 7491 also operates to shift the burden of proof to the Government

in certain situations. However, this provision applies to “any court proceeding,” see

I.R.C. § 7491(a)–(c), and thereby avoids any conflict with the 1954 provision by

trumping it.

275

See S. REP. NO. 100-309, at 17 (1988) (“The committee believes that if the

Tax Court determines that a taxpayer is due a refund and the IRS fails to issue that

refund, the taxpayer should not have to incur the additional time, trouble, and

expense of enforcing the Tax Court’s decision in another forum. Rather, the

taxpayer should be able to enforce the decision in the court that entered the

decision.”).

276

Pub. L. No. 100-647, 102 Stat. 3342.

277

Id. § 6244(a), 102 Stat. at 3750.

278

The underlying “overpayment” determined under § 6512(b)(1) may include

payments of interest in excess of that owed. See Estate of Baumgardner v.

Commissioner, 85 T.C. 445, 452 (1985). However, the “interest” referenced under

§ 6512(b)(2) is that owed with respect to the determined overpayment. The Tax

Court’s authority under § 6512(b)(2) to order the refund of interest owed on a

312 The United States Tax Court – An Historical Analysis

of a refund does not arise unless the Commissioner fails to refund the

overpayment within 120 days following the date on which the Tax Court’s

decision becomes final.

279

At that point, the taxpayer may invoke the Tax

Court’s supplemental jurisdiction by motion. In this manner, the

enactment of § 6512(b)(2) enhanced the judicial economy of overpayment

litigation before the Tax Court.

Congress clarified certain aspects of the Tax Court’s authority to order

refund payments through the Taxpayer Relief Act of 1997.

280

To start,

Congress addressed the appellate review of a Tax Court order disposing of

a motion to refund an overpayment under § 6512(b)(2). Through the

addition of the second sentence to the statute, Congress specified that a Tax

Court order in this setting is reviewable in the same manner as a decision of

the Tax Court.

281

Additionally, Congress clarified that the Tax Court’s authority under

§ 6512(b)(2) does not extend to reviewing the merits of any credit or offset

that reduces the amount of the refund paid to the taxpayer.

282

Through the

enactment of § 6512(b)(4), Congress expressly denied the Tax Court

jurisdiction to review or restrain any credit or offset to the amount of a

determined overpayment made by the Commissioner pursuant to § 6402(a).

The interaction of § 6512(b)(2) and (b)(4) appears relatively

straightforward. The Tax Court may order payment of a determined

refund, but the Commissioner may apply the refund against other

outstanding liabilities of the taxpayer free from Tax Court review.

However, these two provisions do not always operate in such clean

fashion—particularly when the liability the Commissioner seeks to apply as

a § 6402(a) offset falls within the potential scope of the Tax Court’s

overpayment jurisdiction under § 6512(b)(1). The Tax Court faced this

conundrum in Estate of Smith v. Commissioner.

283

Following the entry of the Tax Court’s initial decision in the Estate of

Smith litigation determining a deficiency in estate tax, the taxpayer-estate

remitted payment of the deficiency plus an amount intended to cover

estimated underpayment interest. Years later, the case was back before the

Tax Court on remand following the first appeal in the case. The Tax Court

then issued a final decision determining an “overpayment in estate tax” of

§ 6512(b)(1) overpayment is somewhat curious, given that the Tax Court lacks

jurisdiction to determine the interest owed on such an overpayment. See Harrison

v. Commissioner, T.C. Memo. 1994-614, 68 T.C.M. (CCH) 1438, 1441 (“[W]e are

unable to enter a decision for interest on an overpayment.”).

279

See Mitchell v. Commissioner, T.C. Memo. 1990-213, 59 T.C.M. (CCH) 486,

487 (denying petitioner’s motion to order refund of overpayment as premature).

280

Pub. L. No. 105-34, 111 Stat. 788.

281

Id. § 1451(a), 111 Stat. at 1054.

282

See H.R. REP. NO. 105-220, at 732 (1997), 1997-4 C.B. (vol. 2) 1457, 2202.

283

123 T.C. 15 (2004).

Foundational Parameters of the Court’s Jurisdiction 313

$238,847, which was based on the parties’ stipulated computation submitted

pursuant to Rule 155 of the Tax Court Rules of Practice and Procedure.

284

The stipulated estate tax liability provided in the Rule 155 computation was,

in turn, based on the allowance of an estate tax deduction for

underpayment interest that had not yet been paid by the estate. However,

the parties did not take the estate’s outstanding interest obligation into

account in arriving at the bottom-line $238,847 overpayment. Evidently,

the customary practice at that time was to address only overpayments of the

subject tax as part of the Rule 155 computation, with interest obligations

being later determined by reference to this amount.

285

Following entry of the Tax Court’s decision adopting the Rule 155

computation, the Commissioner first offset $85,337 of assessed but unpaid

interest against the $238,847 overpayment and remitted only the $153,510

balance to the estate. The estate objected to the offset and invoked the Tax

Court’s jurisdiction under § 6512(b)(2) to enforce the Tax Court’s

determination of a $238,847 overpayment under § 6512(b)(1).

At first glance, resolution of the case appeared clear. The

Commissioner possessed the authority to offset the estate’s outstanding

interest liability against the refund owed to the estate pursuant to § 6402(a),

and § 6512(b)(4) precluded the Tax Court from restraining or reviewing this

offset. However, the estate argued that the “overpayment . . . of estate tax”

determined by the Tax Court under § 6512(b)(1) necessarily included any

interest due on the estate tax liability, based in part on the directive in

§ 6601(e) that the term “tax” is to include interest thereon.

286

In this regard,

the Tax Court had previously held in Estate of Baumgardner v. Commissioner

that its jurisdiction to determine an overpayment in tax pursuant to

§ 6512(b)(1) extended to underpayment interest paid in excess of that

properly owed.

287

Hence, the estate argued that because the Tax Court’s

determination of an overpayment of estate tax under § 6512(b)(1)

encompassed the taxpayer’s assessed but unpaid interest obligations, any

attempt by the Commissioner to apply the $238,847 determined

overpayment against the estate’s outstanding interest liability undermined

the court’s express authority to order a refund of the overpayment pursuant

to § 6512(b)(2).

In a reviewed opinion, the Tax Court sided with the taxpayer-estate.

The majority found §§ 6402(a) and 6512(b)(4) inapposite in this context,

284

Id. at 17.

285

See id. at 48 (Goeke, J., dissenting) (noting a “longstanding practice,

followed by parties in many of our cases, to submit agreed computations of

overpayments without interest”); id. at 56 (Holmes, J., dissenting) (noting that the

IRS had developed “an almost-unbroken custom of using Rule 155 to reach

agreement on the amount of tax (rather than tax plus interest) owed”).

286

See 123 T.C. at 22.

287

85 T.C. 445 (1985).

314 The United States Tax Court – An Historical Analysis

reasoning that these provisions apply only to the application of an

overpayment to tax liabilities other than those that served as the subject of

the overpayment decision.

288

Agreeing that the estate’s assessed but unpaid

interest obligation should have been factored into the Rule 155

overpayment computation, the majority reasoned that permitting the

Commissioner to reduce the refund by the outstanding interest obligation

would effectively allow the Commissioner “to disregard the amount of the

overpayment in our final decision.”

289

On appeal, the Fifth Circuit reversed in favor of the Commissioner.

290

From a definitional standpoint, the Fifth Circuit concluded that the Tax

Court’s determination of an “overpayment” of tax under § 6512(b)(1) need

not always include underpayment interest due on the underlying tax

liability

291

—even though the Tax Court may determine an overpayment of

interest as part of its § 6512(b)(1) overpayment jurisdiction in certain

situations.

292

The appellate court supported its holding by referring to

§ 7481, which permits the Tax Court to determine overpayments or

underpayments of interest after the court has first determined an

overpayment in the underlying tax pursuant to § 6512(b)(1).

293

Hence, the

statutory scheme suggests that not all interest determinations need be

addressed in the initial § 6512(b)(1) overpayment determination.

From a factual standpoint, the Fifth Circuit found that the Tax Court’s

overpayment determination did not extend to the estate’s unpaid interest

liability, because the parties did not factor this liability into the Rule 155

stipulation incorporated into the Tax Court’s judgment.

294

Hence, whereas

the Tax Court effectively treated the $238,847 overpayment as

encompassing all items that fell within its § 6512(b)(1) overpayment

jurisdiction (which it interpreted as including assessed but unpaid interest),

the Fifth Circuit viewed the Tax Court’s determination as extending only to

those items actually addressed in the parties’ overpayment stipulation.

Because the parties’ Rule 155 calculation of the estate tax overpayment

failed to account for the estate’s unpaid interest obligation, the Fifth Circuit

held that the Tax Court exceeded its authority under § 6512(b)(2) by

attempting to restrain the Commissioner from offsetting the interest liability

288

Id. at 26.

289

Id. at 27.

290

429 F.3d 533 (5th Cir. 2005).

291

Id. at 538.

292

Id. at 538–39 (citing Estate of Baumgardner v. Commissioner, 85 T.C. 445

(1985)). Although not explicit, the Fifth Circuit appeared to draw the line at

interest that may be incorporated into an overpayment determination to interest

that had been assessed and paid at the time of the overpayment calculation.

293

Id. at 538 (citing I.R.C. § 7481(c)(1) and (c)(2)(B)). For a discussion of the

Tax Court’s jurisdiction under § 7481, see Part VII.D.

294

Id. at 539.

Foundational Parameters of the Court’s Jurisdiction 315

against the refund due. Rather, the court determined that § 6512(b)(4)

specifically barred the Tax Court from restraining the Commissioner’s

offset.

The Fifth Circuit’s reversal of the Tax Court in Estate of Smith does not

necessarily resolve the potential conflict between § 6512(b)(2) and (b)(4) in

future cases. While the Tax Court must observe the decision in cases

appealable to the Fifth Circuit under the Golsen rule, the court is free to

follow its precedent in cases appealable to other circuit courts of appeals.

295

4. Proposals to Expand Refund Jurisdiction

As discussed above, the boundaries of the Board/Tax Court’s limited

refund jurisdiction were established early and have changed relatively little

over the years. Nevertheless, starting in 1924 proposals have been made to

grant full refund jurisdiction to the Board/Tax Court,

296

and these

295

The Fifth Circuit’s decision in Estate of Smith points to a means of avoiding

the potential conflict between § 6512(b)(2) and (b)(4) altogether, by limiting the

Tax Court’s overpayment determination under § 6512(b)(1) to those liabilities

actually addressed by the parties in their Rule 155 computation—rather than

extending the determination to all items that the parties could have (and perhaps

should have) addressed in their stipulation. On the other hand, the Tax Court’s

reviewed opinion in Estate of Smith certainly encourages the Commissioner to

include all assessed interest obligations (and other assessed additions to tax) in the

Rule 155 computation to avoid the prospect of effectively waiving collection of

those obligations.

296

E.g., Hearings on H.R. 6715 Before the Senate Comm. on Finance, 68th Cong., 1st

Sess. 388–89 (1924) (statement of Frank Lowson, American Institute of

Accountants, arguing for refund jurisdiction on the ground that it would provide a

speedy and inexpensive forum for adjudicating refund claims that was not

otherwise available); 1925 Hearings, supra note 217, at 849 (testimony of D.A.

Smith, American Paper and Pulp Ass’n, arguing that taxpayers who had already

paid a disputed tax should have the same right of appeal to the Board as those who

were contesting an asserted deficiency); 1932 Hearings, supra note 244, at 363–64

(statement of Comm. on Federal Taxation of the American Bar Ass’n, arguing that

the Board’s lack of refund jurisdiction resulted in unnecessary duplicative

litigation); 1942 Hearings, supra note 250, at 95 (testimony of Randolph Paul, Tax

Adviser to the Secretary of the Treasury); Hearings on S. 1973, S. 1974, S. 1975, S.

1976, S. 1977, S. 1978, S. 1979, Before the Subcomm. on Improvements in Judicial

Machinery of the Senate Comm. on the Judiciary, 91st Cong., 1st Sess. 194–95 (1969)

(testimony of Bruce S. Lane, Chairman, Comm. on Court Procedure, Tax Section,

American Bar Ass’n) [hereinafter cited as 1969 Hearings].

During consideration of the Revenue Act of 1924, Senator McKellar proposed

an amendment that automatically would have given jurisdiction to the Board of all

refund claims in excess of $10,000. See Part II, notes 151–154 and accompanying

text. Senator McKellar persisted for several years in making the proposal, which

316 The United States Tax Court – An Historical Analysis

proposals have persisted to the present time as part of the broader

controversy over restructuring the entire system of tax litigation. Although

none of these proposals has been adopted, several bear mention as

important phases in the evolution of attitudes towards tax administration

and litigation in general, and the Board/Tax Court in particular.

Probably the most serious attention given to the full refund jurisdiction

proposal came in 1942, as a result of testimony before the Ways and Means

Committee by Randolph Paul, then Tax Adviser to the Secretary of the

Treasury.

The jurisdiction of the Board of Tax Appeals is limited to

proceedings arising under a deficiency letter issued by the

Commissioner. While the Board has authority to find an

overpayment in certain cases, it does not possess any general

authority to hear refund claims. The Board is a tribunal specially

skilled in tax matters and there is no sound reason for denying to

taxpayers the opportunity to present their refund claims to such a

forum. As the great bulk of tax cases are presently tried before the

Board of Tax Appeals, the addition of refund jurisdiction will not

unduly burden the Board. It is therefore suggested that an

appropriate procedure be devised under which the Board may hear

refund cases if the taxpayer desires to utilize that forum instead of

the district courts or the Court of Claims.

297

The refund jurisdiction proposal was not new in 1942. The American

Bar Association among others for years had been making the same

recommendation.

298

Moreover, Treasury had been considering the proposal

for several years. In 1938, Stanley Surrey, then an attorney at Treasury,

authored a memorandum proposing broad changes in the entire structure

of judicial review of tax controversies.

299

Among his proposals was that the

Board of Tax Appeals should be given exclusive jurisdiction of tax litigation

at the trial level, with respect to both deficiency and refund disputes.

300

his view, the relatively small amount of tax litigation before the district

courts and the Court of Claims did not justify their continued role in such

never gained substantial support. See 1932 Hearings, supra note 244, at 355–56

(testimony of Richard S. Doyle, American Bar Ass’n).

297

1942 Hearings, supra note 250, at 95.

298

E.g., 1932 Hearings, supra note 244, at 363 (statement of Comm. on Federal

Taxation of the American Bar Ass’n).

299

Memorandum from Stanley S. Surrey entitled “Proposed Changes in

Method of Judicial Review of Income, Estate and Gift Tax Cases,” Sept. 13, 1938,

filed in the Office of Tax Legislative Counsel, U.S. Treas. Dep’t [hereinafter cited

as Surrey].

300

Id. at 2–3.

Foundational Parameters of the Court’s Jurisdiction 317

cases. Unlike the other forums, the Board was established as an expert

body to deal with disputes under the highly involved tax laws; the

development of refund litigation in the district courts in particular had led

to unnecessary procedural complexity; and the numerous trial forums

hindered the development of a uniform body of precedents and permitted

forum shopping by taxpayers. Jury trials were not available in the Board,

but this was not perceived as a difficulty; in 1936 and 1937 there were only

six jury trials in refund actions.

301

Sound arguments could be advanced in

favor of the Surrey proposal, but there were obvious political problems

with its adoption. Although the organized bar had for several years

supported refund jurisdiction for the Board, it would be unlikely to agree to

a change that would reduce taxpayers’ flexibility in seeking the most

receptive forum.

302

Moreover, the elimination of refund actions in district

court and the Court of Claims would undoubtedly precipitate a struggle

between the Justice and Treasury Departments for control of trial level tax

litigation.

303

The Paul recommendation contemplated concurrent jurisdiction of

refund litigation in the Board, the district courts, and the Court of Claims,

and therefore did not suffer to the same degree from the political problems

raised by the Surrey proposal. The Board, the staff of the Joint Committee

on Internal Revenue Taxation, and bar groups all supported the proposal,

304

and Treasury set to work drafting legislation to embody concurrent

jurisdiction.

305

It was apparently during the drafting process that the

problem emerged which was to prove the undoing of the proposal. This

was the question of recoupment.

306

Since 1926, the tax laws had provided

that the Board in determining tax liability for a year with respect to which a

deficiency notice was issued could consider facts relating to other years, but

had no jurisdiction to determine whether the tax for other years was

301

Id. at 3.

302

See infra note 321 and accompanying text.

303

For a description of this struggle in connection with proposals to

incorporate the Board/Tax Court into the federal judiciary, see Part IV, notes 193–

207, 301–332 and accompanying text.

304

Letter from Chairman Murdock to Randolph Paul, Feb. 14, 1942, filed in

the Office of Tax Legislative Counsel, U.S. Treas. Dep’t; Memorandum from Mr.

Graves to Mr. Wales, Apr. 10, 1945, filed in the Office of Tax Legislative Counsel,

U.S. Treas. Dep’t [hereinafter cited as Graves].

305

Memorandum entitled “Proposal to Extend the Jurisdiction of the Board of

Tax Appeals to Refund Cases Involving Income, Estate, and Gift Taxes,” Apr. 7,

1942, filed in the Office of Tax Legislative Counsel, U.S. Treas. Dep’t [hereinafter

cited as Memorandum].

306

Id. at 8–9; Graves, supra note 304, at 1–2.

318 The United States Tax Court – An Historical Analysis

underpaid or overpaid.

307

Accordingly, the Board had no power to invoke

the doctrine of equitable recoupment, which would permit parties to offset

tax liability from time barred years against the liability determined by the

Board for the year properly before it.

308

On the other hand, no such

statutory provision applied in district court or Court of Claims refund

actions, and under limited circumstances recoupment was permitted.

If the Board was not permitted to invoke the doctrine of recoupment,

taxpayers would be given the “whip hand.”

309

That is, in circumstances in

which they believed themselves entitled to recoupment they could take their

refund actions to district court or the Court of Claims. On the other hand,

if the Government had a recoupment claim, taxpayers could bring their

refund suit in the Board. Obviously, such an option for the taxpayer could

not be sympathetically regarded by Treasury. The alternative was to amend

the statute to permit the Board to apply recoupment in the same

circumstances that the doctrine was permitted to be invoked in district

court and the Court of Claims. Several reasons were advanced against this

solution, the principal one being that it would be inappropriate to grant the

Board power to invoke recoupment since it did not have full judicial

status.

310

The recoupment problem led to the removal of the refund proposal

from the 1942 legislation at an early stage of consideration.

311

The proposal

was revived within Treasury in 1945, but even though it then was pointed

out that the recoupment problem was insubstantial, there apparently was

insufficient interest to generate any explicit legislative proposals.

312

A quarter of a century after Randolph Paul expressed Treasury’s support

for full refund jurisdiction for the Board, the proposal again surfaced as

part of a general debate concerning the entire structure of tax litigation. In

1967, bills were introduced in the House and Senate that proposed

incorporation of the Tax Court into the federal judiciary as an article III

307

Revenue Act of 1926, ch. 27, § 274(g), 44 Stat. 56 (now codified at I.R.C.

§ 6214(b)).

308

See Section D.3.a of this Part.

309

Memorandum, supra note 305, at 8.

310

Id. at 8–9. The evolving history of the Tax Court’s jurisdiction to apply the

doctrine of equitable recoupment, resolved by the express grant of recoupment

jurisdiction in 2006, is recounted in Section D.3.a of this Part.

311

Graves, supra note 304, at 1–2.

312

It was argued that the severity of the recoupment problem was exaggerated

since Tax Court jurisdiction was limited to determining overpayments. It could not

order refunds—such an order could only be made by a district court or the Court

of Claims, and in such a proceeding the Government would be free to raise the

recoupment question. Id.

Foundational Parameters of the Court’s Jurisdiction 319

court.

313

Senator Joseph Tydings, chairman of a subcommittee of the

Senate Judiciary Committee, convened hearings on the Senate bill, which

made no change in the court’s limited jurisdiction to determine

overpayments for years with respect to which a deficiency notice was

issued.

314

Although the purpose of the hearings initially was limited to the

question of Tax Court status, the focus soon changed as a result of a

proposal by the Justice Department that legislation regarding the Tax Court

also should address fundamental problems of tax litigation.

315

For many years a variety of critics had questioned the means by which

tax disputes were settled.

316

A taxpayer confronted with an adverse Service

position had the choice of several trial forums. He could petition the Tax

Court for redetermination of deficiency assertions of the Commissioner,

and if he did so he would not be required to pay the disputed tax until

completion of the Tax Court proceeding. Alternatively, the taxpayer, if he

first paid the tax, could sue for refund in either district court or the Court

of Claims. If he chose district court, the taxpayer would have a local forum

with jury trial available; on the other hand, the Court of Claims was similar

to the Tax Court in that it was a national forum headquartered in

Washington, D.C. that could not provide a jury trial. Different rules of

procedure obtained in the three forums, and commentators noted different

proclivities in the application of substantive rules of tax law.

317

Thus, the

taxpayer had considerable latitude in selecting the most hospitable forum.

313

H.R. 10100, 90th Cong., 1st Sess. (1967); S. 2041, 90th Cong., 1st Sess.

(1967). This development is discussed at length in Part IV, at text accompanying

notes 303–334.

314

Hearings on S. 2041 Before the Subcomm. on Improvements in Judicial Machinery of

the Senate Comm. on the Judiciary, 90th Cong., 1st Sess. (1967) [hereinafter cited as

1967 Hearings]; Hearings on S. 2041 Before the Subcomm. on Improvements in Judicial

Machinery of the Senate Comm. on the Judiciary, 90th Cong., 2d Sess. (1968) [hereinafter

cited as 1968 Hearings]; 1969 Hearings, supra note 296.

315

1967 Hearings, supra note 314, at 40–46 (statement of Mitchell Rogovin,

Ass’t Att’y Gen., Tax Division, Dep’t of Justice).

316

See, e.g., Ferguson, Jurisdictional Problems in Federal Tax Controversies, 48 IOWA

L. REV. 312 (1963) [hereinafter cited as Ferguson]; Surrey, supra note 299.

317

See, e.g., Walter T. Beaman, When Not to go to the Tax Court: Advantages and

Procedures In Going to District Court, 7 J. T

AX’N 356 (1957); William H. Bowen,

Discovery in Tax Court: Why Not Follow the Federal Rules?, 44 A.B.A. J. 129 (1958);

Marvin J. Garbis, Choosing Your Forum in Civil Tax Litigation, 15 P

RAC. LAW. 41

(1968); Marving J. Garbis & Robert L. Frome, Selecting the Court for the Optimum

Disposition of a Tax Controversy, 27 J. T

AX’N 216 (1967); Max J. Hamburger, Choice of

Forum for Litigation: The United States Tax Court, 32 N.Y.U. I

NST. ON FED. TAX’N

1315 (1974); Max J. Hamburger, The Trial of a Tax Court Case: Some Practical

Reflections, 30 N.Y.U. I

NST. ON FED TAX’N 1 (1972); Lester M. Ponder, Trial Court

Litigation—Tax Court, Court of Claims and District Court—A Practicing Lawyer’s View,

21 U.S.C.

TAX INST. 117 (1969).

320 The United States Tax Court – An Historical Analysis

This system of trial litigation was criticized as unnecessarily complex and

unfair to both the Government and the taxpayer. The numerous trial

forums were not bound by the precedents of the others, and conflicting

rules frequently emerged that hindered the uniform application of the tax

laws. Moreover, the interest of predictability, vital in tax planning, was

undermined. Forum shopping by taxpayers was permitted to the prejudice

of the Government, but the forum shopping privilege was discriminatory,

as only those who could afford to pay the tax in advance of litigation could

choose a forum other than the Tax Court. The appellate structure also had

attracted considerable controversy.

318

Eleven different courts of appeals

reviewed decisions of the Tax Court and the district courts, and their

decisions periodically were in conflict with each other as well as with the

Court of Claims, the decisions of which at the time were only reviewable, as

were the decisions of the courts of appeals, by the Supreme Court. The

Supreme Court took few tax cases, and many issues that had received

extensive judicial attention in the lower courts remained unresolved for

many years.

Obviously, these problems were far broader than the issue of refund

jurisdiction for the Tax Court. Nevertheless, refund jurisdiction did play a

role in various broad reform proposals. In its report to the Tydings

committee, the Justice Department suggested the possibility of eliminating

multiple trial forums.

319

In this regard, Justice seemed to favor exclusive tax

jurisdiction in the district courts, but it also raised the possibility of giving

such exclusive jurisdiction to the Tax Court.

320

A concomitant of removing

tax jurisdiction from the district courts and the Court of Claims, under this

approach, would be to accord full refund jurisdiction, as well as deficiency

jurisdiction, to the Tax Court. On the other hand, tax practitioners and the

American Bar Association opposed the elimination of multiple trial forums,

and instead endorsed the concept of full concurrent jurisdiction among the

forums.

321

As with the Justice view, this would mean adding full refund

jurisdiction to deficiency jurisdiction in the case of the Tax Court. In the

case of the district courts and the Court of Claims, the bar proposal would

entail adding deficiency jurisdiction to the extant refund jurisdiction. The

Treasury view differed from that of both Justice and the private tax bar.

Treasury believed that the Tax Court was the most important forum for

resolving tax disputes and establishing a workable and uniform body of tax

precedents.

322

Thus, it opposed any alternative which would lead to the

elimination of the Tax Court or the reduction of its influence. Obviously,

318

See Part XI.H.

319

1968 Hearings, supra note 314, at 120–23.

320

Id. at 122–23.

321

See Part IV, notes 321–323 and accompanying text.

322

See Part IV, notes 324–330 and accompanying text.

Foundational Parameters of the Court’s Jurisdiction 321

the Justice preference for exclusive district court jurisdiction was

unacceptable to Treasury. Moreover, Treasury opposed the proposal for

full concurrent jurisdiction because, in its view, such a system would

inevitably lead to the transfer of much tax litigation to the district courts.

In this connection, Treasury argued that the additional refund cases that

would come to the Tax Court would not nearly offset the loss of deficiency

litigation to the district courts and the Court of Claims. Most refund

litigation did not result from unwitting overpayments of tax, but rather was

the consequence of conscious decisions by taxpayers to pay deficiency

assertions to bring their case in district court or the Court of Claims.

323

Although there could be no accurate prediction of the number of taxpayers

who would prefer to litigate deficiency disputes in district court or the

Court of Claims, Treasury believed their number to be substantial.

324

The Tydings committee deliberations ended on a non-conclusive note,

and no changes in the tax litigation structure were enacted.

325

In effect, the

Treasury view favoring retention of the status quo prevailed. Although the

organized bar continued to support full concurrent jurisdiction,

326

subsequent years have witnessed little legislative activity either to expand

the Tax Court’s refund jurisdiction or to introduce deficiency jurisdiction to

the district courts or the Court of Federal Claims.

The most recent proposal of significance touching on the refund

jurisdiction of the Tax Court was that advanced by the Federal Courts

Study Committee in 1990. This 15-person committee, the composition of

which was determined by the Chief Justice of the United States pursuant to

authorization contained in the Judicial Improvements and Access to Justice

Act,

327

was organized to comprehensively investigate issues plaguing the

federal court system and to make recommendations for improvement.

328

The committee issued tentative recommendations near the end of 1989,

329

followed by final recommendations in early 1990.

330

With respect to the jurisdiction of the Tax Court, the committee

recommended that the vast majority of federal tax litigation be consolidated

before this body. Disturbed by the availability of three separate trial fora in

323

See 1969 Hearings, supra note 296, at 476–78 (statement of K. Martin

Worthy, Chief Counsel, Internal Revenue Service).

324

Id.

325

See Part IV, notes 301–332 and accompanying text.

326

Report of Comm. on Court Procedure, reprinted in 23 TAX LAW. 706 (1970).

327

Pub. L. No. 100-702, 102 Stat. 4642 (1988).

328

Id. at §§ 102, 103, 102 Stat. at 4644. For further details on the composition

of the Federal Courts Study Committee, see Part IV.E.

329

Federal Courts Study Committee, Tentative Recommendations for Public

Comment (Dec. 22, 1989) [hereinafter FCSC Tentative Recommendations].

330

Federal Courts Study Committee, Report of the Federal Courts Study

Committee (Apr. 2, 1990) [hereinafter FCSC Final Report].

322 The United States Tax Court – An Historical Analysis

which to litigate a dispute over tax liability and, in particular, the forum-

shopping such a regime fostered, the committee recommended that the Tax

Court serve as the exclusive trial level forum for disputes concerning tax

liability—whether originating in the deficiency or refund posture.

331

The

proposal would have constrained the jurisdiction of the Federal district

courts over tax matters considerably, leaving those courts with jurisdiction

over criminal tax cases and enforcement actions only.

332

By implication, the

jurisdiction of the United States Claims Court in the federal tax arena would

have been abolished altogether.

Of the various articulated benefits of the proposal, the committee found

the prospect of increasing the quality and uniformity of tax adjudication

most compelling.

333

The proposed restructuring of the federal tax

controversy landscape served as a vote of confidence in the Tax Court.

The committee observed that the Tax Court was the only available forum

that possessed “the time and sufficiently substantial volume of tax litigation

to develop expertise in one of the most specialized and technically

demanding fields in American jurisprudence.”

334

However, the committee’s

proposed reform of the federal tax adjudication landscape did not enjoy

unanimous support. A dissenting statement touted the benefits of the

existing regime. In particular, the dissenting group found the “genius” of

the existing regime to rest in the effective blending of specialist and

331

Id. at 70. As discussed more fully in Part IV.E., the tentative

recommendations of the committee envisioned the newly constituted Tax Court as

an article III tribunal. FCSC Tentative Recommendations, supra note 329, at 30.

Proposed article III status for the trial level of the Tax Court, however, did not

survive to be included in the committee’s final recommendations. FCSC Final

Report, supra note 330, at 70.

332

Id.

333

The committee touted the following benefits of the proposed reforms in

the following terms:

These changes . . . would rationalize federal tax adjudication, reduce forum-

shopping, relieve workload pressures on the existing Article III appellate

courts, and reduce the pressure on the Supreme Court to grant certiorari in

tax cases to resolve intercircuit conflicts. Above all, they would increase the

quality and uniformity of tax adjudication by shifting it from overworked

judges sitting in a large number of diverse courts to a single court of highly

trained specialists.

Id.

334

Id. The proposals of the Federal Courts Study Committee in this setting and

the articulated justifications for such proposals are remarkably consistent with an

article proposing restructuring of the civil tax litigation system published by Tax

Court Judge Dawson expressing his individual views. See Howard A. Dawson, Jr.,

Should the Federal Civil Tax Litigation System Be Restructured?, 40 T

AX NOTES 1427

(1988).

Foundational Parameters of the Court’s Jurisdiction 323

generalist elements, which it found to be efficient and “perceptively fair.”

335

Indeed, this group of committee members appeared heavily influenced by

how the proposed reforms would be received by the public, expressing

grave concern that the centralization of tax litigation in a specialized court

“would leave the American taxpayers with the impression that the judicial

system is remote and unresponsive.”

336

To bolster its position, the

dissenting group highlighted the opposition of institutional segments of the

tax bar to the proposals, including the Internal Revenue Service, the

Treasury Department, the Claims Court, and the American Bar

Association—and even the Tax Court itself.

337

The concerns articulated by the dissenting faction of the Federal Courts

Study Committee evidently prevailed. The implementing legislation

proposed by Congress did not include any of the committee’s proposals

concerning the litigation of federal civil tax disputes.

338

Accordingly, the

landscape of federal tax adjudication remains in central respects largely

consistent with the compromise reached by Congress in the Tax Reform

Act of 1969.

C. Jeopardy Jurisdiction

In the great majority of disputes between the taxpayer and the Internal

Revenue Service, collection of contested tax revenues will not be

endangered by the administrative and judicial remedies ordinarily employed

to reach a resolution in the matter.

339

If administrative procedures do not

result in a settlement, the Government typically sends a notice of deficiency

335

FCSC Final Report, supra note 330, at 72.

336

Id.

337

FCSC Final Report, supra note 330, at 71. The attribution of opposition to

the Tax Court as a body appears to have been an overstatement. To start, it is

doubtful that the Tax Court would have articulated an institutional position on the

matter. Furthermore, at the time, Judge Dawson had recently expressed his private

support for the consolidation of trial-level adjudication of tax disputes before the

Tax Court and for the creation of a national court of tax appeals. See Dawson,

supra note 334. However, around the same period, Judge Sterrett expressed his

disapproval of a national court of tax appeals. See Michael S. Moriarty & R. Eliot

Rosen, An Interview with Former Tax Court Chief Judge Sterrett, 41 T

AX NOTES 910

(1988).

338

See Federal Courts Study Group Implementation Act of 1990, H.R. 5381,

101st Cong. (1990). For that matter, none of the implementing legislation became

law. Although the bill passed the House of Representatives, the Senate failed to

take action on the legislation.

339

See Note, Jeopardy Terminations Under 6851: The Taxpayer’s Rights and Remedies,

60 I

OWA L. REV. 644 (1975); Note, Jeopardy Assessments: The Sovereign’s Stranglehold, 55

EO. L.J. 701 (1967).

324 The United States Tax Court – An Historical Analysis

to the taxpayer.

340

The deficiency notice informs the taxpayer that a final

determination of additional tax liability has been made,

341

and that the

Internal Revenue Service will assess and begin collection procedures in 90

days.

342

During the subsequent 90-day period, however, the Internal

Revenue Service is barred from assessing the deficiency,

343

and if the

taxpayer petitions the Tax Court for a redetermination of the deficiency, the

ban on assessment and collection is extended until the court renders its

decision.

344

If the taxpayer waives the right to litigate on a prepayment

basis before the Tax Court by not acting within the 90-day period, but fails

to pay the tax, the Service then may issue a notice of assessment and

demand for payment. Ten days after issuance of such notice and demand,

the Service may levy upon the taxpayer’s property.

345

There are, however, situations in which the collection of tax revenues

would be jeopardized by use of the procedures outlined above. For

example, the taxpayer may contemplate leaving the country or disposing of

his assets before the usual deficiency procedures have been instituted or

completed.

346

These situations may arise in respect of either past or current

tax years.

347

340

I.R.C. § 6212(a); Treas. Reg. § 301.6212-1(a).

341

I.R.C. §§ 6211, 6212(a). A deficiency is defined as:

the amount by which the tax imposed by Subtitle A or B, or Chapter 41, 42,

43, or 44 exceeds the excess of—

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a

return was made by the taxpayer and an amount was shown as the tax by

the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment)

as a deficiency, over—

(2) the amount of rebates, as defined in subsection (b)(2), made.

I.R.C. § 6211.

342

I.R.C. § 6213(a).

343

I.R.C. § 6213(a), (c). If assessment is made prior to the time that the

taxpayer has to appeal to the Tax Court, suit may be brought in a district court to

enjoin the assessment and collection of the assessment. I.R.C. § 6213(a). The

provisions of I.R.C. § 7421 are necessarily inapplicable.

344

I.R.C. § 6213(a). If assessment is made prior to the decision of the Tax

Court, the taxpayer may sue to enjoin such assessment. Id.

345

I.R.C. §§ 6213(c), 6331(a).

346

I.R.C. §§ 6851, 6861, 6862, 6871.

347

I.R.C. § 6851; STAFF OF THE JOINT COMM. ON TAX’N, GENERAL

EXPLANATION OF THE TAX REFORM ACT OF 1976, at 364 (1976); see also Laing v.

United States, 423 U.S. 161 (1976); Clark v. Campbell, 501 F.2d 108, 121 (5th Cir.

1975); Rambo v. United States, 492 F.2d 1060, 1064 (6th Cir. 1974); Schreck v.

United States, 301 F. Supp. 1265 (D. Md. 1969).

Foundational Parameters of the Court’s Jurisdiction 325

Accordingly, the power immediately to assess and collect jeopardized tax

revenues has been given to the Internal Revenue Service.

348

In situations in

which the Commissioner believes that jeopardy of tax exists for a year

(either current or past) with respect to which a return is not yet due, he is

authorized to make an immediate assessment of tax for such year and such

tax is made immediately due and payable.

349

This procedure is referred to

as a termination assessment.

350

If the Commissioner believes that jeopardy

of tax exists for a prior year for which a return has been filed or is past due,

the usual prohibition against assessment and collection until completion of

normal deficiency procedures is waived.

351

The Internal Revenue Service

immediately may, upon determining that a deficiency exists, assess and

collect the deficiency.

352

This procedure is referred to as a jeopardy

assessment.

353

The relationship of these provisions to the jurisdiction of the

Board/Tax Court has been the subject of conflicting judicial interpretation

and statutory amendment.

354

Originally, jurisdiction of the Board to hear an

appeal in respect of a jeopardy assessment was invoked by a complicated

348

For completed tax years in which a return has been filed, or a return is past

due, the procedures set out in § 6861 are controlling. For current years or years in

which a return is not yet due, assessment is provided by § 6851. See infra notes

478–544 and accompanying text. This text will not deal with jeopardy assessments

under § 6862, as such assessments are not within the jurisdictional purview of the

Tax Court. In addition, assessments under § 6871, concerning claims for income,

estate, and gift taxes in bankruptcy and receivership proceedings will not be

discussed.

349

I.R.C. § 6851(a).

350

Id.

351

I.R.C. § 6861(a). I.R.C. § 6863(a) provides:

When an assessment has been made under section 6851, 6852, 6861, or

6862, the collection of the whole or any amount of such assessment may be

stayed by filing with the Secretary, within such time as may be fixed by

regulations prescribed by the Secretary, a bond equal to the amount as to

which the stay is desired . . . .

Treas. Reg. § 301.6863-1(a)(1)–(2) provides that a bond may be made at any time

before collection is authorized by levy under § 6331(a) or after authorization under

§ 6331(a) but prior to actual collection, or in the discretion of the district director,

after any such levy has been made.

352

I.R.C. §§ 6861, 6331. Unlike the normal assessment procedures, where ten

days must pass before collection, in the jeopardy situation, the usual ten-day waiting

period for payment can be waived and the Service can simultaneously, with the

assessment, levy and collect the assessment. I.R.C. § 6331(a).

353

I.R.C. § 6861.

354

E.g., compare Ludwig Littauer & Co. v. Commissioner, 37 B.T.A. 840 (1938)

with Laing v. United States, 423 U.S. 161 (1976); see also Schreck v. United States,

301 F. Supp. 1265 (D. Md. 1969).

326 The United States Tax Court – An Historical Analysis

procedure of claim in abatement and bond.

355

Numerous difficulties with

respect to the abatement procedure led to its abandonment in 1926.

356

its place was substituted a simpler procedure. A taxpayer against whom a

jeopardy assessment had been made would be able to appeal to the Board

in the same manner as the regular deficiency taxpayer. To effect such a

procedure, the Commissioner was required to send the taxpayer a

deficiency notice within 60 days of the making of the assessment.

357

Although this procedure has remained essentially unchanged to the

present,

358

several issues have confronted the court in the application of this

provision. Among these have been the court’s jurisdiction to review the

propriety of the Commissioner’s action in making a jeopardy assessment,

359

the validity of a jeopardy assessment if a deficiency notice is not mailed

within 60 days,

360

the amount of a deficiency notice based upon a jeopardy

assessment if a prior deficiency notice has been mailed,

361

and whether a

deficiency notice issued in connection with an invalid jeopardy assessment

may form the basis of Tax Court jurisdiction.

362

The jurisdiction of the Board/Tax Court to redetermine termination

assessments was, until 1976, unsettled.

363

The early provision permitting

the Commissioner to terminate a taxpayer’s taxable year and to declare a tax

immediately due and owing, made no provision with respect to either

assessment or issuance of a deficiency notice that would be required for

Tax Court review.

364

The few early cases applying the termination provision turned on the

question of whether the termination assessment authority was derived

under the general assessment provision or the jeopardy assessment

provision.

365

Resolution of this question depended on whether a tax due

upon a terminated year constituted a deficiency.

366

If the terminated tax

355

Revenue Act of 1924, ch. 234, § 279(a), 43 Stat. 300.

356

See infra notes 392–412 and accompanying text.

357

Revenue Act of 1926, ch. 27, § 279, 44 Stat. 59 (now codified at I.R.C.

§ 6861).

358

Compare Revenue Act of 1926, ch. 27, § 279, 44 Stat. 59 with I.R.C. § 6861.

359

See California Associated Raisin Co., 1 B.T.A. 1251 (1924). Substantial

changes in taxpayer remedies in respect of review of the Commissioner’s decision

to make a jeopardy assessment were expected in 1976. See infra notes 429–437 and

accompanying text.

360

See infra notes 460–464 and accompanying text.

361

See infra notes 467–471 and accompanying text.

362

See infra notes 454–459 and accompanying text.

363

See infra notes 483–518 and accompanying text.

364

Revenue Act of 1918, ch. 18, § 250(g), 40 Stat. 1084; Revenue Act of 1921,

ch. 138, § 250(g), 42 Stat. 267; Revenue Act of 1924, ch. 234, § 282, 42 Stat. 302;

Revenue Act of 1926, ch. 27, § 285, 44 Stat. 59.

365

See Ludwig Littauer & Co. v. Commissioner, 37 B.T.A. 840 (1938).

366

See, e.g., Laing v. United States, 423 U.S. 161 (1976).

Foundational Parameters of the Court’s Jurisdiction 327

was considered a deficiency, the jeopardy provision that required the

mailing of a deficiency notice would have to be complied with for the

termination assessment to be valid.

367

A wide range of judicial

interpretation, culminating in the Supreme Court decision in Laing v. United

States,

368

and an increased use of termination assessments, particularly in an

antinarcotics program,

369

led to a major revision of the termination

provision in 1976.

370

1. Jeopardy Assessments

Prior to 1921, the right to pre-assessment review of a disputed tax was

unavailable to the taxpayer.

371

If the Bureau determined that an additional

tax was due, the tax was assessed, and the taxpayer could attack the

assessment only by paying the tax and bringing a subsequent suit for

refund.

372

Because taxpayers were not permitted to contest the tax prior to

payment, there was no need for a jeopardy assessment procedure.

373

Dissatisfaction with the harshness of a “pay first, litigate later” regime

led Congress, in 1921, to authorize an administrative procedure within the

Bureau of Internal Revenue by which taxpayers could question disputed

deficiencies in taxes before assessment.

374

However, if the Bureau believed

that future collection of the deficiency would be prejudiced by the delay

that would result from the use of the pre-assessment procedure, it was

permitted to circumvent the procedure.

375

In such event, assessment could

be made at any time without the necessity of the review procedure.

376

Various difficulties with the administrative remedy authorized in 1921

prompted Congress in 1924 to make a number of important changes in

taxpayer prepayment remedies.

377

The Revenue Act of 1924 provided that

“if, in the case of any taxpayer, the Commissioner determined that there

367

Id.

368

Id. See infra notes 511–518 and accompanying text.

369

See Stephen E. Silver, Terminating the Taxpayer’s Taxable Year: How IRS Uses It

Against Narcotics Suspects, 40 J. T

AX’N 110 (1974).

370

See infra notes 519–540 and accompanying text.

371

See Revenue Act of 1918, ch. 18, § 250(b), (d)–(e), 40 Stat. 1083; Revenue

Act of 1916, ch. 463, § 9(a), 39 Stat. 763; H.R.

REP. NO. 67-350, at 14–15 (1921).

372

See Part I, notes 142–197 and accompanying text.

373

See id.

374

Revenue Act of 1921, ch. 138, § 250, 42 Stat. 264. For discussion of this

material, see Part I.B.3.

375

Revenue Act of 1921, ch. 136, § 250(d), 42 Stat. 265.

376

Id.

377

See H.R. REP. NO. 68-179, at 7–8 (1924); S. REP. NO. 68-398, at 8–9 (1924);

Albert L. Hopkins, The United States Board of Tax Appeals, 12 A.B.A. J. 466, 466–67

(1926); Clarence A. Miller, The United States Board of Tax Appeals, 11 A.B.A. J. 169

(1925).

328 The United States Tax Court – An Historical Analysis

was a deficiency” in the tax imposed by the Revenue Act, the

Commissioner would be required to mail a notice of that determination to

the taxpayer.

378

Within 60 days of mailing of the notice, the taxpayer would

be entitled to file an appeal with the Board of Tax Appeals.

379

If the

taxpayer petitioned the Board for review of the Commissioner’s

determination, assessment and collection of the tax would be stayed,

pending the Board’s final determination of tax liability.

380

There were situations, however, in which pre-assessment review might

endanger future collection of tax deficiencies.

381

Accordingly, the jeopardy

assessment procedure, established three years earlier, was continued and the

Commissioner thereby was permitted to assess and collect a deficiency

immediately—bypassing the procedure set out for the ordinary assessment

and collection of a deficiency.

382

In recognition of the fact that a jeopardy

situation could arise at different times during regular deficiency procedures,

the Act provided that a jeopardy assessment could be made before or after

the mailing of a deficiency notice, during the pendency of Board litigation,

or at any time prior to the time that the Board’s decision became final.

383

The jeopardy assessment could vary in amount from a deficiency notice

sent prior to the jeopardy determination.

384

A taxpayer confronted by a jeopardy assessment could contest the

assessment in one of two ways. First, he could pay the assessment and

institute refund procedures.

385

Alternatively, if the taxpayer desired Board

review, a complicated abatement procedure was available.

386

The taxpayer

could file a claim in abatement with the Bureau, accompanied by a

satisfactory bond in an amount up to twice the assessment.

387

Collection of

the tax would be stayed pending Bureau consideration of the claim.

Notification of the Bureau’s decision was required, and if the claim was

denied in whole or part, the taxpayer could petition the Board to review the

Commissioner’s action within 60 days of the denial.

388

Collection of the tax

would be stayed further until the Board’s decision.

389

Board review would,

378

Revenue Act of 1924, ch. 234, § 274(a), 43 Stat. 297.

379

Id. §§ 274, 900(a)–(h), 43 Stat. 297, 336.

380

Id. § 274.

381

Id. §§ 274(a), 279, 43 Stat. 297, 300. See ROBERT HIESTER MONTGOMERY,

INCOME TAX PROCEDURE 284 (1926); Latham, supra note 228.

382

Revenue Act of 1924, ch. 234, § 274(a), 43 Stat. 297.

383

Id. §§ 274(d), 279, 43 Stat. 300.

384

Id. § 274(d).

385

Revenue Act of 1924, ch. 234, §§ 281(a), 1011–1012, 1014, 43 Stat. 301,

342, 343.

386

Id. § 279(a), 43 Stat. 300.

387

Id.

388

Id. § 279(b).

389

Id. § 279(a).

Foundational Parameters of the Court’s Jurisdiction 329

therefore, be based upon the denial of the claim in abatement, and not

upon an appeal from a deficiency notice.

390

In any event, whether the

taxpayer pursued the refund or the Board’s abatement procedure, the

jeopardy assessment provisions achieved their objectives—payment, either

voluntarily, by collection, or guaranteed by bond, prior to any independent

review.

391

Certain difficulties arose in respect of the claim in abatement procedure.

If the jeopardy assessment was made prior to the mailing of a deficiency

notice, Board jurisdiction could result only from a denial of a claim in

abatement.

392

A taxpayer who was unable to secure the appropriate amount

of a bond, which was required to accompany the claim in abatement, would

be deprived of a hearing before the Board.

393

If the Bureau collected by

distraint or levy prior to the filing of a claim in abatement, the taxpayer also

would be deprived of Board review.

394

Moreover, if the taxpayer voluntarily

paid the assessment, no hearing before the Board was possible under the

1924 Act because the Board could not determine overpayments or order

refunds.

395

A more confusing situation arose if a deficiency notice had been mailed

prior to the making of a jeopardy assessment. Under the provisions of the

1924 Act, the Board had jurisdiction to redetermine deficiencies but had no

power to determine overpayments.

396

If an action was pending before the

Board, and a jeopardy assessment was made with respect to that deficiency,

the assessment of the deficiency would, under a strict reading of the statute,

terminate whatever deficiency existed and thus deprive the Board of

jurisdiction based upon the earlier deficiency notice.

397

Voluntary payment

or collection by distraint or levy was theoretically not necessary to terminate

the Board’s jurisdiction.

398

Thus, the Bureau could succeed in terminating

Board jurisdiction, if an action were pending, or potential Board

jurisdiction, if a deficiency notice had been mailed and a petition had not

been filed, merely by making a jeopardy assessment.

399

390

Id.

391

Id.

392

Id. §§ 274(d), 279.

393

Id.; National Tank & Export Co., 3 B.T.A. 1217, 1220 (1926); Clois L.

Greene, 2 B.T.A. 148, 149 (1925); California Associated Raisin Co., 1 B.T.A. 1251,

1252 (1925).

394

Latham, supra note 228, at 219. But see California Associated Raisin Co., 1

B.T.A. 314, 315 (1925); Oakdale Coal Co., 1 B.T.A. 773, 774 (1925).

395

California Associated Raisin Co., 1 B.T.A. 314, 315 (1925); ROBERT

HIESTER MONTGOMERY, INCOME TAX PROCEDURE 503 (1926).

396

Revenue Act of 1924, ch. 234, §§ 274, 900(a)–(h), 43 Stat. 297, 336.

397

Id. §§ 273–274, 279, 43 Stat. 296–297, 300.

398

Latham, supra note 228, at 212–14.

399

Id.

330 The United States Tax Court – An Historical Analysis

The Board, however, was unwilling to permit such unilateral action on

the part of the Bureau to destroy Board jurisdiction after a deficiency notice

had been mailed and the taxpayer had petitioned the Board for review.

400

Some taxpayers might be unable to secure the bond necessary for the

abatement procedure, and if a jeopardy assessment could prevent the Board

from completing action on a case already before it, the purpose for which

the Board was created would be subverted.

401

Accordingly, the Board, in an

early decision, stated in dictum that once Board jurisdiction was invoked by

a timely petition appealing from a deficiency determination, the Board’s

jurisdiction could not be terminated by a unilateral Bureau jeopardy

assessment unless the taxpayer voluntarily paid the tax.

402

This position

defied the clear import of the statutory definition of a deficiency and would

have resulted in an extension of the Board’s jurisdiction beyond its limited

deficiency jurisdiction. The dictum, however, never figured in the

disposition of a case. In the two-year period between 1924 and 1926, the

situation was not presented to the Board, and 1926 legislation radically

altered the procedure.

403

Apart from the jurisdictional problems that confronted the court, the

claim in abatement procedure failed to achieve its objective—a prompt

review of the underlying deficiency. First, if a jeopardy assessment was

made after the conclusion of a Board hearing but prior to a final decision, it

was possible that two hearings might result; the first hearing to determine

the deficiency and the second to review the denial of a claim in

abatement.

404

This was possible because the Commissioner could assert a

jeopardy assessment before the Board’s decision became final. Further,

since the Commissioner already had determined that a jeopardy assessment

was necessary, the requirement that the taxpayer first seek Bureau review of

the jeopardy determination was repetitive.

405

In response to the difficulties generated by the jeopardy assessment

provisions of the 1924 Act, a less complicated and more streamlined system

400

See California Associated Raisin Co., 1 B.T.A. 314 (1925), rev’d and dismissed,

California Associated Raisin Co., 1 B.T.A. 1251 (1925); R

OBERT HIESTER

MONTGOMERY, INCOME TAX PROCEDURE 493 (1926).

401

California Associated Raisin Co., 1 B.T.A. 314, 316 (1925).

402

Id.; see also Northwestern Mut. Life Ins. Co., 1 B.T.A. 767 (1925).

403

In the original California Raisin case, the Board had applied its holding to

maintain jurisdiction after a jeopardy assessment was made. 1 B.T.A. 314, 315. In a

subsequent decision, 1 B.T.A. 1251 (1925), the Board, although indicating its

approval of its earlier legal holding, reversed and dismissed for want of jurisdiction

because the facts indicated that the petitioner had never received a deficiency

notice on which proper jurisdiction could be based. Id. at 1251–52.

404

See S. REP. NO. 69-52, at 26–27 (1926).

405

See Revenue Act of 1924, ch. 234, § 279, 43 Stat. 300.

Foundational Parameters of the Court’s Jurisdiction 331

was substituted by the Revenue Act of 1926.

406

Under the revised rules, if a

jeopardy assessment was made prior to the issuance of a deficiency notice,

the Commissioner was required to mail a deficiency notice in respect of the

assessment within 60 days.

407

The taxpayer then could file a petition with

the Board based on that notice, in the same manner as a regular deficiency

determination.

408

The Board then would determine the tax liability for the

year in question. If, however, the jeopardy assessment was made

subsequent to the mailing of a deficiency notice, the assessment would not

serve to terminate Board jurisdiction based on the original notice.

409

Whether the jeopardy assessment was made prior to the mailing of the

deficiency notice or subsequent thereto, the taxpayer had the option of

paying the assessment or staying collection by filing a satisfactory bond.

410

In neither case would the taxpayer lose his right of appeal to the Board.

411

In effect, if the assessment was paid, the Board action would become one

for refund.

412

Although the need to protect revenues provided ample justification for

the jeopardy assessment procedure, the potential for abuse remained ever

present. First, the possibility always existed that the Commissioner might

err either in the computation of the deficiency or in the determination of

jeopardy. Another problem sometimes encountered was the use of

jeopardy assessments to toll the statute of limitations; the same tolling of

the statute could be effected by the issuance of a deficiency letter, but the

Service occasionally used the more drastic jeopardy procedure for this

purpose.

413

The difficulties engendered by misuse of the jeopardy procedure were

compounded by the Bureau’s position that once a jeopardy assessment was

made, it could not be abated except by judicial determination that there had

been an over-assessment of tax.

414

Thus, if subsequent facts indicated that

the assessment had been improperly made or new facts came to light that

406

Revenue Act of 1926, ch. 27, § 279, 44 Stat. 59 (now codified at I.R.C.

§§ 6861, 6863).

407

Id. § 279(b).

408

Id. §§ 274(a), 279(c).

409

Id. § 279(c).

410

Id. § 279(f), (j).

411

Id. § 279.

412

Id.

413

See Veeder v. Commissioner, 36 F.2d 342 (7th Cir. 1929); Foundation Co. v.

United States, 15 F. Supp. 229 (Ct. Cl. 1936); Couzens v. Commissioner, 11 B.T.A.

1040, 1158 (1928); R

OBERT HIESTER MONTGOMERY, INCOME TAX PROCEDURE

284 (1926).

414

The statutory language of the jeopardy provision did not indicate whether a

jeopardy assessment, once made, could be abated. Revenue Act of 1926, ch. 27,

§ 279, 44 Stat. 59.

332 The United States Tax Court – An Historical Analysis

dispelled any belief that jeopardy of revenues was imminent, the Bureau

would not abate the assessment. The Bureau maintained this position even

after 1938, when an amendment to the jeopardy provision was adopted that

seemed to authorize administrative abatement.

415

In 1954, congressional

intent with regard to jeopardy assessment abatement was clarified by a

provision that authorized the Commissioner to abate a jeopardy assessment,

or any unpaid portion thereof, to the extent that he believed the assessment

to be excessive in amount.

416

The statute was silent, however, as to the

method by which a taxpayer could secure such abatement. Experience with

the provision indicates that taxpayer use of the provision had been minimal,

probably due to the lack of a delineated procedure.

417

In view of the difficulties of securing abatement of jeopardy

assessments, many believed that some form of expedited judicial review of

the propriety of such assessments was necessary.

418

The Board, however, in

one of its earliest decisions, held that it was without power to adjudicate

whether the circumstances upon which the Commissioner acted were such

as to denote jeopardy and justify his belief.

419

This position was supported

by the legislative history of the Revenue Act of 1926.

420

Thereafter, in 1928

Hearings before the Ways and Means Committee, many tax practitioners

urged that the Board be given jurisdiction to adjudicate whether the

Commissioner’s determination of jeopardy was proper.

421

Such proposals

were not adopted.

422

Continued attempts by taxpayers to have the Board and other courts

examine the underlying factual basis for the jeopardy determination met

with failure;

423

in 1931, the Supreme Court implicitly approved the

415

Revenue Act of 1938, ch. 289, § 819(e), 52 Stat. 580, amending Revenue Act

of 1926, ch. 27, § 279(f), 44 Stat. 59.

416

I.R.C. § 6861(c).

417

Id. See Note, Jeopardy Assessments: The Sovereign Stranglehold, 55 GEO. L.J. 701,

707 (1967); see also Treas. Reg. § 301.6861-1(e).

418

See, e.g., H.R. REP. NO. 94-658, at 302–03 (1975); S. REP. NO. 94-938, at

363–64 (1976); Hearings on Revenue Revision, 1928, Before the Comm. on Ways and Means,

70th Cong., 1st Sess. 466–67, 530–32, 543–44, 547 (1928) (statement of H.

Satterlee, Ass’n of the Bar of the City of New York); Hearings on Revenue Revision,

1928, Before the Senate Finance Comm., 70th Cong., 1st Sess. 22, 298–99, 338 (1928)

(statements of H. Satterlee, A.A. Ballantyne and W.A. Staub).

419

California Associated Raisin Co., 1 B.T.A. 1251 (1925).

420

See S. REP. NO. 69-52, at 27 (1926); H.R. REP. NO. 69-356, at 43 (1926).

421

Hearings on Revenue Revision, 1928, Before Comm. on Ways and Means, 70th

Cong., 1st Sess. 466–67, 530–32, 543–44 (1928); Hearings on Revenue Revision, 1928,

Before the Senate Finance Comm., 70th Cong., 1st Sess. 22, 298–99, 338 (1928).

422

See Revenue Act of 1928, ch. 852, 45 Stat. 791.

423

See, e.g., Darnell v. Thomlinson, 220 F.2d 894 (5th Cir. 1955); Human Eng’r

Inst. v. Commissioner, 61 T.C. 61, 65 (1973); Continental Prod. Co., 20 B.T.A. 818,

828 (1930); Couzens v. Commissioner, 11 B.T.A. 1040, 1158 (1928).

Foundational Parameters of the Court’s Jurisdiction 333

constitutionality of the jeopardy assessment procedure in Phillips v.

Commissioner.

424

The primary reason offered by the courts and the Board for

their refusal to review the propriety of a jeopardy determination was that

adequate remedies, in both the Board and federal courts, were ultimately

available to review the underlying deficiency.

425

In addition, three other

considerations undoubtedly prompted courts to decline such review. First,

the taxpayer could initiate abatement procedures before the Bureau.

426

Second, injunctive relief against assessments traditionally had been strictly

limited.

427

Third, the availability of pre-assessment review in non-jeopardy

situations was a privilege accorded certain taxpayers and did not require all

taxpayers to be subject to favored treatment.

428

Fifty years of continued judicial affirmation of administrative discretion

came to an end in 1976. In Commissioner v. Shapiro,

429

the Supreme Court

rejected the Government’s position that “it has no obligation to prove that

the seizure has any basis in fact no matter how severe or irreparable the

injury to the taxpayer and no matter how inadequate his eventual remedy in

the Tax Court.”

430

Prompted by the Shapiro decision, Congress, in the Tax Reform Act of

1976, changed the jeopardy procedure under § 7429 to require the

Commissioner to send the taxpayer a written statement of the information

upon which the Service relies in making the assessment within five days of

the making of that assessment.

431

Within 30 days after the statement is

furnished to the taxpayer, the taxpayer may request the Service to determine

if the making of the assessment is reasonable and if the amount assessed is

appropriate.

432

In making these determinations, the Service is required to

424

283 U.S. 589 (1931).

425

See, e.g., Salisbury v. United States, 356 F.2d 822 (D.C. Cir. 1966); Lloyd v.

Patterson, 242 F.2d 742 (5th Cir. 1957); Adler v. Nicholas, 70 F. Supp. 514 (D.

Colo. 1946), rev’d on other grounds, 166 F.2d 674 (10th Cir. 1948).

426

I.R.C. § 6861(g).

427

For a limited exception developed by judicial rule, see Enochs v. Williams

Packing Co., 370 U.S. 1 (1962).

428

See Phillips v. Commissioner, 283 U.S. 589, 594–95 (1931); Ginsburg v.

United States, 278 F.2d 470, 472 (1st Cir. 1960).

429

424 U.S. 614 (1976), aff’g sub nom. Shapiro v. Sec’y of State, 499 F.2d 527

(D.C. Cir. 1974).

430

424 U.S. at 629–30.

431

Tax Reform Act of 1976, Pub. L. No. 94-455, § 1204(a), 90 Stat. 1695

(adding I.R.C. § 7429). See H.R.

REP. NO. 94-658, at 302 (1976); S. REP. NO. 94-

938, at 363–64 (1976). As a result of the Internal Revenue Service Restructuring

and Reform Act of 1998, the Chief Counsel of the IRS or such Counsel’s delegate

must approve every jeopardy or termination assessment, as well as every levy to be

made before 30 days after notice and demand for payment. See Pub. L. No. 105-

206, § 3434, 112 Stat. 685, 760 (1998) (enacting I.R.C. § 7429(a)(1)(A)).

432

I.R.C. § 7429(a)(2)–(3).

334 The United States Tax Court – An Historical Analysis

consider information obtained after the assessment.

433

If the Service finds

the assessment inappropriate, it may abate the assessment in whole or in

part.

434

If the taxpayer is not satisfied with the Service’s determination, the

taxpayer may, within 30 days after notification by the Service, bring an

action for judicial review of the Commissioner’s determination.

435

As originally enacted, judicial review of agency determinations under

§ 7429 was limited to the Federal district courts. The decision to place

expedited review under the jurisdiction of the district courts and not the

Tax Court was based in large part on a belief that taxpayers would find it

more convenient to bring such an action in their local district courts.

436

Speedy review of the propriety of jeopardy assessments in the Tax Court

would require either the taxpayer to come to Washington or the court to

make extraordinary arrangements for a circuit hearing.

437

However, the exclusivity of district court jurisdiction in this setting did

not prove long lasting. As part of the Technical and Miscellaneous

Revenue Act of 1988,

438

Congress granted the Tax Court concurrent

jurisdiction to review determinations concerning jeopardy assessments and

levies in limited circumstances. If a taxpayer has already invoked the

deficiency jurisdiction of the Tax Court for a tax year that serves as the

subject of a subsequent jeopardy assessment or levy, the taxpayer is

permitted to seek judicial review of the assessment or levy by motion filed

in the underlying deficiency proceeding.

439

If the Tax Court is available as a

forum, its jurisdiction to review a jeopardy assessment or levy is subject to

the same terms and limitations as that of the district court, which are

described below.

Within 20 days of commencement of the action, the reviewing court

must make an independent, de novo determination as to the issues

considered by the Internal Revenue Service.

440

That is, the court must

determine whether the assessment or levy is reasonable under the

433

S. REP. NO. 94-938, at 365 (1976).

434

See S. REP. NO. 94-938, at 364 n.5 (1976).

435

I.R.C. § 7429(b)(1).

436

S. REP. NO. 94-938, at 366 (1976).

437

Id.

438

Pub. L. No. 100-647, § 6237, 102 Stat. 3342, 3741–43 (1988).

439

I.R.C. § 7429(b)(2)(B). Pursuant to Rule 56 of the Tax Court Rules of

Practice and Procedure, a taxpayer in this posture invokes the court’s jurisdiction

by filing either a “Motion for Review of Jeopardy Assessment” or a “Motion for

Review of Jeopardy Levy.” If the Tax Court determines that it lacks jurisdiction to

hear the taxpayer’s motion because its deficiency jurisdiction has not been

previously invoked for a tax and year that serves as the subject of the jeopardy

assessment or levy, the court will transfer the civil action to the appropriate Federal

district court. See I.R.C. § 7429(e)(2).

440

I.R.C. § 7429(b)(2).

Foundational Parameters of the Court’s Jurisdiction 335

circumstances and, with respect to assessments, whether the amount

assessed is appropriate under the circumstances.

441

In such proceedings,

the Government has the burden of proving that the making of the

assessment is reasonable,

442

and the taxpayer has the burden of proving that

the amount of the assessment is unreasonable.

443

In this regard, the

Government is required to provide a written statement containing any

information relating to its determination of the amount assessed.

444

The

standard by which “reasonableness” in this setting must be determined is

unavoidably imprecise. However, the Tax Court has articulated certain

parameters for evaluating this standard, explaining that reasonableness must

be established by a standard of proof that is something more than “not

arbitrary or capricious” but something less than “substantial evidence.”

445

In determining whether the assessment is appropriate, the court is not

expected to pass on ultimate tax liability; the determination of the propriety

of the assessment will have no effect on the determination of correct tax

liability in a subsequent proceeding.

446

Accordingly, the Tax Court’s

jurisdiction to make a determination under § 7429(b) has no effect on the

determination of the tax liability that serves as the subject of the underlying

deficiency proceeding.

447

If the court finds in favor of the taxpayer, it may order the Secretary to

release the levy, to abate the assessment, or to redetermine the amount

assessed.

448

In addition, the court is provided broad authority to “take such

further action as the court finds appropriate.”

449

The court’s determination

in this setting is final; no appellate review is permitted.

450

Judicial review under § 7429(b) is not open ended. Rather, the taxpayer

may commence a judicial proceeding to review a jeopardy assessment or

levy only within the following window: the earlier of (1) 90 days after the

Service notifies the taxpayer of its determination concerning its

administrative review of the assessment or levy, or (2) the 16th day after the

441

I.R.C. § 7429(b)(3).

442

I.R.C. § 7429(g)(1). If the Service fails to file a timely response to the

taxpayer’s motion seeking judicial review, the court may shift this burden of proof

to the Service as a sanction for the delay. See Gaw v. Commissioner, T.C. Memo.

1995-373, 70 T.C.M. (CCH) 336.

443

I.R.C. § 7429(g)(2).

444

Id.

445

McWilliams v. Commissioner, 103 T.C. 416, 422 (1994) (citations omitted).

446

I.R.C. § 7429(b)(2)(A)–(B); see also S. REP. NO. 94-938, at 365 (1976).

447

See Gaw v. Commissioner, T.C. Memo. 1995-373, 70 T.C.M. (CCH) 336,

337 (“A section 7429 review is a summary proceeding; we are not determining the

taxpayer’s correct tax liability.”).

448

I.R.C. § 7429(b)(4).

449

Id.

450

I.R.C. § 7429(f).

336 The United States Tax Court – An Historical Analysis

taxpayer requested the administrative review be undertaken.

451

These filing

requirements are central to the subject matter jurisdiction of the court, and

they may not be waived—even with the consent of the Service.

452

Hence,

the failure of the Service to promptly respond to the taxpayer’s request for

an administrative review of the jeopardy assessment or levy does not serve

to extend the period for judicial review of the matter.

453

With the exception of the provisions supplying judicial review of the

propriety of a jeopardy assessment, the procedures established in 1926 have

remained essentially unchanged.

454

However, various jurisdictional

questions have arisen, particularly with respect to the procedural regularity

of the assessment and its relation to the notice of deficiency and Tax Court

proceedings. A prerequisite for the making of a jeopardy assessment is a

final determination that a deficiency exists.

455

If such determination is not

made, the assessment is a nullity and may be enjoined by a district court.

456

The application of this doctrine in the Tax Court, however, is problematic.

Since a jurisdictional prerequisite to review by the Tax Court is the sending

of a deficiency notice, the taxpayer will not be in a position to request that

the Tax Court invalidate an assessment until he is in receipt of a deficiency

notice based on that assessment.

457

If a final determination is made

subsequent to the jeopardy assessment but prior to the issuance of the

deficiency notice, the assessment may be held invalid, but the deficiency

notice will stand independent of the assessment and the taxpayer will be

subject to a court determination of the deficiency.

458

In the event the court

finds the assessment improper, the Commissioner is empowered to make a

new assessment, so the net effect will be a continuation of the old

assessment.

459

Assuming that the jeopardy assessment is based upon a final

determination of deficiency, such assessment can be made prior to the

institution of regular deficiency procedures.

460

In such event, the Code

requires the mailing of a deficiency notice within 60 days after

451

I.R.C. § 7429(b)(1).

452

See Green v. Commissioner, 121 T.C. 301 (2003).

453

See id. at 307 (“We do not interpret section 7429(b)(1) to allow for the filing

of a civil action 90 days from the date of respondent’s administrative determination

in this case.”).

454

Compare Revenue Act of 1926, ch. 27, §§ 274, 279, 44 Stat. 5559 with I.R.C.

§§ 6861, 6863.

455

I.R.C. § 6861(a).

456

See United States v. Bonaguro, 294 F. Supp. 750 (E.D.N.Y. 1968).

457

See I.R.C. §§ 6211–6213, 6851, 6861.

458

See Teitelbaum v. Commissioner, 40 T.C. 223, 226–27 (1963).

459

I.R.C. § 6861(a); see also Berry v. Commissioner, 11 T.C.M. (CCH) 301, 314

(1952).

460

I.R.C. § 6861(b).

Foundational Parameters of the Court’s Jurisdiction 337

assessment.

461

If the deficiency notice is not mailed, the assessment is a

nullity and the taxpayer may sue in a district court to enjoin collection.

462

Obviously, the failure to send a deficiency notice will block any appeal to

the Tax Court.

463

If the deficiency notice is sent subsequent to the 60-day

period, the assessment may be invalid, but the deficiency notice will be

valid, and such notice provides the necessary prerequisite for ordinary

deficiency jurisdiction.

464

Jurisdictional questions also may arise with respect to the use of

jeopardy assessments near the time that the period of limitations on

assessment and collection is about to expire. If the assessment is made

within 60 days of the date on which the period of limitations runs, and the

deficiency notice thereupon is not mailed until after the period has expired

but prior to the expiration of 60 days from the date of assessment, the

assessment is valid and the Tax Court will have jurisdiction to redetermine

the deficiency.

465

If the assessment is made within 60 days of the date on

which the period of limitations expires and the deficiency notice is not

mailed until after the period has expired and after 60 days from the date of

the assessment, the assessment is invalid. Because the period of limitations

has expired, judgment must be entered for the taxpayer.

466

The jeopardy assessment also may be made subsequent to the sending

of a deficiency notice.

467

In that event, the Code provides that the

assessment may be for a greater or lesser amount than the original

deficiency notice.

468

If the jeopardy assessment is greater in amount than

the original deficiency on which it is based, the second deficiency notice,

required to be mailed within 60 days of the assessment, cannot exceed the

amount stated in the original deficiency notice, provided the taxpayer

already has petitioned the Tax Court for a redetermination of the original

deficiency.

469

Any increase in the deficiency that the Commissioner wishes

to assert must be made at the hearing before the court.

470

This approach

461

Id.; Treas. Reg. § 301.6861-l (c).

462

Laing v. United States, 423 U.S. 161 (1976); Harris v. United States, 412 F.

Supp. 24 (E.D. Mich. 1976); Williams v. United States, 373 F. Supp. 71 (D. Nev.

1973).

463

See Mason v. Commissioner, 210 F.2d 388 (5th Cir. 1954).

464

Teitelbaum v. Commissioner, 40 T.C. 223, 226–27 (1963).

465

See Brown-Wheeler Co. v. Commissioner, 21 B.T.A. 755 (1930); American

Felt Co. v. Commissioner, 18 B.T.A. 509 (1929).

466

E.g., Cornwell v. Commissioner, 15 B.T.A. 1309 (1929); Reese v.

Commissioner, 15 B.T.A. 1261 (1929).

467

I.R.C. § 6861(c).

468

Id.

469

I.R.C. §§ 6212(c), 6214(a).

470

Id.

338 The United States Tax Court – An Historical Analysis

appropriately places the burden of proof in respect to the additional

deficiency on the Government.

471

If the jeopardy assessment is made subsequent to the decision of the

court, the assessment cannot be for an amount greater than the

determination of the court.

472

Had the Government asserted a jeopardy

assessment prior to the court’s decision, the Government would have been

required to abate its jeopardy assessment to the amount of deficiency finally

determined.

473

If the decision of the Tax Court has become final, either by the passage

of 90 days from the date of decision or by exhaustion of appeal rights, a

jeopardy assessment will not be permitted.

474

Since immediate assessment

is permissible, there is no need for a jeopardy provision to insure revenue

collection.

475

Similarly, no jeopardy assessment may be made during the

pendency of an appeal from a Tax Court decision.

476

Rather, in such

instances, the taxpayer must file a bond securing payment of the ultimate

liability to forestall assessment and collection of a deficiency determined by

the court.

477

2. Termination Assessments

The termination provision first appeared in the Revenue Act of 1918.

478

It permitted the Bureau to terminate a taxpayer’s current tax year before its

completion and to declare taxes, for the abbreviated period, immediately

due and payable. Similarly, such an assessment could be made for any

preceding year for which a return was not yet due. To make such a

determination, the Bureau had to conclude that there existed certain

prejudicial activity by the taxpayer that threatened the future collectability of

taxes.

479

The termination provision did not specifically authorize the

Commissioner to assess the taxes for the terminated year. Rather,

assessment authority was derived from the general assessment provision,

which applied to both terminated and normal tax years.

480

In the event of

471

TAX CT. R. 142 (July 6, 2012 ed.). For an analysis of the burden of proof in

respect of increased deficiencies asserted at trial, see Part X.C.3.

472

I.R.C. § 6861(d).

473

I.R.C. § 6861(f).

474

I.R.C. § 6861(e).

475

I.R.C. § 6213(a).

476

I.R.C. § 6861(e).

477

I.R.C. § 7485; TAX CT. R. 192 (July 6, 2012 ed.).

478

Revenue Act of 1918, ch. 18, § 250(g), 40 Stat. 1084 (now codified at I.R.C.

§ 6851).

479

Id.

480

Revenue Act of 1918, ch. 18, § 3176, 40 Stat. 1147 (now codified at I.R.C.

§ 6201).

Foundational Parameters of the Court’s Jurisdiction 339

an assessment, the taxpayer was required to pay the tax and institute refund

procedures if the taxpayer believed that such assessment was erroneous.

481

No pre-assessment review was available in the case of a normal or

terminated tax year assessment.

482

The termination provision continued unchanged through the Revenue

Acts of 1921, 1924, and 1926,

483

which effected major changes in taxpayer

pre-assessment remedies and in jeopardy assessments.

484

The termination

provision was theoretically similar to the jeopardy assessment, but no cross-

reference between the statutes existed.

485

If the termination taxes were to

be assessed within the jeopardy assessment provision, then the Board, by

virtue of the requirement that a deficiency notice be mailed within 60 days

of assessment, could have jurisdiction to review the termination

determination. If such provision did not apply, Board review would be

precluded, and the taxpayer would be forced to pursue available refund

remedies. In determining whether the jeopardy assessment provision

applied, a threshold question had to be answered: Were the taxes due upon

a terminated tax year the equivalent of a deficiency?

486

If the taxes were a

deficiency, the jeopardy assessment provision would apply. If the taxes

were not a deficiency, then the jeopardy assessment provision, which

required the determination of a deficiency as a necessary prerequisite for the

making of an assessment, was inapplicable.

487

Little if any use of the termination provision was made immediately

subsequent to the enactment of the 1926 legislation.

488

As a result, the

Board and other courts were not confronted with this issue until 1938.

489

In Ludwig Littauer & Co. v. Commissioner,

490

the taxpayer had received a

481

Revenue Act of 1918, ch. 18, § 250(b), 40 Stat. 1083.

482

See Part I.B.2.

483

Compare Revenue Act of 1921, ch. 136, § 250(g), 42 Stat. 266 with Revenue

Act of 1924, ch. 234, § 282, 43 Stat. 302 and Revenue Act of 1926, ch. 27, § 285, 44

Stat. 68.

484

Compare Revenue Act of 1921, ch. 138, § 250(d), 42 Stat. 265 with Revenue

Act of 1924, ch. 234, §§ 279, 400, 43 Stat. 300, 316 and Revenue Act of 1926, ch.

27, §§ 274, 279, 1000, 44 Stat. 55, 59, 109.

485

See, e.g., Revenue Act of 1924, ch. 234, §§ 274(d), 282, 43 Stat. 297, 302;

Revenue Act of 1926, ch. 27, §§ 274, 279, 285, 44 Stat. 55, 59, 68; see also H.R.

REP.

NO. 68-179 (1924); S. REP. NO. 68-398 (1924); H.R. REP. NO. 68-844 (1925); S.

REP. NO. 69-52 (1926); H.R. REP. NO. 69-356 (1926).

486

See I.R.C. § 6211.

487

Revenue Act of 1926, ch. 27, §§ 274(a), 279, 282, 44 Stat. 55, 59, 68.

488

See Schreck v. United States, 301 F. Supp. 1265, 1276 (D. Md. 1969);

Thomas L. Kummer, Code Section 6851 – “Termination of Taxable Year” – Application

and Function Within the Internal Revenue Code of 1954, 9 W

AKE FOREST L. REV. 381,

382 (1973).

489

37 B.T.A. 840 (1939).

490

Id.

340 The United States Tax Court – An Historical Analysis

notice of termination and demand for the payment of taxes. The taxpayer

immediately appealed to the Board, basing jurisdiction on the notice of

termination, which the taxpayer believed to be equivalent to a deficiency

notice. The Commissioner moved to dismiss the petition for lack of

jurisdiction.

491

The Board recognized that both the termination provision

and the jeopardy assessment provision were concerned with the collection

of jeopardized revenues. However, the Board viewed the termination

situation “as presupposing a more exigent situation of jeopardy” than that

governed by the jeopardy assessment provision.

492

In the absence of an

explicit statutory mandate, the Board concluded that the taxes due upon a

termination were not the equivalent of a deficiency and that, therefore, the

deficiency notice procedure did not apply.

493

Without the necessity of a

deficiency notice, the jeopardy assessment provision, with its Board review

and procedural safeguards, was inapplicable. Implicit in the Board’s

opinion was the belief that the termination provision itself provided the

basis for assessment.

494

The decision in Littauer was reaffirmed by the Tax

Court in 1951 in Puritan Church–The Church of America v. Commissioner.

495

Use of the termination provision in the 30 years subsequent to Littauer

was infrequent.

496

In fact, by 1969, there existed only seven reported cases

dealing with the termination provision.

497

In most of these cases, the

question presented to the Board in Littauer was not at issue.

498

In that year,

however, major changes were foreshadowed by the decision in Schreck v.

United States.

499

Unlike the situation in Littauer, in which the taxpayer sought

redetermination of a “deficiency” before the Board, the taxpayer in Schreck

requested a district court to enjoin collection of a termination assessment

because of the Service’s failure to provide a deficiency notice under the

jeopardy assessment provision.

500

Emphasizing the clear congressional

491

Id. at 840.

492

Id. at 841.

493

Id. at 842.

494

Id.

495

10 T.C.M. (CCH) 485, 494 (1951), aff’d per curiam, 209 F.2d 306 (1953).

496

See Schreck v. United States, 301 F. Supp. 1265, 1276 (D. Md. 1969).

497

United States v. Rochelle, 384 F.2d 748 (5th Cir. 1967); Carlo v. United

States, 286 F.2d 841 (2d Cir. 1961); Rogan v. Mertens, 153 F.2d 937 (9th Cir. 1946);

Rinieri v. Scanlon, 254 F. Supp. 469 (S.D.N.Y. 1966); Fancher v. United States, 10

A.F.T.R.2d 5925 (D.S.D. 1962); United States v. Johansson, 8 A.F.T.R.2d 6001

(S.D. Fla. 1961), aff’d in part and rem’d in part, 336 F.2d 809 (5th Cir. 1964); Puritan

Church

–The Church of America, 10 T.C.M. (CCH) 485 (1951), aff’d per curiam, 209

F.2d 306 (D.C. Cir. 1953).

498

E.g., Rogan v. Mertens, 153 F.2d 937 (9th Cir. 1946) (taxpayers voluntarily

paid the termination assessment and merely sued for a refund).

499

301 F. Supp. 1265 (D. Md. 1969).

500

Id. at 1267. If the Commissioner follows the procedures established under

normal deficiency or jeopardy situations, no injunction against assessment or

Foundational Parameters of the Court’s Jurisdiction 341

policy of providing the normal taxpayer with an opportunity to litigate prior

to assessment, and providing the jeopardy taxpayer with substantial

procedural safeguards, as well as an opportunity for Tax Court review, the

court concluded that the power to assess a termination deficiency arose

under the general jeopardy provision.

501

Accordingly, collection was

enjoined.

502

Shortly after the taxpayer victory in Schreck, the Internal Revenue Service

instituted a program to disrupt the distribution of narcotics through the

rigorous enforcement of all available tax statutes.

503

As part of this

program, the Service made expanded use of the termination provision.

504

Under this procedure, the Service was able to effectively tie up a taxpayer’s

assets for many months.

505

In addition, a taxpayer subject to a termination

assessment had to pay the assessment to prevent seizure of assets in the

collection process. Unlike the situation with respect to jeopardy

assessments, the Government was able to sell the seized assets prior to any

judicial determination of the liability for the terminated tax period.

506

The increased use of the termination provision in combating the

narcotics trade led to a large number of taxpayer challenges to the

collection may be instituted. I.R.C. § 7421. If the Commissioner fails to send a

deficiency notice within 60 days of making a jeopardy assessment, the prohibition

against injunctive relief is not applicable. I.R.C. §§ 6213(a), 686l(b).

501

301 F. Supp. at 1280. The court was particularly concerned over the lack of

safeguards for seized property under a § 6851 termination; the slowness of refund

procedures; the lack of review of the propriety of the termination; and the lack of

the power to abate the termination. Id. at 1279–81.

502

Id. at 1284. The court, in enjoining collection, held that the termination

taxpayer was entitled to a deficiency notice when his tax year was terminated

pursuant to the termination provision. Id. The court, in examining the legislative

development of the termination and jeopardy provision, rejected the Government’s

argument that the termination provision provided independent assessment

authority. Id. at 1271.

503

See generally Silver, supra note 369; Thomas L. Kummer, Comment, Code

Section 6851 — “Termination of Taxable Year” — Application and Function Within the

Internal Revenue Code of 1954, 9 W

AKE FOREST L. REV. 381, 382 (1973); Note,

Jeopardy Terminations Under Section 6851, 60 I

OWA L. REV. 644, 645 (1975); John

McQuagge Fite, Narcotic Offenders and the Internal Revenue Code: Sheathing the Section

6851 Sword, 28 V

AND. L. REV. 363 (1975).

504

See Silver, supra note 369.

505

See supra note 503.

506

Prior to the amendments of § 6851 in 1976, assets seized by the Service

were subject to immediate sale. I.R.C. § 6851(a) (prior to amendment by Tax

Reform Act of 1976, Pub. L. No. 94-455, § 1201(b)(1), 90 Stat. 1525, 1696).

342 The United States Tax Court – An Historical Analysis

termination procedures employed by the Commissioner.

507

Following the

approach taken by the taxpayer in Schreck, these challenges took the form of

suits in district court to enjoin collection.

508

Since such relief was available

in situations in which the Commissioner was required to send a deficiency

notice but had failed to do so,

509

the question whether a termination tax was

a deficiency arose once again. The proliferating litigation brought forth a

variety of arguments on both sides of the question, as well as a divergence

of judicial opinions.

510

The Supreme Court resolved these differences

through its 1976 decision in Laing v. United States.

511

The Court held that the

tax due upon a terminated tax year constituted a deficiency. Accordingly,

the tax was assessable under the jeopardy assessment provisions and subject

to Tax Court review.

512

The language of the statute defining a deficiency, the Court concluded,

did not limit a deficiency to the completion of a normal tax year.

513

Rather,

a deficiency could arise whenever a tax year was terminated and the tax was

declared due.

514

Termination brought the tax year to a close and was the

equivalent, for all practical purposes, of the end of a normal tax year.

515

The taxpayer was required to file a return upon termination,

516

and in the

absence of a return, the tax declared due was a deficiency.

517

The

termination deficiency, being a tax in jeopardy, was assessable under the

jeopardy assessment provision. The Court found further support for this

conclusion in the absence of any legislative history indicating that Congress

intended harsher treatment for taxpayers subject to termination assessments

than for those subject to jeopardy assessments.

518

507

See, e.g., Laing v. United States, 364 F. Supp. 469 (D. Vt. 1973), aff’d, 496

F.2d 853 (2d Cir. 1974); Clark v. Campbell, 341 F. Supp. 171 (N.D. Tex. 1972),

aff’d, 501 F.2d 108 (5th Cir. 1974).

508

See supra note 507. Because the Tax Court took the position with respect to

termination assessments that the notice of termination did not amount to a

deficiency notice, jurisdiction before the court could not be invoked. See Jones v.

Commissioner, 62 T.C. 1 (1974).

509

I.R.C. § 6213(a).

510

See, e.g., Laing v. United States, 496 F.2d 853 (2d Cir. 1974); Hall v. United

States, 493 F.2d 1211 (6th Cir. 1974); Rambo v. United States, 492 F.2d 1060 (6th

Cir. 1974); Irving v. Gray, 479 F.2d 20 (2d Cir. 1973).

511

423 U.S. 161 (1976).

512

Id. at 183–84.

513

Id. at 175.

514

Id.

515

Id.; see also Sanzoqano v. Commissioner, 60 T.C. 321 (1973).

516

I.R.C. § 443(a). If the taxpayer failed to file a return, the Service would

prepare a return for the taxpayer pursuant to § 6020(a).

517

423 U.S. at 175.

518

Id. at 183.

Foundational Parameters of the Court’s Jurisdiction 343

Increased utilization of termination assessments in combating narcotics

traffic and the resulting divergent judicial views on this trend had focused

congressional attention on the inadequacies of the termination procedure.

519

As a result, and prior to the Supreme Court decision in Laing, the Ways and

Means Committee approved legislation to provide an expedited judicial

review of the propriety of a termination assessment (as opposed to the

accuracy of the amount assessed) and to prevent the Internal Revenue

Service from selling any seized property before or during the pendency of

such review.

520

The Committee believed that such expedited review would

be more appropriate than a requirement that the taxpayer receive a

deficiency notice because, under the latter requirement, the Tax Court

might have to make multiple determinations for a single year.

521

Such

difficulties would arise in situations in which the taxpayer received income

subsequent to a termination, since, under existing law, the Service was not

permitted to reopen a taxable year until its normal end.

522

Additionally,

with the provision for expedited review of the propriety of the termination,

the judicial remedy in the refund procedure was viewed as adequate.

523

After the bill had passed the House and while it was before the Senate

Finance Committee, the Supreme Court in Laing held that following a

termination assessment, the Service had to send a deficiency notice within

60 days and follow the procedures specified for jeopardy assessments.

524

The Senate Finance Committee was disturbed by the implications of

Laing,

525

believing the case would create the procedural difficulties that the

House had attempted to avoid.

526

In addition, the requirement of multiple

short tax years could create serious administrative problems for the Service

and could result in detriment to taxpayers whose income tax liability might

be greater because of the multiple years.

527

Nevertheless, although the

Finance Committee subscribed to the general objectives of the House bill, it

did not completely agree with its mechanics.

528

Thus, the bill made certain

changes in the operation of the expedited review procedure.

529

In addition,

it was deemed necessary to amend the termination provision if the Laing

519

See H.R. REP. NO. 94-658, at 302 (1975); S. REP. NO. 94-938, at 362 (1976).

520

H.R. REP. NO. 94-658, at 303 (1975). The procedure was to be applicable

to both jeopardy and termination assessments. Id.

521

H.R. REP. NO. 94-658, at 303 (1975).

522

Id. at 304.

523

I.R.C. § 7422.

524

423 U.S. 161 (1976).

525

S. REP. NO. 94-938, at 366 (1976).

526

Id.

527

Id. at 366–67.

528

Id. at 366.

529

Id. See infra notes 530–538 and accompanying text for a discussion of those

changes.

344 The United States Tax Court – An Historical Analysis

decision was not to be followed.

530

In accordance with the Committee’s

version of the bill,

531

the Senate amended the termination provision to

provide independent assessment authority.

532

Second, it was provided that

the making of a termination assessment did not terminate a taxable year,

create a deficiency, or require the Service to issue a notice of deficiency

within 60 days of assessment.

533

Third, the statutory language relating to

the reopening of a taxable year was eliminated.

534

Thus, the taxable year

would continue until its normal end.

535

These changes apparently were

intended to have the effect of treating amounts assessed and collected in a

manner similar to estimated taxes.

536

The Senate, however, decided to allow a taxpayer who had been subject

to a termination assessment to contest the ultimate issue of tax liability in

the Tax Court at the end of his normal tax year.

537

Thus, under the Senate

bill, the Service would have been required to send the taxpayer a notice of

deficiency within 60 days of the due date of a tax return for the full year or

the date on which the return was filed.

538

The Senate amendments to the

House bill were accepted in conference

539

and were subsequently enacted as

part of the Tax Reform Act of 1976.

540

Because the procedures governing termination assessments have been

brought into line with those governing jeopardy assessments, these

assessment procedures are subject to the same regime of judicial review.

Hence, the Tax Court theoretically possesses concurrent jurisdiction with

the Federal district courts to review the propriety of the termination

assessment as well as the amount so assessed pursuant to § 7429(b)(2)(B).

541

However, because the Tax Court’s jurisdiction in this setting is predicated

upon a petition for redetermination having been filed before the

termination assessment, the court’s jurisdiction likely constitutes a null set.

A termination assessment applies only to the current or preceding taxable

530

S. REP. NO. 94-938, at 367 (1976).

531

Id. at 366–67.

532

I.R.C. § 6851(a).

533

Id.

534

Id.

535

S. REP. NO. 94-938, at 367 (1976).

536

Id.

537

Id.

538

I.R.C. § 6851(b).

539

H.R. REP. NO. 94-1515, at 485 (1976).

540

Tax Reform Act of 1976, Pub. L. No. 94-455, § 1204(b)(1)–(2), (d), 90 Stat.

1696–99.

541

Note that § 7429(b)(2)(B) refers to judicial review of an assessment or levy

that is subject to the review procedures of § 7429 in general, which includes

termination assessments under § 6851.

Foundational Parameters of the Court’s Jurisdiction 345

year,

542

and the Service is required to mail the notice of deficiency for the

full taxable year within 60 days of the later of the due date of the taxpayer’s

return for such year or the date on which the return for such year was

filed.

543

Hence, the mailing of the notice of deficiency in this setting

therefore will follow the making of the termination assessment, negating the

condition to the Tax Court’s jurisdiction. The Tax Court’s rules envision

jeopardy assessments alone; the rules do not address the court’s review of a

termination assessment.

544

3. Review of Proposed Sale of Property Obtained Through Jeopardy or

Termination Assessment

If the Service makes a jeopardy or termination assessment of tax under

§ 6851 (termination assessment), § 6852 (termination assessment based on

political expenditures of § 501(c)(3) organizations), or § 6861 (jeopardy

assessment) in advance of the issuance of a statutory notice of deficiency,

the Service is prohibited from selling property seized in connection with the

assessment until a notice of deficiency for the assessed tax is issued and the

period for filing a petition for redetermination with the Tax Court

expires.

545

If the taxpayer files a petition with the court, the prohibition on

the sale of seized property is extended until the decision of the court

becomes final.

546

In this manner, sale of property obtained in connection

with a jeopardy or termination assessment generally is stayed during the

period during which assessment would have been prohibited under the

normal procedures. However, exceptions exist to the prohibition on sale.

Pursuant to § 6863(b), the Service may sell the seized property during this

period if the taxpayer consents to the sale, if the Service determines that the

cost of conserving and maintaining the property will greatly reduce the

proceeds of the sale, or if the property is perishable or otherwise likely to

greatly decline in value if kept on hand.

547

Prior to 1989, a taxpayer who sought to challenge the Service’s

determination that property seized in connection with a jeopardy or

542

I.R.C. § 6851(a).

543

I.R.C. § 6851(b),

544

See TAX CT. R. 56 (July 6, 2012 ed.).

545

See I.R.C. § 6863(b)(3)(A)(ii). In the context of a jeopardy assessment, the

Service must issue the notice of deficiency within 60 days of the assessment. I.R.C.

§ 6861(b). In the context of a termination assessment, the Service must issue the

notice of deficiency within 60 days of the due date of the return for the year to

which the assessment relates or the date on which the taxpayer files such return,

whichever occurs later. I.R.C. § 6851(b).

546

See I.R.C. § 6863(b)(3)(A)(iii).

547

See I.R.C. § 6863(b)(3)(B) (incorporating in part property described in

§ 6336).

346 The United States Tax Court – An Historical Analysis

termination assessment could be sold pursuant to one of the § 6863(b)

exceptions was forced to seek redress in Federal district court.

548

This was

the case even though the underlying tax liability was pending before the Tax

Court.

549

Additionally, the prospect of obtaining relief through the district

courts was complicated by the § 7421 prohibition on suits to restrain the

assessment or collection of tax.

550

Recognizing the difficulties that

taxpayers faced in this context and believing that both taxpayers and the

Service would benefit from the availability of an additional forum for

review,

551

Congress supplied an avenue for Tax Court review of

§ 6863(b)(3)(B) determinations as part of the Technical and Miscellaneous

Revenue Act of 1988.

552

Through the enactment of § 6863(b)(3)(C),

Congress provided the Tax Court with jurisdiction to review the

Commissioner’s determination that property seized in a jeopardy or

termination assessment could be sold pursuant to the exceptions contained

in § 6863(b)(3)(B), provided the Tax Court’s jurisdiction to review the

underlying tax liability giving rise to the jeopardy or termination assessment

had already been properly invoked.

The statutory guidance on the Tax Court’s jurisdiction in this setting is

scant. Interestingly, the statute provides that either party—the taxpayer or

the Service—may invoke the court’s jurisdiction to review the Service’s

determination that a sale of seized property is permitted under

§ 6863(b)(3)(B).

553

Hence, in addition to providing an avenue for taxpayers

to stay a sale of seized property, § 6863(b)(3)(C) provides the Service with a

means of seeking judicial approval of its determination that an exception

permitting the sale is available. Apart from this point, the statute merely

provides that an order disposing of a motion under § 6863(b)(3)(C) shall be

reviewed in the same manner as a decision of the Tax Court.

554

In this

manner, Congress left the finer points of the Tax Court’s jurisdiction in this

setting to be resolved by the court itself.

548

See Miravalle v. Commissioner, 105 T.C. 65, 68–69 (1995). If disinclined to

contest the Service’s determination, taxpayers could stay the sale of seized property

by posting bond pursuant to § 6863(a).

549

See id.

550

See, e.g., Smith v. Flinn, 261 F.2d 781 (8th

Cir. 1958), modified and reh’g denied,

264 F.2d 523 (8th Cir. 1959); Zion Coptic Church v. United States, 489 F. Supp. 35

(S.D. Fla. 1980).

551

S. REP. NO. 100-309, at 17–18 (1988).

552

Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,

§§ 6226, 6245(a), 102 Stat. 3730, 3750–51 (adding subsection (b)(3)(C) to § 6863 as

part of the Omnibus Taxpayer Bill of Rights). The Tax Court’s jurisdiction to stay

sales of seized property under § 6863(b)(3)(C) took effect on February 8, 1989, 90

days after the date of the enactment of the legislation. Id. § 6245(b), 102 Stat. 3752.

553

I.R.C. § 6863(b)(3)(C).

554

Id.

Foundational Parameters of the Court’s Jurisdiction 347

The Tax Court’s first opportunity to explore the bounds of its

jurisdiction under § 6863(b)(3)(C) came shortly after the effective date of

the provision in the 1989 case of Williams v. Commissioner.

555

Through a

reviewed opinion without dissent, the court in Williams tackled a number of

issues not directly addressed by the statute. To start, the court interpreted

review of the Service’s determination under § 6863(b)(3)(B) as including the

authority to issue a temporary stay of the sale if appropriate.

556

Finding that

courts possess inherent authority to issue orders deemed necessary and

prudent to the proper resolution of cases within their jurisdiction, the court

reasoned that the ability to stay a proposed sale temporarily—to allow the

parties to present evidence and submit written arguments—was essential to

the Tax Court’s exercise of authority to review the determination that a sale

was permitted.

557

The Williams court’s articulation of authority inherent in

its jurisdiction to review a § 6863(b)(3)(B) determination is currently

reflected in Rule 57 of the Tax Court Rules of Practice and Procedure,

which permits the court to issue a temporary stay of the sale to provide

adequate time to consider the motion, to stay the sale for a specific period

or until a specific date, to stay the sale until appropriate safeguards are

implemented, and to provide “such other temporary, extended, or

permanent relief as may be appropriate under the circumstances.”

558

The court in Williams next addressed three issues of critical practical

importance in the disposition of motions seeking review of § 6863(b)(3)(B)

determinations: the allocation of the burden of proof in this setting; the

standard of review to be employed by the court in reviewing the

Commissioner’s determination; and the scope of evidence the court may

consider as part of its review. Contrasting this scenario to that of the

deficiency setting (where the taxpayer possesses knowledge of the

information on which the tax liability rests), the court noted that the

Commissioner occupied the dominant position in this setting. Among

other factors, the court noted that the Commissioner maintains physical

possession or control of the seized property, initiates the sale of the

property, and determines the scheduling and condition of sale. The

taxpayer, on the other hand, may have little time to develop evidence to

support his position.

559

As a result of these unique factors, the court

reasoned that if a taxpayer requests a stay of a proposed sale on grounds

555

92 T.C. 920 (1989), action on dec., 1992-07 (Dec. 16, 1991), nonacq., 1991-2

C.B. 1 n.7.

556

Id. at 932.

557

Id.

558

TAX CT. R. 57(g)(1)(A) (July 6, 2012 ed.). However, the Tax Court in

Williams was careful to warn taxpayers that temporary stays could not be expected

as a matter of right. See Williams, 92 T.C. at 933 (“Temporary stays will not be

granted automatically. We will be selective as warranted by the circumstances.”).

559

Id. at 934–35.

348 The United States Tax Court – An Historical Analysis

that are “plausible and believable,” the Commissioner bears the burden of

proving that the determination to sell the seized property was proper by a

preponderance of the evidence.

560

With respect to the standard of review to be employed in reviewing the

Commissioner’s determination that a sale of the seized property is

permitted under § 6863(b)(3)(B), the Tax Court in Williams dismissed the

contention that it could take action only upon finding that the

Commissioner’s determination rose to the level of an abuse of discretion.

561

The court supported its holding by pointing to the objective standards set

out by Congress in § 6863(b)(3), standards that provided the Commissioner

little in the way of discretion.

562

Although the court in Williams did not

explicitly make this point, presumably the court’s review of a

§ 6863(b)(3)(B) determination is undertaken on a de novo basis.

563

As a final matter, the court in Williams addressed the appropriate scope

of review. Noting that nothing in the statute serves to limit the range of

evidence the court may consider in undertaking its review of the

Commissioner’s determination in this setting, the court curtly held that it

could consider all affidavits, appraisals, and other appropriate

information.

564

Hence, the court’s review in this setting is not limited to the

evidence contained in the administrative record. This broad scope of

review is now reflected in Rule 57.

565

The potential time-sensitive nature of the Tax Court’s review of a

§ 6863(b)(3)(B) determination necessitates prompt action by the parties if

the court is to have a meaningful opportunity to conduct its review.

Section 6863(b)(3)(C) is silent on temporal requirements and other

procedural matters in this context. As described below, Rule 57 fills this

gap.

The Tax Court’s jurisdiction in this regard is commenced by filing a

motion in the underlying deficiency proceeding. The Commissioner may

560

Id. at 935.

561

Id. at 936.

562

Id. at 937.

563

The Service has since reaffirmed its position that the appropriate standard

of review in this context is one of abuse of discretion. Accordingly, the Service

contends that a taxpayer requesting a stay of the sale of seized property carries the

burden of proving that the Service abused its discretion in determining that the sale

is authorized pursuant to § 6863(b)(3)(B). I.R.S. Action on Decision 1992-07

(Dec. 16, 1991).

564

Williams, 92 T.C. at 937.

565

See TAX CT. R. 57(g)(2) (July 6, 2012 ed.) (“[T]he Court may consider such

appraisals, affidavits, valuation reports, and other evidence as may be appropriate,

giving due regard to the necessity of acting on the motion within a brief period of

time.”).

Foundational Parameters of the Court’s Jurisdiction 349

file at any time if a date for the proposed sale has not been scheduled.

566

a date for the proposed sale has been scheduled, the movant must file

within a prescribed period of no less than 15 days before the date of the

proposed sale and no more than 20 days after receiving the § 6335(b) notice

of sale.

567

If the motion is filed outside of the prescribed period, it will be

considered dilatory unless the movant shows good reason for not filing

within the period.

568

To discourage gamesmanship attributable to the

intentional delay of a motion to review a § 6863(b)(3)(B) determination,

Rule 57 makes clear that the dilatory nature of the motion will be taken into

consideration in disposing of the motion.

569

On this note, the Tax Court in

Williams warned that “eleventh-hour filing will not be allowed by the Court

. . . absent special circumstances, such as late notice to petitioner.”

570

After

a motion is filed, the opposing party must respond within a brief 10-day

window from the date on which the motion was received by the court.

571

D. Scope of Judicial Powers

The legal status of the Tax Court has been described extensively in a

previous chapter.

572

The Board of Tax Appeals was created in 1924 as an

independent agency in the executive branch of the Government.

573

1942, its name was changed to the Tax Court of the United States, but its

location in the executive branch remained unchanged.

574

Finally, in 1969

the court was removed from the executive branch and made a court of

record under article I—a legislative court.

575

Despite the delay of Congress

in formally recognizing the court as a judicial body, the Board/Tax Court

has throughout its history operated as a court, not an executive agency. It

has never rendered advisory opinions, nor has it ever functioned in an

administrative, investigative, regulatory, or policymaking capacity.

566

TAX CT. R. 57(a)(2)(A) (July 6, 2012 ed.).

567

TAX CT. R. 57(a)(2)(B)(i) (July 6, 2012 ed.).

568

TAX CT. R. 57(a)(2)(B)(ii) (July 6, 2012 ed.).

569

TAX CT. R. 57(g)(4); see also Williams v. Commissioner, 92 T.C. 920, 932

(1989) (“[L]ast-minute filing effectively prevents orderly review of legal and factual

issues raised by the parties unless a temporary stay is issued.”).

570

Williams, 92 T.C. at 932.

571

TAX CT. R. 57(d)(2).

572

See Part IV.

573

Revenue Act of 1924, ch. 234, § 900(a), (k), 43 Stat. 336, 338.

574

Revenue Act of 1942, ch. 619, § 504, 56 Stat. 957.

575

Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83 Stat. 730 (amending

I.R.C. § 7441). In its 1991 opinion in Freytag v. Commissioner, 501 U.S. 868 (1991),

the Supreme Court confirmed that, following the 1969 legislation, the Tax Court is

“independent of the Executive and Legislative Branches.” Id. at 891. The Freytag

case is discussed in detail in Part V.

350 The United States Tax Court – An Historical Analysis

Moreover, since 1926, its decisions have been accorded the finality of

judicial bodies, with appeals permitted only to the federal courts.

576

Nevertheless, the functional judicial character of the Board/Tax Court

did not mean that all its attributes were judicial. Questions regarding

powers that were thought of as inherently judicial were especially

troublesome. Could the court enforce its own judgments or hold parties in

contempt? As an independent agency of the executive branch, could the

court rule on the validity of statutes that the executive branch was charged

with enforcing? Did the court have power to grant equitable remedies such

as equitable recoupment? The Tax Court’s ability to apply equitable

principles to matters within its jurisdiction was significantly bolstered by the

Supreme Court’s decision in Freytag v. Commissioner,

577

in which the Court

observed that the Tax Court exercises its judicial power

“in much of the same ways as federal district courts exercise theirs.”

578

addition to describing legislative developments with respect to equitable

recoupment, this section traces the evolving understanding of the Tax

Court’s broader equitable powers.

1. Enforcement Powers

The legislation creating the Board of Tax Appeals gave it a number of

procedural powers, including those permitting it to administer oaths,

examine witnesses, take depositions, and require the attendance and

testimony of witnesses and the production of evidence.

579

The statute,

however, did not give the Board many other important powers typically

accorded a judicial body. Foremost among these was the power to render

final judgments. Decisions of the Board would be accepted only as prima

facie evidence in subsequent judicial proceedings,

580

but neither party was

precluded from further de novo litigation as a result of a Board

proceeding.

581

Other judicial powers were withheld as well. These included

powers to enforce subpoenas,

582

to hold witnesses and others in

contempt,

583

to order depositions before an action was instituted,

584

to grant

576

Revenue Act of 1926, ch. 27, §§ 1001, 1003(a), 1005(a)(1), 44 Stat. 109, 110.

577

501 U.S. 868 (1991).

578

Id. at 891. Perhaps even more profoundly, in resolving the Appointments

Clause challenge before it, the Supreme Court in Freytag declared that the Tax

Court exercises “a portion of the judicial power of the United States.” Id. The

Freytag decision is analyzed in Part V.

579

Revenue Act of 1924, ch. 234, § 900(i), 43 Stat. 338.

580

Id. § 900(g), 43 Stat. 337.

581

Part II, notes 155–158 and accompanying text.

582

See 1925 House Hearings, supra note 217, at 913 (testimony of James Ivins).

583

See id.

Foundational Parameters of the Court’s Jurisdiction 351

relief from final judgments,

585

to utilize the office of the United States

Marshall,

586

and to otherwise compel compliance with its rules.

587

Thus, in

1924, although the Board could receive evidence and make findings

thereon, it had no power to apply a remedy or enforce either its process or

decisions.

The Revenue Act of 1926 significantly expanded the powers of the

Board by according finality to its decisions.

588

No longer could Board

decisions be reviewed by the Bureau of Internal Revenue or collaterally

attacked in the federal courts. Unless a Board decision was appealed

directly to the federal courts of appeals, it would bind the parties.

589

But despite this expansion of Board jurisdiction, no change was made by

the 1926 Act with respect to the other disabilities mentioned above. These

remained for more than four decades and were a constant irritant to the

Board/Tax Court.

590

The most significant of these disabilities was the Board’s lack of power

to enforce its own subpoenas through the contempt power. In the 1927

decision in Blair v. Oesterlein Machine Co.,

591

the Supreme Court had upheld

the Board’s power to issue subpoenas. However, enforcement of the

subpoena in that case was effected in federal court, not in the Board. This

was in accordance with the general understanding that the statute did not

permit the Board to compel compliance with its own process.

592

The lack

of this power resulted from the Board’s exclusion from status as a federal

584

Louisville Builders Supply Co. v. Commissioner, 294 F.2d 333 (6th Cir.

1961).

585

Lasky v. Commissioner, 235 F.2d 97 (9th Cir. 1956), aff’d per curiam, 352 U.S.

1027 (1957).

586

See 1967 Hearings, supra note 314, at 60 (joint statement of Charles Davis,

Rupert Gresham, H. Brian Holland, Hart Spiegel, and Laurens Williams).

587

Id.

588

Revenue Act of 1926, ch. 27, §§ 1001, 1003(a), 1005(a)(1), 44 Stat. 109, 110.

589

See, e.g., United States v. Bottenfield, 442 F.2d 1007, 1008 (3d Cir. 1971).

590

Although for most purposes the Board was without enforcement powers,

exceptions did exist. A type of reverse enforcement power was sustained in

MacRae v. Riddell, 350 F.2d 291 (9th Cir. 1965), in which the Ninth Circuit held that

the Tax Court could cancel a subpoena, although it could not independently

enforce it. Moreover, since 1926, the Board/Tax Court has had statutory authority

to impose damages of up to $500 in cases of appeals brought merely for purposes

of delay. Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 109, amending Revenue Act

of 1924, ch. 234, § 900, 43 Stat. 336 (now codified at I.R.C. § 6673). The damage

provision was suggested by James Ivins as a means of reducing the Board’s

workload by discouraging frivolous appeals. James Ivins, What Should Congress Do

with the Board of Tax Appeals?, 3 N

AT’L INC. TAX MAG. 391, 410 (1925).

591

275 U.S. 220.

592

See, e.g ., 1925 House Hearings, supra note 217, at 913 (testimony of James

Ivins).

352 The United States Tax Court – An Historical Analysis

court. Had such status been accorded, the contempt power would have

existed even without statutory authority because it is a power that is

inherent in courts.

593

Obviously, a procedure that required resort to another tribunal for

enforcement was cumbersome, particularly when the matter related to such

“housekeeping” concerns as were necessary for the orderly disposition of

cases. Of course, the occasions when resort to enforcement powers would

be helpful were relatively rare. However, they did occasionally arise, as in

the famous Mellon

594

case, in which the Union Trust Company of Pittsburgh

refused to comply with a Board subpoena, causing a delay of seven months

in the proceedings while the Government sought and obtained enforcement

in district court.

595

Granting the Board/Tax Court enforcement powers

would tend to reduce the delay and inconvenience necessitated by resort to

the district courts. Moreover, it could be argued that the mere existence of

such powers would stimulate parties to comply with process without

compulsion.

596

In addition to the direct benefits of enforcement powers, there was also

the fact that such powers generally are associated with judicial bodies.

597

Most if not all courts had such powers, and their denial to the Board/Tax

Court, at least slightly, diminished its judicial attributes.

For these reasons, the Board/Tax Court and those supporting the view

that it should be treated as a court, generally referred to its lack of power to

enforce subpoenas as something that required legislative change, preferably

by full incorporation of the court into the federal judiciary.

598

These views

were expressed as early as 1926 and continued to be pressed in connection

with legislation dealing with the Board/Tax Court.

599

Nevertheless, it was

not until 1969, when the court was established as an article I court, that it

was finally given the same enforcement powers as those accorded district

593

E.g., Michaelson v. United States, 266 U.S. 42, 65–66 (1924).

594

Mellon v. Commissioner, 36 B.T.A. 977 (1937).

595

Memorandum from Chairman Murdock in re Changing from “Board” to

“Court” the name of the United States Board of Tax Appeals, Feb. 1942, at 6, filed

at the U.S. Tax Court in “Revenue Act of 1942: Memoranda & Correspondence.”

596

Id. at 7.

597

The contempt power, for example, has long been thought to be an inherent

power of courts. See, e.g., R

ONALD L. GOLDFARB, THE CONTEMPT POWER 9–25

(1963).

598

One notable exception to this was Senator Russell Long, who was generally

a supporter of measures to enhance the prestige and efficiency of the court.

Although Senator Long favored granting the court contempt powers, he opposed

its full incorporation into the federal judiciary because that would necessitate the

granting of life tenure to its judges. See Part IV, notes 15–34, 97–99, 162–168,

275–300 and accompanying text.

599

Id.

Foundational Parameters of the Court’s Jurisdiction 353

courts in regard to contempt and the carrying out of its writs and orders.

600

The availability of such powers further enhanced the court’s status as a

judicial body.

2. Power to Review Constitutionality of Laws

The power to review the constitutionality of congressional acts is

frequently thought of as the quintessential judicial function. Since the

Board/Tax Court was formally at least a part of the executive branch until

1969,

601

the question could be raised as to its authority to refuse to apply a

statute it believed to be unconstitutional. The same question might even be

raised now that the court is established under article I.

602

On the other hand, the Board/Tax Court has never functioned as an

administrative or legislative body. Rather, it has always performed solely

judicial duties. In the case of other judicial bodies, such duties invariably

comprehend the power to refuse to apply a statute that violates the

Constitution. In view of the actual nature of the Board/Tax Court, should

the theoretical objection to constitutional review by an executive or

legislative body preclude it from performing this judicial function? Since

the earliest days of the Board, the answer to this question has been a

cautious “no.”

One would expect that cases involving constitutional questions would

be among the first decided by the Board. Actually, however, it would

appear that the Board did not face any such questions until a little more

than two years after its formation. In that instance the Board, prior to the

preparation of an opinion in the case involved, faced the question of

whether it could refuse to apply a statute that it was convinced was

unconstitutional. By a vote of nine to five, the Board in conference decided

that it could, notwithstanding the argument of the minority that an agency

of the executive branch could not declare an action of Congress invalid.

603

Ultimately, however, it developed that the Board was premature in

considering the question of its power to pass on constitutionality, because

when the opinion in the particular case was written there was no necessity

of considering the validity of any of the statutes involved.

604

In the next case in which a constitutional issue was raised, the Board

also was able to dispose of the matter without addressing the question of its

600

Tax Reform Act of 1969, Pub. L. No. 91-172, § 956, 83 Stat. 732 (adding

I.R.C. § 7456(d)). The court first exercised this power in Ryan v. Commissioner, 67

T.C. 212 (1976), aff’d, 568 F.2d 531 (7th Cir. 1977).

601

Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83 Stat. 730 (amending

I.R.C. § 7441).

602

Id.

603

B.T.A. Conference Minutes, Sept. 8, 1926.

604

Una Libby Kaufman, 5 B.T.A. 31 (1926).

354 The United States Tax Court – An Historical Analysis

power of review.

605

The case concerned transferee liability under section

280 of the Revenue Act of 1926,

606

which provided that such liability

should be assessed, collected, and paid in the same manner as deficiencies

in tax. Because the statute under attack by the petitioners was jurisdictional,

the Board was able to dispose of the case on the ground that a party could

not be heard to attack the validity of a statute invoked by that party to be

heard.

607

Several months later, however, the Board was confronted with a case in

which the validity of a tax statute was squarely presented. The case of

Independent Life Ins. Co. of America v. Commissioner

608

involved the question of

whether an income tax could apply to the rental value of property owned

and occupied by the taxpayer. Both the Government and the taxpayer

urged the Board to consider the constitutionality of the statute

609

(the

Government argued in favor of its validity, the taxpayer against), and the

Board, over three dissenting members, agreed to make the consideration.

610

Upon examination, the Board concluded that the provision was

unconstitutional since rental value was not income within the meaning of

the sixteenth amendment. This finding was affirmed in the Sixth Circuit

Court of Appeals

611

and reversed in the Supreme Court.

612

Neither

appellate court directly passed on the propriety of the Board’s action in

reviewing the constitutionality of the provision, although the Sixth Circuit

mentioned the problem indirectly:

The court is not concerned with whether the Board of Tax Appeals

was authorized to pass upon the constitutionality of these

enactments. A decision by us upon that question would not decide

this case. We are, however, required to consider and determine

whether the decision of the board that respondent had overpaid its

income taxes for the years involved was “in accordance with law.”

In the discharge of this duty the court is called upon to determine for

itself whether section 245(b) . . . was a valid enactment. If it was not,

the finding of the board, which may be construed as a finding that

no additional tax was due, would obviously have been correct,

605

Cappellini v. Commissioner, 14 B.T.A. 1269 (1929).

606

Ch. 27, 44 Stat. 61.

607

14 B.T.A. at 1272, citing inter alia Great Falls Mfg. Co. v. Attorney General,

124 U.S. 581, 598–99 (1888). But see Nash Miami Motors, Inc. v. Commissioner,

358 F.2d 636, 637 (5th Cir. 1966).

608

17 B.T.A. 757 (1929) aff’d, 67 F.2d 470 (6th Cir. 1933), rev’d, 292 U.S. 371

(1934).

609

17 B.T.A. at 764, 765.

610

17 B.T.A. at 765.

611

67 F.2d 470 (6th Cir. 1933).

612

Helvering v. Independent Life Ins. Co. of America, 292 U.S. 371 (1934).

Foundational Parameters of the Court’s Jurisdiction 355

regardless of the power of the board to pass upon the

constitutionality of the act of Congress.

613

Since the decision in Independent Life Ins. Co., the Board/Tax Court never

has refused to consider the question of the validity of statutes involved in

cases before it. As with other judicial bodies, however, rules of

construction have evolved to limit strictly the cases in which congressional

enactments will be held invalid. Thus, if a statute may be interpreted in

different manners, an interpretation will be adopted that makes it

constitutional in preference to one that makes it unconstitutional.

614

Moreover, a presumption of validity attaches to any congressional act that

must be countered by a party seeking to overturn it.

615

Further, a party

cannot take advantage of a statute and then be heard to question its

validity.

616

Finally, questions of constitutionality must be clearly and

specifically raised; a general attack on the validity of a statute will not be

entertained.

617

In addition to these rules of construction, which have in

some form been adopted by courts in general,

618

the Board, recognizing its

status as an agency in the executive branch, fashioned another rule of

construction.

While the Board will consider [the issue of constitutionality] . . . the

unconstitutionality of any provision of the tax law must clearly

appear before the Board, as part of the executive branch of the

Government, would be justified in holding that it should not be

enforced. If after consideration there remains a substantial doubt, the

law should be followed until the doubt is dispelled by a court

decision.

619

Of course, even as limited, the prospect of an agency of the executive

branch reviewing the validity of acts of the legislative branch was

troublesome to some, and the Board’s early decisions in this regard were

613

Commissioner v. Independent Life Ins. Co. of America, 67 F.2d 470, 471

(6th Cir. 1933) (citations omitted), rev’d on other grounds, 292 U.S. 371 (1934).

614

Independent Life Ins. Co. of America, 17 B.T.A. 757, 764 (1929), aff’d, 67

F.2d 470 (6th Cir. 1933), rev’d on other grounds, 292 U.S. 371 (1934).

615

Id. at 767–68.

616

Cappellini v. Commissioner, 14 B.T.A. 1269, 1272 (1929).

617

Dillon v. Commissioner, 20 B.T.A. 690, 691 (1930).

618

E.g., Fleming v. Nestor, 363 U.S. 603, 617 (1960) (presumption of

constitutionality); N.L.R.B. v. Jones & Laughlin Steel Corp., 301 U.S. 1, 30 (1936)

(interpretation in favor of constitutionality); Buck v. Kuykendall, 267 U.S. 307,

316–17 (1925) (accepting benefits estops challenge); Stanhurf v. Sipes, 335 F.2d

224, 228–29 (8th Cir. 1964) (pleading of challenge).

619

See, e.g., O’Shaughnessy v. Commissioner, 21 B.T.A. 1046, 1049 (1930).

356 The United States Tax Court – An Historical Analysis

not unanimous.

620

However, the practice was soon accepted without

dissent.

There can be little doubt that the Board/Tax Court’s position with

regard to its power of constitutional review is correct. Its basic work,

determining the correctness of deficiency assertions, cannot be

accomplished by simply examining the tax statutes in a vacuum. To

properly interpret these statutes, resort must be made to case law,

administrative interpretations, and congressional policy as evidenced by

legislative history. Examination of these sources is fully consistent with the

duties of judicial bodies in general. Moreover, just as a correct evaluation of

the merits of a deficiency demands judicial techniques of statutory

interpretation, it also requires, in appropriate cases, consideration of

whether the law that a party invokes is valid. A deficiency cannot be

correct if it is predicated on an invalid statute. That a non-article III

tribunal may exercise judicial functions cannot now be questioned, even

though the exercise of such functions in a particular instance may result in a

decision unfavorable to the executive or legislative branch.

621

Little reason

supports circumscribing these functions to encompass only statutory

interpretation.

The structure of tax litigation lends further support to the court’s power

of constitutional review. Since 1926, any party aggrieved by a Board/Tax

Court decision has been accorded an absolute right of appeal to the federal

courts of appeals, and from there, on certiorari, to the Supreme Court.

622

Regardless of whether the Tax Court may review the constitutionality of

legislation, it seems clear that the appellate courts may do so.

623

Thus, the

Tax Court will never necessarily be the final arbiter of constitutionality in

any particular case. Yet, if the Tax Court was barred from considering such

an issue, an adequate trial and factual record might be unavailable to the

appellate court, making its decision, as a practical matter, difficult or

impossible.

In view of the potent arguments favoring constitutional review in the

Tax Court, its unusual status as a non-article III court has not, since the

early days of the Board of Tax Appeals, been seriously advanced as a

620

Independent Life Ins. Co. of America v. Commissioner, 17 B.T.A. 757, 775

(1929) (members Marquette, Morris and Van Fossan, dissenting), aff’d, 67 F.2d 470

(6th Cir. 1933), rev’d on other grounds, 292 U.S. 371 (1934); Cappellini v.

Commissioner, 14 B.T.A. 1269, 1280, 1282 (1929) (members Marquette, Phillips

and Siefkin, concurring).

621

See Williams v. United States, 289 U.S. 553 (1933); Ex parte Bakelite Corp.,

279 U.S. 438 (1929).

622

Revenue Act of 1926, ch. 27, § 1003, 44 Stat. 110 (now codified at I.R.C.

§ 7482).

623

See Commissioner v. Independent Life Ins. Co. of America, 67 F.2d 470,

471 (6th Cir. 1933), rev’d on other grounds, 292 U.S. 371 (1934).

Foundational Parameters of the Court’s Jurisdiction 357

justification for limiting its powers in this regard. Since its change in status

to a court established under article I, the Tax Court has continued to

entertain constitutional objections to the laws without comment on its

power to do so as a part of the legislative branch.

624

No appellate decision

has ever questioned the practice, and little occasion for such criticism has

arisen. On that note, following the decision in Independent Life Ins. Co., the

Board/Tax Court has not found any act of Congress to be unconstitutional.

3. Equitable Powers

As with all federal courts other than the Supreme Court, the Tax Court

is a statutory creation with a specified jurisdiction.

625

However, because of

its status as an article I court and its prior history as an independent agency

within the executive branch, there have been some inconsistencies

regarding the court’s judicial attributes—attributes which other courts need

not be specifically granted by statute but which are inherent in judicial

status. Thus, for example, as has been pointed out, the Board of Tax

Appeals/Tax Court originally was not regarded as having the inherent

judicial contempt power

626

but has exercised since its earliest days the

power to review the constitutionality of tax laws.

627

This tension between

judicial and non-judicial attributes also exists in the area of equitable

jurisdiction.

Statutes dealing with the Board of Tax Appeals and the Tax Court have

never directly specified whether it could exercise equitable powers as a

general proposition. The question has, however, arisen in several contexts.

In some instances the request for equitable relief is obviously groundless, as

in the case of a taxpayer who urged the court to promulgate an equitable

deduction for the cost of home improvements to offset a required inclusion

in gross income of a prize awarded on the basis of such improvements.

628

The court has consistently rejected arguments of this sort, which in reality

624

See, e.g., Shepherd v. Commissioner, 115 T.C. 376 (2000) (addressing

challenge to constitutionality of the application of the gift tax); Byrd Investments v.

Commissioner, 89 T.C. 1 (1987) (addressing challenge to application of TEFRA

partnership procedures as violating Fifth Amendment Due Process protections);

Allum v. Commissioner, T.C. Memo. 2005-177, 90 T.C.M. (CCH) 74 (addressing

challenge to § 104(a)(2) as unconstitutionally vague); Cole v. Commissioner, T.C.

Memo. 1975-144, 34 T.C.M. (CCH) 680, 682 (1975) (addressing argument that

limitations on dependency deductions violated constitutional protections).

625

The Constitution provides for “one supreme Court, and . . . such inferior

Courts as the Congress may from time to time ordain and establish.” U.S. C

ONST.

art. III, § 1.

626

See supra notes 591–600 and accompanying text.

627

See supra notes 601–624 and accompanying text.

628

See Paxman v. Commissioner, 50 T.C. 567, 576 (1968).

358 The United States Tax Court – An Historical Analysis

represent pleas for remedial legislation.

629

Requests for the application of

equitable doctrines traditionally applied by other courts have had more

substance. The subjects that have occasioned the most interest in this

regard are equitable recoupment and equitable estoppel. The Tax Court’s

experience with these two remedies has shaped the bounds of the Tax

Court’s equitable jurisdiction.

a. Equitable Recoupment

Equitable recoupment, a doctrine developed and applied by both the

courts of common law and equity,

630

permits one party (usually the

defendant) to reduce a claim against it by asserting a claim in its favor

related to the same transaction on which its adversary seeks judgment.

With respect to tax litigation, by far the most important aspect of

recoupment is that it permits the revival of a claim otherwise barred by an

expired statutory limitation period. However, the doctrine’s exception to

the statute of limitations is narrow in scope. The tax to be recouped must

relate to the same transaction, item, or event as that before the court for the

open year, and the otherwise stale claim may serve only to offset the liability

resulting from the related and timely claim. The primary purpose of the

recoupment doctrine’s deviation from the strong interest represented by the

statute of limitations is to avoid inequitable windfalls that otherwise would

result from the inconsistent tax treatment of a common transaction.

631

Equitable recoupment in the tax context traces its origins to the 1935

Supreme Court decision in Bull v. United States.

632

The Bull case concerned

the estate of a decedent who was a member of a service partnership. The

partnership agreement provided that the estate of a deceased partner was

entitled to receive that partner’s proportionate share of profits for the

balance of the year in which the partner died. The Commissioner

determined that the decedent’s gross estate included the post-mortem share

of earnings paid to the estate, and the estate paid the resulting estate tax

deficiency. Years later, the Service further determined that the post-

mortem share of earnings also constituted income to the estate. After

paying the resulting income tax, the estate sued to have this amount

629

E.g., Hays Corp. v. Commissioner, 40 T.C. 436 (1963), aff’d, 331 F.2d 422

(7th Cir. 1964).

630

See David N. McConnell, The Doctrine of Recoupment in Federal Taxation, 28

A. L. REV. 577, 579–84 (1942).

631

See Estate of Mueller v. Commissioner, 101 T.C. 551, 552 (1993) (reviewing

contours of the recoupment doctrine).

632

295 U.S. 247 (1935).

Foundational Parameters of the Court’s Jurisdiction 359

refunded, contending that the overpayment of estate tax should serve as a

credit against the income tax liability.

633

Agreeing that the Government had mistakenly collected more estate tax

than was properly due, the Court reasoned that retention of the excess tax

would be “against morality and conscience,”

634

later reiterating that the

“unjust retention” of amounts collected by mistake “is immoral and

amounts in law to a fraud on the taxpayer’s rights.”

635

Having framed the

matter in these terms, the Court unsurprisingly sidestepped the

Commissioner’s invocation of the statute of limitations on refund claims.

The Court first reasoned that the estate tax overpayment would have

provided a defense to the Government’s attempt to pursue an income tax

deficiency:

If the claim for income tax deficiency had been the subject of a suit,

any counter demand for recoupment of the overpayment of estate

tax could have been asserted by way of defense and credit obtained,

notwithstanding the statute of limitations had barred an independent

suit against the government therefor. This is because recoupment is

in the nature of a defense arising out of some feature of the

transaction upon which the plaintiff's action is grounded. Such a

defense is never barred by the statute of limitations so long as the

main action itself is timely.

636

Having articulated the affirmative defense of equitable recoupment in the

deficiency setting, the Court determined that the remedy should not be lost

simply due to the differing procedural posture of the case. Recoupment

therefore permitted the taxpayer-estate in Bull to credit a time-barred

overpayment of estate tax against the income tax liability arising out of the

633

The underlying inconsistency in tax treatment at issue in Bull—that is,

inclusion of post-mortem profits in both the estate tax and income tax bases—is

curious when viewed in hindsight. Under current law, a decedent’s gross estate for

estate tax purposes includes the fair market value of the decedent’s vested right to

receive a future payment of income, see Rev. Rul. 55-123, 1955-1 C.B. 443, and this

amount also is included in the gross income of the party who collects it (reduced by

the marginal estate tax attributable to the item). See I.R.C. § 691(a), (c). Indeed, the

Commissioner in Bull argued that there existed no inconsistency in the tax

treatment of the post-mortem profits. The Court disagreed, apparently troubled by

the inclusion of the same nominal figure in both tax bases (without reduction for

the tax liability attributable to either). See Bull, 295 U.S. at 257. The Court

ultimately agreed that the estate’s entitlement to the post-mortem profits paid in

respect of the decedent’s interest was not properly subject to estate taxation.

634

Id. at 260.

635

Id. at 261.

636

Id. at 262.

360 The United States Tax Court – An Historical Analysis

same transaction, yielding a refund of income tax that, standing alone, had

not been overpaid.

Subsequent case law refined the doctrine of equitable recoupment in the

tax setting. In Stone v. White,

637

the Supreme Court permitted recoupment

of a time-barred deficiency in income tax owed by beneficiaries on account

of trust distributions against the trustee’s claim for a refund of income tax

paid in error with respect to the distributed amounts. The case therefore

demonstrates not only that equitable recoupment can benefit taxpayer and

Government alike, but also that the doctrine can be invoked by or asserted

against related taxpayers affected by a common transaction. In contrast to

the expansive application of recoupment in Stone, the Court in Rothensies v.

Electric Storage Battery Co.

638

attempted to cordon the breadth of the doctrine.

After characterizing the Bull and Stone decisions as evidencing the limited

scope of the recoupment doctrine in the tax setting,

639

the Court explained

that recoupment did not permit the tax consequences of one transaction to

be offset against another—an interpretation the Court warned “would

invite a search of the taxpayer’s entire tax history for items to recoup.”

640

Rather, the Court explained that the doctrine permitted only a single

transaction to be examined in all respects, to facilitate a judgment “that

does justice in view of the one transaction as a whole.”

641

In its most recent formulation, the doctrine of equitable recoupment

requires the party invoking its application to establish the following

elements: (1) the overpayment or deficiency for which recoupment is

sought by way of offset is barred by the expiration of the period of

limitations; (2) the time-barred overpayment or deficiency arose out of the

same transaction or is attributable to the same item or taxable event as the

matter properly before the court; (3) the transaction, item, or taxable event

has been subject to two taxes; and (4) if the transaction, item, or taxable

event involves more than one taxpayer, there is a sufficient identity of

interest among the taxpayers to permit their treatment as one.

642

If these

elements are satisfied, the doctrine permits the time-barred overpayment or

deficiency to be applied as an offset to the sought after payment.

Consistent with its purpose of preventing windfalls resulting from

inconsistent tax treatment, equitable recoupment does not permit the

637

301 U.S. 532 (1937).

638

329 U.S. 296 (1946).

639

Id. at 299.

640

Id. at 302.

641

Id. at 299. Accordingly, the Court did not permit the taxpayer to offset a

time-barred refund for excise tax in prior years against the income tax attributable

to the taxpayer’s timely prosecution of excise tax refunds in later years.

642

Menard, Inc. v. Commissioner, 130 T.C. 54, 62–63 (2008) (citing, among

other authority, United States v. Dalm, 494 U.S. 596, 604–05 (1990)).

Foundational Parameters of the Court’s Jurisdiction 361

invoking party to recover the excess, if any, of the time-barred claim

remaining after application of the offset.

643

The authority of the Board of Tax Appeals and the Tax Court to

consider claims of equitable recoupment has a long history, one marked

both by evolving judicial interpretation and statutory responses. Courts

struggled in grafting the equitable remedy into the statutory jurisdiction of

the Board and Tax Court, which generally was limited to determining

deficiencies or overpayments of taxes that were the subject of the taxpayer’s

petition for redetermination. Although Congress affirmatively addressed

the Tax Court’s jurisdiction over equitable recoupment in 2006,

644

the

development in the case law leading to the statutory clarification provides

insight into the larger question of the extent of the court’s equitable powers

in general.

The Revenue Act of 1924 expressed the jurisdiction of the Board in

terms of determining deficiencies,

645

a formulation that implied the lack of

power to consider tax liabilities other than those disputed with respect to

the particular tax at issue. Nevertheless, a case soon arose that indicated the

Board’s attitude that recoupment fell within its province. In Barry v.

Commissioner,

646

the Commissioner had determined an income tax

overpayment of $805 for the year 1920 and a deficiency of $12,149 for

1921. The taxpayer petitioned the Board and sought to reduce the amount

of the 1921 deficiency by showing that the Commissioner had not allowed

the taxpayer sufficient depreciation deductions for 1920 and 1921. The

Commissioner argued that the Board could not consider the amount of the

overpayment for 1920, if any, because no deficiency notice had been issued

with respect to that year. The Commissioner fashioned the taxpayer’s

position as a claim for a refund—a claim that was clearly beyond the

jurisdiction of the Board. Without specifically referring to the doctrine of

recoupment, the Board concluded that because the Commissioner was

authorized to credit the overpayment for 1920 against the 1921 liability

(and, in fact, had done so with respect to the overpayment of $805),

647

the

question of the taxpayer’s deficiency for 1921 comprehended the question

of whether the overpayment for the earlier year was in fact greater than that

643

See O’Brien v. United States, 766 F.2d 1038, 1049 (7th Cir. 1985).

644

See Pension Protection Act of 2006, Pub. L. No. 109-280, § 858, 120 Stat.

1020.

645

Revenue Act of 1924, ch. 234, § 274(a)–(b), 43 Stat. 297 (now codified at

I.R.C. §§ 6214–6215).

646

1 B.T.A. 156 (1924); see also Henry Myer Thread Mfg. Co., 2 B.T.A. 665

(1925); Fort Orange Paper Co., 1 B.T.A. 1230 (1925); R.A. Tuttle Co., 1 B.T.A.

1218 (1925); Banna Mfg. Co., 1 B.T.A. 1037 (1925); Hickory Spinning Co., 1

B.T.A. 409 (1925).

647

Id. at 158 (noting the Commissioner’s authority under the Revenue Act of

1918, § 252, 40 Stat. 1085).

362 The United States Tax Court – An Historical Analysis

determined by the Commissioner. The Board’s opinion did not mention

whether a claim for refund for 1920 would have been time-barred and

therefore did not consider the effect of such a fact on its jurisdiction.

Although the Barry case did not assert the Board’s power to consider a

claim for recoupment in express terms, such a power was implied in its

holding.

648

Movement in this direction, however, was expressly terminated

by the Revenue Act of 1926. Section 274(g) of the legislation provided:

The Board in redetermining a deficiency in respect of any taxable

year shall consider such facts with relation to the taxes for other

taxable years as may be necessary correctly to redetermine the

amount of such deficiency, but in so doing shall have no jurisdiction

to determine whether or not the tax for any other taxable year has

been overpaid or underpaid.

649

The committee reports accompanying the 1926 Act do not disclose

whether Congress intended to withdraw the power of equitable recoupment

from the Board.

650

However, that was the effect of the provision. In 1926,

the Board expressly recognized that Barry had been overruled by statute,

651

and thereafter the Board refused to entertain taxpayers’ invocations of the

recoupment doctrine—even while noting that it found the equitable

arguments compelling.

652

In denying recoupment, the Board repeatedly

cited the statutory prohibition on determining overpayments or

underpayments for any year other than that with respect to which the

648

But see Gress Mfg. Co., 3 B.T.A. 977 (1926) (holding that Board lacks

jurisdiction to examine tax year not audited by Commissioner for purposes of

determining possible existence of refund to be applied against claimed deficiency).

649

Revenue Act of 1926, ch. 27, § 274(g), 44 Stat. 56 (now codified at I.R.C.

§ 6214(b)).

650

The only reference to the provision was in the report of the Ways and

Means Committee:

Subdivision (g) [of section 274] limits the jurisdiction of the Board in

determining a deficiency to the taxable year with respect to which the

deficiency is claimed, and provides that while the Board shall consider any

facts with relation to the taxes for other taxable years that may be necessary

to correctly redetermine the amount of the deficiency, the Board shall have

no jurisdiction to determine whether or not the tax for any other taxable

year has been overpaid or underpaid.

H.R.

REP. NO. 69-1, at 11 (1925).

651

See Cornelius Cotton Mills, 4 B.T.A. 255, 256 (1926) (noting that, pursuant

to intervening legislation, “the Board no longer has the jurisdiction exercised in the

Barry appeal”).

652

See Heyl v. Commissioner, 34 B.T.A. 223, 226–28 (1936).

Foundational Parameters of the Court’s Jurisdiction 363

deficiency notice was issued.

653

Without such a determination, the Board

could not conclude that an amount existed to be recouped.

The Supreme Court first addressed the Board’s jurisdiction over claims

of equitable recoupment in Gooch Milling & Elevator Co. v. Commissioner.

654

The Commissioner in Gooch Milling determined that the taxpayer had

overvalued its inventory as of the close of its 1935 tax year. The revaluation

yielded a deficiency for 1936 and an overpayment for 1935. As refund on

the overpayment was barred by the statute of limitations, the taxpayer

petitioned to have the 1935 overpayment offset against the 1936 deficiency.

The Eighth Circuit reversed the Board’s ruling that it lacked jurisdiction to

grant such relief.

655

Narrowly interpreting the 1926 provision, the circuit

court held that justice required the use of recoupment.

656

The court’s

opinion hinted that even if the Board lacked jurisdiction to entertain

recoupment claims, the appellate court was not so limited.

657

The Supreme Court granted certiorari and upheld the original Board

ruling.

658

Declaring that “[t]he Internal Revenue Code, not general

equitable principles, is the mainspring of the Board’s jurisdiction,”

659

the

Court focused its analysis on the Board’s statutory grant of jurisdiction.

The Board could determine a deficiency or overpayment only for the year

for which the taxpayer petitioned for review of a proposed deficiency

assessment. And although the predecessor of § 6214(b) permitted the

Board to consider facts from other years to correctly redetermine the tax

liability for the year before it, the provision denied the Board jurisdiction to

determine whether tax for any other such year had been overpaid or

underpaid. In light of this “clear and unambiguous” legislative pattern,

660

the Court viewed resolution of the taxpayer’s recoupment claim under these

provisions as a straightforward matter.

661

The Court observed that no

aspect of the taxpayer’s 1935 tax year was relevant to determining the

653

See Gould-Mersereau Co. v. Commissioner, 21 B.T.A. 1316, 1328 (1931);

Pederson v. Commissioner, 14 B.T.A. 1089, 1119 (1929); B.T. Couch Glue Co. v.

Commissioner, 12 B.T.A. 1321, 1325 (1928); Anderson v. Commissioner, 12 B.T.A.

1111, 1137 (1928); Dickermann & Ellis, Inc., 5 B.T.A. 633, 635 (1926); Cornelius

Cotton Mills, 4 B.T.A. 255, 256 (1926); R.P. Hazzard Co., 4 B.T.A. 150, 151 (1926).

654

10 B.T.A.M. (Prentice Hall) ¶ 41,563 (1941), rev’d, 133 F.2d 131 (8th Cir.

1943), rev’d, 320 U.S. 418 (1943).

655

133 F.2d at 138.

656

Id. at 136–37.

657

Id. at 138. As discussed in infra note 663, the prospect of an appellate court

granting relief not available to the Tax Court while sitting in review of a Tax Court

decision was first implicitly and later explicitly foreclosed by the Supreme Court.

658

320 U.S. 418 (1943).

659

Id. at 422.

660

Id. at 420.

661

Id. (“The Board’s want of jurisdiction to apply the doctrine of equitable

recoupment is manifest from these statutory provisions.”).

364 The United States Tax Court – An Historical Analysis

taxpayer’s 1936 deficiency that was before the Board. The taxpayer’s

attempt to employ the 1935 overpayment as an affirmative defense to the

1936 deficiency necessitated a determination of whether an overpayment

for 1935 existed in the first place, and the court found this preliminary

determination to be foreclosed by the “absolute and unequivocal language”

of the proviso contained in the predecessor of § 6214(b).

662

The Court

therefore concluded that permitting the Board to apply equitable

recoupment in this instance would contravene the express will of

Congress.

663

Subsequent to the Gooch Milling decision, the Tax Court, during its initial

phase as an executive agency, maintained the position that it lacked

authority to apply equitable recoupment. While the primary justification

continued to rest in the statutory scheme governing its jurisdiction,

including the prohibition contained in the 1926 legislation on determining

an overpayment or underpayment in tax for periods not before the court,

664

the failure of Congress to accord the court equitable jurisdiction provided

an additional but less frequently cited ground.

665

The Tax Reform Act of 1969 reconstituted the Tax Court as an article I

court,

666

and arguments existed to support the proposition that legislative

courts may be invested with the same judicial powers as are provided to

662

Id. at 421.

663

Id. By reversing the circuit court’s ruling in Gooch, the Supreme Court not

only clarified the extent of the Board’s limited jurisdiction, but also implicitly

established that the circuit courts were similarly restricted in hearing Board appeals.

Subsequent to the Gooch decision, two circuit courts expressly held that they were

bound by the Tax Court’s limited jurisdiction in this arena. See Taylor v.

Commissioner, 258 F.2d 89, 93 (2d Cir. 1958); Vanderberge v. Commissioner, 147

F.2d 167, 168 (5th Cir. 1945). The Supreme Court resolved this matter definitively

in Commissioner v. McCoy, 484 U.S. 3, 6 (1987), where it held that an appellate court

sitting in review of a decision of the Tax Court lacks jurisdiction to decide an issue

that was not the subject of the Tax Court proceeding or to grant relief that was

beyond that available to the Tax Court.

664

See Estate of Van Winkle v. Commissioner, 51 T.C. 994, 999–1000 (1969);

Vandenberge v. Commissioner, 3 T.C. 321, 327–28 (1944), aff’d, 147 F.2d 167 (5th

Cir. 1945); see also Rothensies v. Electric Battery Co., 329 U.S. 296, 303 (1946)

(citing Gooch Milling for the proposition that the Tax Court lacks jurisdiction to hear

claims of equitable recoupment).

665

See Miller v. Commissioner, 39 T.C. 940, 953 (1963), aff’d, 333 F.2d 400 (8th

Cir. 1964); Estate of Stein v. Commissioner, 37 T.C. 945, 956 (1962); Estate of

Garber v. Commissioner, 17 T.C.M. (CCH) 646, 650–51 (1958), aff’d, 271 F.2d 97

(3d Cir. 1959); Vandenberge v. Commissioner, 3 T.C. 321, 328 (1944), aff’d, 147

F.2d 167 (5th Cir. 1944).

666

Pub. L. No. 91-172, § 951, 83 Stat. 730.

Foundational Parameters of the Court’s Jurisdiction 365

article III courts, including equitable powers.

667

However, the Tax Court

initially did not use its reconstituted status as an article I court as grounds to

reconsider its equitable jurisdiction.

668

Rather, the court continued to adhere

to the holding of Gooch Milling that it lacked jurisdiction to apply the

recoupment doctrine.

669

The court’s steadfast position was understandable

given the statutory bar to determining overpayments or underpayments for

years other than those covered by the deficiency notice.

670

Indeed, in light

of the Supreme Court’s reliance on this ground in Gooch Milling, Professor

667

See Note, The Distinction Between Legislative and Constitutional Courts and its Effect

on Judicial Assignment, 62 C

OLUM. L. REV. 133, 161 (1962); Note, The Judicial Power of

Federal Tribunals Not Organized Under Article Three, 34 C

OLUM. L. REV. 746, 747–48

(1934); Note, The Court of Claims: Judicial Power and Congressional Review, 46 H

ARV. L.

REV. 677, 680–81 (1933); see also David F. Shores, Article I Status for the Tax Court, 25

AX LAW. 335, 340–41 (1972). Although the issue of equitable powers was not

explicitly raised in Bull v. United States, 295 U.S. 247 (1935), the Supreme Court

therein applied equitable recoupment in a case originating in the Court of Claims.

The decision in Bull came two years after Williams v. United States, 289 U.S. 553

(1933), in which the Supreme Court held the Court of Claims to be a legislative

court.

668

Perhaps the Tax Court’s failure to do so reflected the prevailing view that

the transformation of its status to an article I court did not affect its equitable

jurisdiction. In Continental Equities, Inc. v. Commissioner, 551 F.2d 74 (5th Cir. 1977),

the Fifth Circuit addressed the Tax Court’s jurisdiction to entertain claims of

equitable recoupment and provided the following assessment of the change in the

court’s status from executive agency to legislative court:

Prior to the enactment of the Tax Reform Act of 1969, the Tax Court

did not possess equity jurisdiction. . . .

[T]here is no evidence in the text of the Act that Congress meant to

expand the Tax Court’s jurisdiction to encompass equitable claims. We

cannot believe that Congress would modify the powers of the Tax Court in

such a significant way without mentioning what it was doing. . . .

It does not follow from the fact that the Tax Court is now an Article I

“legislative court” that it possesses or was intended to possess the full

judicial power, extending to “all cases, in law and equity,” that is vested in

“constitutional courts” created by Congress under Article III, which it had

not possessed before.

Id. at 83–84 (footnotes and citations omitted). Yet as discussed in text

accompanying infra notes 702–712, the Tax Court and other appellate courts later

would adopt a more expansive view of the Tax Court’s judicial power as an article I

court.

669

See Estate of Schneider v. Commissioner, 93 T.C. 568, 570 (1989); Phillips

Petroleum Co. v. Commissioner, 92 T.C. 885, 888–90 (1989); Poiner v.

Commissioner, 86 T.C. 478, 490–91 (1986), aff’d in part and rev’d in part, 898 F.2d

917 (3d Cir. 1988). This view was shared by the Service. Rev. Rul. 71-56, 1971-1

C.B. 404, 405 (“[T]he Tax Court lacks jurisdiction to consider a plea of equitable

recoupment.”).

670

I.R.C. § 6214(b).

366 The United States Tax Court – An Historical Analysis

Dubroff reasonably predicted in the 1979 preliminary edition of this text

that “it is unlikely that any change will be made in the Tax Court’s view

with respect to recoupment.”

671

While the question of the Tax Court’s jurisdiction to apply the

recoupment doctrine appeared definitively resolved in the negative, the Tax

Court continued to grapple with the scope of its authority to exercise

equitable powers in other contexts. The court’s reviewed opinion in Woods

v. Commissioner

672

supplied the most thorough examination of this broader

issue, and the case later would prove instrumental in the court’s

reconsideration of its authority to entertain equitable recoupment claims.

The taxpayer’s invocation of the statute of limitations on assessment as

an affirmative defense provided the procedural framework for the court’s

decision in Woods. The court found as a factual matter that the parties’

private agreement to extend the statute of limitations (which, on its face,

was ineffective in doing so) reflected a mutual mistake. The Tax Court

therefore proposed to reform the agreement to accurately reflect the

intentions of the parties. Yet, because reformation constitutes an equitable

remedy, the Tax Court in Woods first considered whether it possessed

jurisdiction to exercise equitable powers in this manner.

The court in Woods began its analysis by citing numerous instances in

which it had applied equitable principles or theories to decide matters over

which it possessed jurisdiction. The list included waiver, duty of

consistency, estoppel, substantial compliance, abuse of discretion, laches,

and the tax benefit rule.

673

In light of this historical review, the court

surmised that it was empowered to apply equitable principles to dispose of

cases properly before it.

674

At the same time, the court in Woods recognized

the Supreme Court’s prior statement in Commissioner v. McCoy that the Tax

Court “is a court of limited jurisdiction and lacks general equitable

powers.”

675

However, the Tax Court in Woods did not interpret this

statement as prohibiting its exercise of equitable powers across the board.

Rather, the court interpreted the absence of general equitable authority as

simply meaning that it could not expand its statutorily prescribed

jurisdiction on equitable grounds.

676

The following observation by Judge

Hamblen, quoted by the court in Woods, succinctly captures the court’s

interpretation of its equitable jurisdiction: “‘While we cannot expand our

jurisdiction through equitable principles, we can apply equitable principles

671

HAROLD DUBROFF, THE UNITED STATES TAX COURT: AN HISTORICAL

ANALYSIS 487–88 (1979).

672

92 T.C. 776 (1989).

673

Id. at 784.

674

Id. at 784–85.

675

484 U.S. 3, 7 (1987).

676

Woods, 92 T.C. at 785.

Foundational Parameters of the Court’s Jurisdiction 367

in the disposition of cases that come within our jurisdiction.’”

677

On these

terms, the court’s application of reformation in Woods was proper. The

exercise of reformation was necessary to resolve the taxpayer’s affirmative

defense to an estate tax deficiency over which the court possessed

undisputed jurisdiction.

678

The Tax Court in Woods further supported its authority to exercise

equitable powers to resolve matters within its jurisdiction by reference to

the statutory scheme articulated in §§ 7422(e), 6512(a), and 7481.

Characterizing these provisions as serving “to channel tax litigation into the

Tax Court, to make our decisions binding, and to preclude relitigation of

the same issues in another forum,” the court concluded that Congress did

not intend to restrict the court’s application of equitable principles to

resolve cases absent an express limitation to that effect.

679

The Tax Court’s affirmation of its limited authority to exercise equitable

powers in Woods may have appeared to conflict with the then-prevailing

view that it lacked jurisdiction to entertain claims of equitable recoupment.

The two positions, however, were not inconsistent. The Board of Tax

Appeals, the Tax Court, and the Supreme Court all had interpreted

§ 6214(b) (or its predecessor) as a statutory prohibition on the court’s

application of equitable recoupment. While the Tax Court’s want of

jurisdiction over the equitable recoupment remedy appeared settled even in

light of Woods, the Supreme Court shortly thereafter conveyed an apparent

willingness to reconsider the issue through its 1990 decision in United States

v. Dalm.

680

The taxpayer in Dalm served as the executor of a decedent’s estate,

receiving commissions for her services. In addition to these commissions,

the taxpayer received considerable sums by way of gift from the decedent’s

brother on which the taxpayer paid the resulting gift tax. The Service later

determined that the purported gifts constituted additional fees for the

taxpayer’s services as executor, and asserted a resulting income tax

deficiency. The taxpayer petitioned the Tax Court for a redetermination,

and the parties reached a settlement reflecting reduced income tax

deficiencies for the years at issue.

Immediately after settling the income tax dispute, the taxpayer in Dalm

filed a refund claim seeking recoupment of the gift tax paid with respect to

the transfers. However, the limitations period for prosecuting a refund of

the gift tax had long expired. The district court agreed with the

677

Id. at 784–85 (quoting Berkery v. Commissioner, 90 T.C. 259, 270 (1988)

(Hamblen, J., concurring)).

678

Under this analysis, the extent of the Tax Court’s supplemental jurisdiction

turns on the scope of issues that may be raised as an affirmative defense to the

imposition of a tax over which the court possesses jurisdiction to review.

679

Id. at 788–89.

680

494 U.S. 596 (1990).

368 The United States Tax Court – An Historical Analysis

Commissioner’s denial of the claim based on expiration of the limitations

period, explaining that the recoupment doctrine could not support the

maintenance of an independent suit to recover a time-barred refund of the

very tax to be recouped.

After the Sixth Circuit Court of Appeals reversed the district court’s

dismissal of the refund claim, the Supreme Court granted certiorari and

reinstated the district court’s disposition of the case. In so doing, the Court

carefully explained why its decision in Bull v. United States did not support

the taxpayer’s position: equitable recoupment operated only to permit a

time-barred claim to offset a separate tax over which the reviewing court

possessed jurisdiction.

681

The separate tax in this case—the taxpayer’s

income tax deficiencies—had been resolved in the Tax Court proceeding

prior to the filing of the time-barred claim for refund of the gift tax.

Hence, the district court was not asked to review any tax other than that for

which the taxpayer sought recoupment. The Supreme Court noted that it

had not previously allowed recoupment to serve as “the sole basis for

jurisdiction,”

682

and the Court rejected the taxpayer’s invocation of

recoupment as a stand-alone exception to the bar posed by the expiration

of the limitations period on refund claims.

The Court’s holding in Dalm was consistent with the limited scope of

the recoupment remedy and, hence, not particularly remarkable. The

surprising aspect of the decision came in the Court’s statements regarding

the taxpayer’s handling of her recoupment claim. The Court observed that

the taxpayer chose to litigate the income tax deficiency before the Tax

Court, where she did not attempt to recoup her gift tax liability.

683

course, the taxpayer’s failure to raise her recoupment claim before the Tax

Court did not stem from oversight but instead from recognition of the

court’s then-established lack of jurisdiction to hear such claims.

684

Yet

rather than conceding the inability of the Tax Court to consider the

taxpayer’s claim of recoupment, the Court dropped the following disclaimer

in a footnote: “We have no occasion to pass upon the question whether

Dalm could have raised a recoupment claim in the Tax Court.”

685

This

somewhat dry statement intimated the existence of ambiguity concerning

the Tax Court’s jurisdiction over recoupment.

681

Id. at 606–07.

682

Id. at 608.

683

Id. at 611.

684

Justice Stevens’ dissent notes that the taxpayer’s counsel believed that no

recoupment claim could be had in the Tax Court. Id. at 615 n.3 (Stevens, J.,

dissenting). The Commissioner shared this view, contending that the taxpayer had

effectively waived her recoupment claim by choosing to litigate the matter before

the Tax Court. See id. at 615 (quoting the Government’s reply brief).

685

Id. at 611 n.8.

Foundational Parameters of the Court’s Jurisdiction 369

Writing in dissent, Justice Stevens took the question of the Tax Court’s

potential jurisdiction a step further. After commending the majority for

reserving the issue of the Tax Court’s jurisdiction over recoupment claims,

Justice Stevens contemplated the prospect of the Tax Court possessing

such jurisdiction:

Of course, if this Court were eventually to decide the reserved issue

by holding that the Tax Court has jurisdiction to hear an equitable

recoupment claim, today’s decision would become a complete dead

letter. No taxpayer would have any reason to litigate the deficiency

and the recoupment issues separately, and in any event a judgment

upon the former would bar a subsequent suit upon the latter under

the doctrine of res judicata.

686

Hence, the Court appeared to retreat considerably from the certainty of its

prior determination in Gooch Milling that the Tax Court’s statutory

jurisdiction unequivocally foreclosed consideration of recoupment claims.

To the extent the Court’s decision in Dalm could be interpreted as an

invitation for the Tax Court to revisit its jurisdiction to address claims of

equitable recoupment, the Tax Court accepted the invitation in Estate of

Mueller v. Commissioner.

687

In a prior proceeding in Estate of Mueller, the court

had determined a deficiency in estate tax based on an increase in the value

of shares of a closely held company included in the decedent’s gross estate.

Faced with this deficiency, the estate amended its petition to raise a time-

barred overpayment of income tax by the legatee of the stock as an

affirmative defense. Reconsidering its jurisdiction to address recoupment

claims “in light of Dalm,”

688

the court determined that it possessed authority

to consider equity-based defenses—including equitable recoupment—to a

claim over which the court possessed jurisdiction.

689

In a reviewed opinion, the court explained that consideration of the

taxpayer’s equitable recoupment claim did not require the exercise of

jurisdiction beyond the statutory grant to redetermine the estate tax

deficiency before it. The court reasoned that the recoupment claim, as an

affirmative defense to the estate tax deficiency, was “part of the entire

action over which we have jurisdiction,”

690

relying heavily on its then-recent

decision to this effect in Woods v. Commissioner. Yet despite the strength of

686

Id. Justice Stevens raised the prospect of distinguishing the Court’s prior

decision in Gooch Milling on the ground that the opinion considered recoupment

only in the context of a time-barred overpayment relating to a year other than the

year in dispute.

687

101 T.C. 551 (1993).

688

Id. at 553.

689

Id. at 557.

690

Id. at 556.

370 The United States Tax Court – An Historical Analysis

the Woods precedent, the court in Estate of Mueller nonetheless had to

contend with the question of whether § 6214(b) constituted a statutory

denial of such jurisdiction, as the Supreme Court in Gooch Milling had

previously determined. The court resolved this point by revisiting the

circumstances surrounding the 1926 legislation introducing the predecessor

of § 6214(b)—in particular, the Board’s decision in Barry v. Commissioner.

691

The court explained that although the Board in Barry had granted the

taxpayer’s request to apply a time-barred overpayment as a setoff to the

deficiency before it, the Barry case did not concern or address the doctrine

of equitable recoupment. The time-barred overpayment at issue in Barry

was attributable to depreciation deductions that bore no relation to the

deficiency the taxpayer petitioned the Board to review.

692

After clarifying

the circumstances of the Barry decision, the court in Estate of Mueller found

nothing in the 1926 legislative response to Barry or in the legislative

materials accompanying its passage to indicate congressional intent to deny

the Board jurisdiction over equitable recoupment.

693

In light of this

background, the court essentially concluded that subsequent decisions

construing § 6214(b) or its predecessor as foreclosing Tax Court

consideration of equitable recoupment claims—including the Supreme

Court’s decision in Gooch Milling—had misconstrued the statute.

694

Alternatively, the Tax Court found Gooch Milling inapposite on grounds that

§ 6214(b) literally does not apply to the redetermination of an estate tax

deficiency.

695

Although the court’s treatment of Supreme Court precedent

in Estate of Mueller may appear surprising when considered in isolation, the

court undoubtedly was emboldened to re-examine its equitable recoupment

jurisdiction by the apparent willingness of the Supreme Court to do the

same in Dalm.

691

1 B.T.A. 156 (1924). For discussion of the Barry decision, see supra notes

646–653 and accompanying text.

692

Estate of Mueller v. Commissioner, 101 T.C. 551, 559 (1993).

693

Id.

694

The Tax Court did not do so directly. Instead, after noting that the

Supreme Court in Gooch Milling had determined that the Board lacked jurisdiction

to allow a time-barred overpayment of income tax to be offset against a related

income tax deficiency (in other words, equitably recouped), the court interpreted

Gooch Milling as “not preventing the Tax Court from considering the affirmative

defense of equitable recoupment when it is properly raised in a timely suit for

redetermination of a tax deficiency over which we have jurisdiction.” Id. at 560.

695

Id. However, even while attempting to continue the distinction where the

taxpayer sought to recoup an estate tax overpayment against an income tax liability,

the Tax Court later conceded that it had determined in Estate of Mueller that

equitable recoupment would be available “in any event”—that is, even if the literal

terms of § 6214(b) could not be avoided—in a common transaction scenario. See

Estate of Bartels v. Commissioner, 106 T.C. 430, 434 (1996).

Foundational Parameters of the Court’s Jurisdiction 371

The Tax Court’s reconsideration of its jurisdiction to entertain claims of

equitable recoupment in Estate of Mueller was not well received by the Sixth

Circuit Court of Appeals. Reviewing the court’s consideration of the

taxpayer’s recoupment claim on the merits and its determination that the

remedy was not available,

696

the Sixth Circuit technically affirmed.

However, the circuit court did so on the basis that the Tax Court lacked

jurisdiction to consider the recoupment claim in the first place.

697

In the

court’s view, § 6214(b) made it “abundantly clear” that the Tax Court’s

jurisdiction was limited to determining only the deficiency before it, a

proposition the court found to be additionally supported by § 6512(b).

698

The court further cited the Tax Court’s want of general equitable powers as

precluding the extension of its statutory jurisdiction to address equitable

remedies such as recoupment.

699

In short, the Sixth Circuit restated the

analysis of the Supreme Court in Gooch Milling in updated form.

700

The

court was not timid in its assessment of the Tax Court’s newly found

jurisdiction, contending that it “fl[ew] in the face of unambiguous statutory

language as well as 50 years of Supreme Court precedent.”

701

The Tax Court did not allow the initial and emphatic appellate rejection

of its equitable recoupment jurisdiction to shake its stance. Applying the

Golsen rule, the court affirmed its position in Estate of Mueller in three cases

that were appealable to different circuit courts. The first case was Estate of

Bartels v. Commissioner,

702

a case appealable to the Seventh Circuit. Although

the taxpayer in Estate of Bartels asserted a time-barred overpayment of estate

696

107 T.C. 189 (1996). The court denied the recoupment claim because, even

though the value of the decedent’s stock originally yielded an estate tax deficiency

against which the estate sought to recoup the related income tax overpayment, the

Commissioner subsequently allowed a credit for tax on prior transfers that yielded

an estate tax overpayment. Because the recoupment claim could no longer offset a

claim for tax due, the court determined the remedy to be inapposite.

697

153 F.3d 302 (6th Cir. 1998).

698

Id. at 305.

699

Id.

700

Id. at 306. Whereas the Tax Court had attempted to distinguish Gooch

Milling based on the failure of § 6214(b) to reference estate taxes, the Sixth Circuit

found the reasoning of the case to be “just as applicable to the determination of

estate tax deficiencies as it is to the determination of income tax deficiencies.” Id.

701

Id. at 307. For a modern evaluation of the Tax Court’s equitable jurisdiction

advancing a similarly narrow interpretation, see Leandra Lederman, Equity and the

Article I Court: Is the Tax Court’s Exercise of Equitable Powers Constitutional?, 5 F

LA.

TAX REV. 357 (2001).

702

106 T.C. 430 (1996). Specifically, the court emphasized the words “the tax”

in the portion of § 6214(b) providing that the Tax Court “shall have no jurisdiction

to determine whether or not the tax for any other year or calendar quarter,” and

interpreted this reference as restricting application of the phrase to determinations

of income tax or gift tax for other periods.

372 The United States Tax Court – An Historical Analysis

tax as an offset to a related income tax deficiency (as opposed to the inverse

scenario in Estate of Mueller), the court nonetheless continued to find

§ 6214(b) inapposite. The court explained that the jurisdiction-limiting

proviso of § 6214(b) referred only to the income tax or gift tax that served

as the subject of the court’s primary determination in the statute’s opening

clause.

703

However, the Court did not rest its decision on this narrow

interpretation of § 6214(b) alone. The court observed that it previously had

reasoned in Estate of Mueller that equitable recoupment would apply “in any

event”—that is, even if the tax to be recouped consisted of income tax or

gift tax from a time-barred period—if those taxes arose in a same-

transaction scenario,

704

and endorsed this broader view of its recoupment

jurisdiction.

705

The Court’s next opportunity to affirm its authority to apply equitable

recoupment came in Estate of Branson v. Commissioner,

706

a case consisting of

facts paralleling those of Estate of Mueller. In addition to restating points

made in prior decisions, the Tax Court in Estate of Branson noted that the

Sixth Circuit, in reaching a contrary result, failed to consider that Gooch

Milling interpreted the jurisdiction of the Board of Tax Appeals—not that

of the Tax Court as an article I court.

707

The court then quoted the

Supreme Court’s observation in Freytag v. United States that the Tax Court

“‘exercises its judicial power in much the same way as the federal district

courts exercise theirs.’”

708

Based on this statement and the court’s holding

in Woods, the court asserted that the Tax Court “should be properly viewed

as exercising full judicial power within its limited subject matter

jurisdiction.”

709

The Ninth Circuit Court of Appeals endorsed this view,

affirming the Tax Court’s decision and declaring that the Tax Court could

exercise the “full range of equitable principles generally granted to courts

that possess judicial powers” within the sphere of its statutorily defined

703

Id. at 434.

704

Id.

705

Although the Estate of Bartels decision was not reviewed by the Seventh

Circuit, the decision of that circuit court in Flight Attendants Against UAL Offset v.

Commissioner, 165 F.3d 572 (7th Cir. 1999), suggests that any such review would

have been favorable. That case, which concerned the Tax Court’s jurisdiction to

apply equitable estoppel, declared any contention that the Tax Court lacked

authority to do so because of its status as a court of limited jurisdiction to be

“fatuous.” Id. at 578. Instead, the Seventh Circuit observed that the present day

Tax Court operates “pretty indistinguishably” from a Federal district court with

respect to cases within the Tax Court’s jurisdiction. Id.

706

113 T.C. 6 (1999), aff’d, 264 F.3d 904 (9th Cir. 2001).

707

Id. at 10–11.

708

Id. at 11 (quoting Freytag v. Commissioner, 501 U.S. 868, 891 (1991)).

709

Id. at 11.

Foundational Parameters of the Court’s Jurisdiction 373

jurisdiction.

710

In addition to noting the parallels between the judicial

power of the Tax Court and that of a Federal district court,

711

the circuit

court went on to stress the practical ramifications of its decision. If the Tax

Court were determined to lack jurisdiction over recoupment claims, less

affluent taxpayers who found it necessary to litigate in the court’s exclusive

prepayment forum effectively would be required to waive any recoupment

claims for the privilege of doing so.

712

The Tax Court’s final opportunity to affirm its jurisdiction to apply

equitable recoupment came in Estate of Orenstein v. Commissioner.

713

Because

the case was appealable to the Eleventh Circuit, the Golsen rule required the

court to address Continental Equities, Inc. v. Commissioner,

714

a decision of the

former Fifth Circuit (which, at the time, included what is now the Eleventh

Circuit). The taxpayer in Continental Equities contended that the Tax Court

should have addressed its plea to recoup time-barred overpayments of

income tax by related corporations stemming from the Commissioner’s

adjustment of interest deductions under § 482. The Fifth Circuit dispensed

with this argument through the following:

[T]he conclusion that the 1969 Tax Reform Act did not grant the

Tax Court equitable jurisdiction is inescapable. The courts that have

addressed the issue are in agreement without [sic] conclusion that the

Tax Court still does not possess jurisdiction over equitable claims.

715

Although Continental Equities appeared to foreclose the court’s proposed

application of equitable recoupment in Estate of Orenstein, the Tax Court was

not convinced that the case constituted binding precedent on appeal. The

court cited the factual dissimilarities of the cases, the staleness of the

Continental Equities decision in light of the passage of two decades in which

views of the Tax Court’s jurisdiction evolved, and, most significantly, the

Eleventh Circuit’s intervening decision in Bokum v. Commissioner.

716

The

circuit court in Bokum affirmed the Tax Court’s authority to apply the

710

264 F.3d 904, 908 (9th Cir. 2001).

711

See id. at 911 (observing that the Tax Court, “within its specialized

jurisdiction, ‘operates pretty indistinguishably from a federal district court,’”

quoting Flight Attendants Against UAL Offset v. Commissioner, 165 F.3d 572, 578

(7th Cir. 1999)).

712

Estate of Branson, 264 F.3d at 911. The Ninth Circuit noted the related

analysis of the Eleventh Circuit in Bokum v. Commissioner, 992 F.2d 1136 (11th Cir.

1993), that taxpayers would be put to a similar inequitable election if the Tax Court

were determined to lack jurisdiction to exercise equitable estoppel. Id. at 911–12.

713

T.C. Memo. 2000-150, 79 T.C.M. (CCH) 1971.

714

551 F.2d 74 (5th Cir. 1977).

715

Id. at 84 (citations omitted).

716

992 F.2d 1136 (11th Cir. 1993).

374 The United States Tax Court – An Historical Analysis

doctrine of equitable estoppel and, in so doing, endorsed the distinction

that the Tax Court possessed authority to apply equitable principles in cases

properly before it even though it lacked authority to expand its statutory

jurisdiction on equitable grounds.

717

Because the Eleventh Circuit had

essentially adopted the Tax Court’s conception of its equitable jurisdiction

in this manner, the Tax Court in Estate of Orenstein determined itself to be

unbridled by precedent in its continued application of equitable

recoupment. The Tax Court’s decision in Estate of Orenstein was not

appealed.

Against this backdrop of developing and conflicting judicial

interpretations of the Tax Court’s jurisdiction to entertain claims of

equitable recoupment, Congress attempted to bring clarity to the field. Its

first attempt consisted of a provision in the Senate version of the Technical

and Miscellaneous Revenue Act of 1988 providing that the Tax Court’s

jurisdiction would extend to “any counterclaim, set-off, or equitable

recoupment against (or for) the taxpayer.”

718

However, Congress dropped

this provision at the conference level without explanation.

719

As part of the Taxpayer Relief and Refund Act of 1999,

720

Congress

offered a more circumscribed provision. Through a provision captioned

“Confirmation of Authority of Tax Court To Apply Doctrine of Equitable

Recoupment,” Congress proposed the addition of the following sentence to

§ 6214(b):

Notwithstanding the preceding sentence, the Tax Court may apply

the doctrine of equitable recoupment to the same extent that it is

available in civil tax cases before the district courts of the United

States and the United States Court of Federal Claims.

721

However, the legislation did not survive a presidential veto made for

reasons unrelated to the Tax Court.

717

Id. at 1140.

718

S. 2238, 100th Cong., § 785 (1988). The conference committee report

describes the Senate amendment as follows:

The Tax Court is granted jurisdiction over tax refund actions against the

IRS where there is already pending and awaiting submission for disposition

by a judge a deficiency action in the Tax Court, and where the issue in the

refund action is related by subject matter to the deficiency action or the

result in either of the two actions will affect the amount in controversy in

the related action.

H.R.

REP. NO. 100-1104, at 234 (1998).

719

Id.

720

H.R. 2488, 106th Cong. (1999).

721

Id. § 1343(a).

Foundational Parameters of the Court’s Jurisdiction 375

Congress returned in 2006 with an identical proposed amendment to

§ 6214(b) raised in light of the split that had then developed among the

circuit courts of appeals.

722

This time, the amendment was enacted as part

of the Pension Protection Act of 2006.

723

The legislative history

accompanying the amendment indicates that Congress enacted the

provision both to resolve the existing conflict among the circuit courts over

the Tax Court’s jurisdiction and to provide simplification benefits to both

taxpayers and the IRS (that presumably would follow from the Tax Court’s

ability to address recoupment claims).

724

The Tax Court had occasion to interpret the scope of its jurisdiction

under § 6214(b), as amended, in Menard, Inc. v. Commissioner.

725

In an earlier

proceeding, the Tax Court in Menard determined income tax deficiencies on

grounds that compensation paid to its chief executive officer and principal

shareholder was not reasonable and constituted disguised dividends. In

response to this determination, the taxpayer corporation sought to recoup

the hospital insurance tax paid by the corporation and the officer-

shareholder under §§ 3101(b) and 3111(b) with respect to amounts

originally characterized as compensation. By the time the Tax Court

considered the taxpayer’s recoupment claim, the period of limitations for

filing a refund claim of the hospital insurance tax had expired.

The Commissioner did not dispute the amount by which the taxpayers

had overpaid the hospital insurance tax. Nonetheless, the Commissioner

contended that the Tax Court lacked jurisdiction to consider the

recoupment claim on the basis that the court generally lacks jurisdiction to

determine a deficiency or overpayment of hospital insurance tax.

726

As a

matter of statutory interpretation, the Commissioner contended that the

722

See S. REP. NO. 109-336, at 97 (2006) (noting the conflict between the Sixth

Circuit Court of Appeals in Estate of Mueller and the Ninth Circuit Court of Appeals

in Estate of Branson).

723

Pub. L. No. 109-280, § 858(a), 120 Stat. 1020 (2006). The amendment was

effective for any matter pending before the Tax Court for which the decision had

not become final (within the meaning of § 7481) as of the August 17, 2006 date of

enactment. Id. § 858(b). Although Congress fashioned the amendment as a

confirmation of the Tax Court’s jurisdiction and the legislative history supports the

confirmation motivation, see S.

REP. NO. 109-336, at 97 (2006), a literal reading of

the “notwithstanding” clause of the addition to § 6214(b) suggests the existence of

a contrary directive in the statute in its prior form.

724

S. REP. NO. 109-336, at 97 (2006).

725

130 T.C. 54 (2008).

726

Id. at 58. The court conceded that it lacked original jurisdiction over the

hospita l insurance tax, and that any possible secondary jurisdiction to determine

the amount of this tax under § 7436 was not available due to the absence of a

determination regarding worker classification. Id. at 60–61. For a discussion of the

Tax Court’s secondary jurisdiction over hospital insurance tax and other

employment taxes under § 7436, see Part VII.B.

376 The United States Tax Court – An Historical Analysis

second sentence of § 6214(b) (providing Tax Court jurisdiction over

equitable recoupment) served only as an exception to the first sentence,

which denied the Tax Court jurisdiction to determine an overpayment or

underpayment in tax otherwise within the court’s jurisdiction for a period

not before the court. In short, the Commissioner did not read the second

sentence of § 6214(b) as permitting consideration only of time-barred

claims relating to taxes otherwise within the Tax Court’s jurisdiction.

The Tax Court was not persuaded. As a textual matter, the court found

the Commissioner’s restricted interpretation of the second sentence of

§ 6214(b) contrary to the statutory text confirming “in the broadest of

terms” the court’s authority to apply the doctrine of equitable recoupment

to the same extent the remedy is available in civil tax cases before the

Federal district courts and the Court of Federal Claims.

727

The court

further explained that a literal interpretation of the statutory text—one that

confirmed the Tax Court’s jurisdiction to entertain recoupment claims

based on all internal revenue taxes—advanced the legislative goals of the

amendment by offering “clarity and a meaningful measure of simplification

in that both parties can be confident that the Court may provide a complete

remedy for a given taxable year.”

728

In this manner, the court in Menard

held that there existed no condition to the court’s application of the

doctrine of equitable recoupment that it possess original or subject matter

jurisdiction over the tax that the Commissioner or the taxpayer seeks to

recoup.

As interpreted by the Tax Court in Menard, the statutory “confirmation”

of the Tax Court’s jurisdiction to entertain claims of equitable recoupment

contained in § 6214(b) actually served to expand the court’s recoupment

jurisdiction. The provision not only clarified that the court could address

claims relating to periods outside those covered by the statutory notice of

deficiency for recoupment purposes, the provision further allowed the

court to determine the taxpayer’s liability for a tax outside of the court’s

original jurisdiction.

Although the 2006 amendment to § 6214(b) proved expansive in its

grant of recoupment jurisdiction, the accompanying legislative history did

not provide a ringing endorsement of the Tax Court’s equitable jurisdiction

in general terms. The Senate Report provided the following qualifier in its

explanation of the provision: “No implication is intended as to whether the

Tax Court has the authority to continue to apply other equitable principles

in deciding matters over which it has jurisdiction.”

729

Thus, at a minimum,

727

Id. at 66.

728

Id. at 67.

729

S. REP. NO. 109-336, at 97 (2006).

Foundational Parameters of the Court’s Jurisdiction 377

Congress passed on the opportunity to affirm the Tax Court’s broader

articulation of its equitable jurisdiction in Woods.

730

b. Equitable Estoppel

Cases in which parties have invoked the doctrine of equitable estoppel

provide a cleaner framework for examining the equitable jurisdiction of the

Board of Tax Appeals and the Tax Court because, unlike equitable

recoupment, no statute exists to potentially restrict the court’s jurisdiction

to entertain these claims.

731

Instead, the scope of the court’s jurisdiction to

address claims grounded in equitable estoppel and related theories has been

determined through judicial exploration alone.

Generally speaking, a once restrictive view of the Tax Court’s

jurisdiction has given way to a general acceptance of the court’s ability to

address claims grounded in estoppel. A 1964 article addressing the

jurisdiction of the Tax Court (prior to its reconstitution as an article I court)

reflected the once-restrictive view of the court to adjudicate claims of

estoppel by closing its discussion of the matter with the following

admonition: “The moral is clear. Other factors being equal, a case

involving these issues in a dominant manner should not be brought to the

Tax Court.”

732

However, the prevailing view of the court’s jurisdiction in

730

On the other hand, the inference the legislative history cautions against may

not be a positive one regarding the Tax Court’s equitable jurisdiction. The Tax

Court had determined that it possessed jurisdiction to apply equitable recoupment

in cases over which it had jurisdiction in Estate of Mueller based in large measure on

its holding in Woods. Hence, the amendment to § 6214(b) expressly granting the

court equitable recoupment jurisdiction could be interpreted as a determination

that the reasoning in Woods did not adequately support the court’s exercise of such

jurisdiction. From a broader standpoint, any statutory grant of equitable

jurisdiction to the Tax Court reinforces the view that the court may not exercise

equitable powers outside of the statutory sphere. See, e.g., Lederman, supra note

701, at 398 (“[I]f the Tax Court is going to apply equitable principles, it must find a

specific source of the power to do so.”). While the statement that the legislation is

not intended to have any implication for the Tax Court’s authority to continue to

apply other equitable principles could be interpreted as protecting the Tax Court’s

non-statutory equitable jurisdiction, the qualifier in the legislative history

accompanying the amendment to § 6214(b) does not convey this sense of

affirmation.

731

As discussed in text accompanying supra notes 647–671, § 6214(b) and its

predecessor at one point were interpreted as a statutory bar to the ability of the

Board of Tax Appeals and the Tax Court to entertain claims of equitable

recoupment. However, that view no longer prevails.

732

Theodore S. Lynn & Mervyn S. Gerson, Quasi-Estoppel and Abuse of Discretion

as Applied Against the United States in Federal Tax Controversies, 19 T

AX L. REV. 487,

520 (1964).

378 The United States Tax Court – An Historical Analysis

this area has changed considerably. The Tax Court in numerous instances

has addressed claims of equitable estoppel without questioning its

jurisdiction to do so, while at other times doing so after first affirming its

jurisdiction. Similarly, several Circuit Courts of Appeals have assumed the

Tax Court possesses jurisdiction to adjudicate estoppel claims, while others

have expressly confirmed the Tax Court’s jurisdiction in this arena.

This section traces the major developments in the jurisdiction of the

Board of Tax Appeals and the Tax Court to entertain claims of equitable

estoppel. Yet before doing so, this section reviews the doctrine of equitable

estoppel and related claims in the tax setting for context.

The application of the doctrine ordinarily involves a decision not to

follow general principles of the tax law because of the equities in a

particular case. Courts therefore are cautious in its use. As is the case with

recoupment, the doctrine of estoppel has its roots in both law and equity

and has been applied by both types of courts.

733

The Pomeroy treatise

defines equitable estoppel as:

the effect of the voluntary conduct of a party whereby he is

absolutely precluded, both at law and in equity, from asserting rights

which might perhaps have otherwise existed, either of property, of

contract, or of remedy, as against another person, who has in good

faith relied upon such conduct, and has been led thereby to change

his position for the worse, and who on his part acquires some

corresponding right, either of property, of contract, or of remedy.

734

The treatise goes on to enumerate the elements generally required for its

application: (1) conduct amounting to a misrepresentation or concealment

of a material fact; (2) actual or imputed knowledge of the misrepresentation

by the party to be estopped; (3) absence of knowledge of the facts by the

party in whose favor estoppel is applied; (4) intention or expectation of the

party to be estopped that the representation or concealment will be acted

upon by the other party; (5) reliance by the party seeking the estoppel; and

(6) detriment to the party seeking the estoppel resulting from his reliance.

735

The elements of classical estoppel are obviously closely related to fraud;

some courts in fact have required a fraudulent intention to apply

733

3 JOHN NORTON POMEROY, EQUITY JURISPRUDENCE § 802 (5th ed. by

Spencer S. Symons 1941) [hereinafter cited as P

OMEROY].

734

Id. § 804.

735

Id. § 805; see also Graff v. Commissioner, 74 T.C. 743, 761 (1980) (citing

these “traditional elements” of equitable estoppel), aff’d, 673 F.2d 784 (5th Cir.

1982); Illinois Addressograph Mfg. Co. v. Commissioner, 31 B.T.A. 498, 504–05

(1934) (Murdock, J., concurring) (citing estoppel factors from earlier edition of

Pomeroy treatise); 15 M

ERTENS LAW OF FEDERAL INCOME TAXATION § 60:03

(2003 ed.) [hereinafter cited as M

ERTENS] (listing the same six factors for estoppel).

Foundational Parameters of the Court’s Jurisdiction 379

estoppel.

736

But even without such a requirement, the basic elements

themselves are so restrictive that if the doctrine was limited to these

circumstances it would be applicable only in rare cases against taxpayers and

virtually never against the Government.

737

Nevertheless, cases arise in which one or more of the above elements

are absent, but in which “equitable” considerations dictate the application

of some form of estoppel to prevent a party from deriving an

unconscionable benefit from his adversary’s reliance on a

misrepresentation. As a result, the courts from time to time have

recognized a doctrine related to traditional estoppel, but in which one or

more of the traditional elements have been relaxed or eliminated.

738

Nomenclature reflecting the modified doctrine includes pseudo-estoppel,

739

quasi-estoppel,

740

duty of consistency,

741

abuse of discretion,

742

and

waiver.

743

An exposition of the varied circumstances in which the doctrine

has been recognized is beyond the scope of this work. Suffice it to say that

the principal relaxation of traditional estoppel requirements concerns

knowledge of the misrepresentation by the person against whom the

estoppel is invoked.

744

736

POMEROY, supra note 733, at § 805.

737

Lynn & Gerson, supra note 732, at 488.

738

MERTENS, supra note 735, at § 60:05; Lynn & Gerson, supra note 732, at

488–89.

739

Schwartz v. Commissioner, 40 T.C. 191, 193 (1963).

740

Eagan v. United States, 80 F.3d 13, 17 (1st Cir. 1996); Lewis v.

Commissioner, 18 F.3d 20, 26 (1st Cir. 1994); Mayfair Minerals, Inc. v.

Commissioner, 56 T.C. 82, 89 (1971), aff’d per curiam, 456 F.2d 622 (5th Cir. 1972).

741

Eagan v. United States, 80 F.3d 13, 17 (1st Cir. 1996); Herrington v.

Commissioner, 854 F.2d 755, 758 (5th Cir. 1988); Orange Sec. Corp. v.

Commissioner, 131 F.2d 662, 663 (5th Cir. 1942); Estate of Letts v. Commissioner,

109 T.C. 290, 297 (1997); LeFever v. Commissioner, 103 T.C. 525, 543 (1994), aff’d,

100 F.3d 778 (10th Cir. 1996); Mayfair Minerals, Inc. v. Commissioner, 56 T.C. 82,

89 (1971), aff’d per curiam, 456 F.2d 622 (5th Cir. 1972); Bartel v. Commissioner, 54

T.C. 25, 29 (1970).

742

Gold Nugget Inc. v. Commissioner, 83 T.C. 28, 42–43 (1984); Automobile

Club of Mich. v. Commissioner, 353 U.S. 180, 184 (1957); Lesavoy Foundation v.

Commissioner, 238 F.2d 589, 594 (3d Cir. 1956); Stevens Bros. Foundation v.

Commissioner, 39 T.C. 93, 106–08 (1962), modified, 324 F.2d 633 (3d Cir. 1963).

743

Aero Rental v. Commissioner, 64 T.C. 331, 338 (1975); Eisenstadt Mfg. Co.,

28 T.C. 221, 233–34 (1957).

744

See Herrington v. Commissioner, 854 F.2d 755, 758 (5th Cir. 1988); Wichita

Coca-Cola Bottling Co. v. United States, 152 F.2d 6, 8 (5th Cir. 1946); Underwood

v. Commissioner, 63 T.C. 468, 477–78 (1975), aff’d, 535 F.2d 309 (5th Cir. 1976);

Mayfair Minerals, Inc. v. Commissioner, 56 T.C. 82, 88 (1971), aff’d per curiam, 456

F.2d 622 (5th Cir. 1972); Estate of Kingdon v. Commissioner, 9 T.C. 838, 844

(1947); 10 M

ERTENS, supra note 735, at §§ 60:11 to 60:17. But see Wobber Bros. v.

380 The United States Tax Court – An Historical Analysis

Because of the difficulty of discussing estoppel in the abstract in tax

cases, it may be useful to give illustrations of cases in which the doctrine

has been applied. In Bartel v. Commissioner,

745

the taxpayer and his controlled

corporation had in prior years treated corporate payments to the taxpayer as

loans. In a later year, in connection with the liquidation of the corporation

and when the earlier years apparently were closed by the statute of

limitations, the taxpayer sought to recharacterize these payments as

compensation, which would reduce the tax upon the liquidation. On the

basis of equitable considerations, the Tax Court applied a duty of

consistency to the taxpayer to estop him from maintaining that the

payments were in substance anything other than loans.

The modified doctrine of equitable estoppel frequently has been applied

against taxpayers.

746

However, courts are far more reluctant to apply the

doctrine against the Government, particularly in the tax setting.

747

In Estate

of Emerson v. Commissioner, the Tax Court explained that “[a]lthough the

doctrines of estoppel and quasi-estoppel are applicable against the

Commissioner, it is well established that these doctrines should be applied

against him with utmost caution and restraint.”

748

With respect to the

application of estoppel against the Government in general, the Supreme

Court has explained that precluding the Government from enforcing the

law based on the conduct of its agents would undermine “the interest of the

Commissioner, 35 B.T.A. 890, 892 (1938) (innocent mistake on tax return does not

serve as basis for estoppel against taxpayer).

745

54 T.C. 25 (1970).

746

See Wichita Coca-Cola Bottling Co. v. United States, 152 F.2d 6 (5th Cir.

1946); Orange Sec. Corp. v. Commissioner, 131 F.2d 662 (5th Cir. 1942); Ryan v.

Alexander, 118 F.2d 744 (10th Cir. 1941); Commissioner v. New York Trust Co.,

54 F.2d 463 (2d Cir. 1931); Specialized Systems, Inc. v. United States, 792 F. Supp.

577 (M.D. Tenn. 1992); Erickson v. United States, 309 F.2d 760 (Ct. Cl. 1962);

Sangers Home for Chronic Patients, Inc. v. Commissioner, 72 T.C. 105 (1979);

Bartel v. Commissioner, 54 T.C. 25 (1970); Benoit v. Commissioner, 25 T.C. 656

(1955), rev’d, 238 F.2d 485 (1st Cir. 1956); Flynn v. Commissioner, 35 B.T.A. 1064

(1937).

747

Kennedy v. United States, 965 F.2d 413, 417 (1992); Schuster v.

Commissioner, 312 F.2d 311 (9th Cir. 1962); see also United States v. Asmar, 827

F.2d 907, 911 n.4 (3d Cir. 1987) (detailing the various standards for applying

equitable estoppel against the Government by the Circuit Courts of Appeals). It is

recognized generally that application of estoppel against the Government is less

frequent than application of the doctrine against taxpayers. See 10 M

ERTENS, supra

note 735, at § 60:18.

748

67 T.C. 612, 617 (1977); see also Kronish v. Commissioner, 90 T.C. 684, 695

(1988); Boulez v. Commissioner, 76 T.C. 209, 214–15 (1981), aff’d, 310 F.2d 209

(D.C. Cir. 1987); Graff v. Commissioner, 74 T.C. 743, 761 (1980), aff’d 673 F.2d

784 (5th Cir. 1982).

Foundational Parameters of the Court’s Jurisdiction 381

citizenry as a whole in obedience to the rule of law.”

749

As applied to the

Commissioner in particular, estoppel could jeopardize the public interest in

preserving the fisc through the efficient collection of revenue.

750

While instances of estoppel against the Government are unusual, they

do exist. In Schuster v. Commissioner,

751

transferee liability was asserted by the

Commissioner against a bank on the basis of the includibility of an inter

vivos trust, of which it had been trustee, in the gross estate of the settlor.

The Service, after being fully apprised of the existence and terms of the

trust originally had taken the position on audit that the trust was not

includible in the settlor’s gross estate, and on the basis of that

representation, the bank had distributed the assets of the trust. The

Government subsequently changed its position with respect to the

includibility of the trust assets in the gross estate, but the statute of

limitations barred assessment and collection of additional tax from the

estate. Accordingly, the Government sought recovery against, among

others, the bank as transferee. The Ninth Circuit, reversing the Tax Court,

applied estoppel against the Government to preclude collection of any

additional tax because of the strength of the “[b]ank’s equitable interest”

752

and the unwarranted loss it would suffer if the Government were allowed

to prevail. Estoppel was applied absent a knowing misrepresentation by the

Government,

753

and in a case in which the misrepresentation was arguably

one of law rather than fact. While it is firmly established that estoppel can

be applied only to misrepresentations of fact (and not law),

754

the well-

749

Heckler v. Community Health Services, 467 U.S. 51, 60 (1984) (not adopting

but also not foreclosing an absolute rule barring estoppel against the Government);

see also Shuster v. Commissioner, 312 F.2d 311, 317 (9th Cir. 1962) (“Congress’s

legislative authority should not be readily subordinated to the action of a wayward

or unknowledgeable administrative official.”); Couzens v. Commissioner, 11 B.T.A.

1040, 1148 (1928) (explaining that the application of estoppel against the

Commissioner would cause individual tax liabilities to turn on conduct of a

particular Government officer rather than on the uniform law prescribed by

Congress).

750

See Reynolds v. Commissioner, 861 F.2d 469, 474 (6th Cir. 1988); Shuster,

312 F.2d at 317.

751

312 F.2d 311 (9th Cir. 1962), modifying First W. Bank & Trust Co., 32 T.C.

1017 (1959).

752

312 F.2d at 318.

753

A finding of knowledge or imputed knowledge would have been required

for application of the traditional doctrine of estoppel. See supra note 735 and

accompanying text.

754

Automobile Club of Mich. v. Commissioner, 353 U.S. 180, 183 (1957); Beer

v. Commissioner, 733 F.2d 435, 437 (6th Cir. 1984); Estate of Vitt v. United States,

706 F.2d 871, 874 (8th Cir. 1983); Graff v. Commissioner, 74 T.C. 743, aff’d, 673

F.2d 784 (5th Cir. 1982).

382 The United States Tax Court – An Historical Analysis

known difficulty of isolating these elements, especially as to questions of

mixed law and fact, renders the scope of the doctrine uncertain.

755

The application of equitable estoppel and its variants by the Board of

the Tax Appeals and the Tax Court has been somewhat uncertain over the

years. The court has applied the doctrine to taxpayers in several cases,

756

and it has entertained claims of estoppel against the Government but found

the necessary elements lacking.

757

However, in two decisions predating the

Tax Court’s reconstitution as an article I court, the court rejected the

taxpayer’s invocation of estoppel against the Government on grounds that

it lacked equity jurisdiction.

758

In the latter of these cases, Schwartz v.

Commissioner, the Tax Court relied on the Supreme Court’s decision in Gooch

Milling in rejecting the taxpayer’s claim of pseudo-estoppel:

We cannot adopt such an assertion here. This Court is a statutory

body of limited jurisdiction, and we do not have the powers of a

court of equity. . . . We cannot and do not adopt the asserted

doctrine of pseudoestoppel.

759

755

See, e.g., KENNETH CULP DAVIS, ADMINISTRATIVE LAW TEXT ch. 30 (3d ed.

1972).

756

E.g., Graff v. Commissioner, 74 T.C. 743 (1980), aff’d, 673 F.2d 784 (5th

Cir. 1982); Bartel v. Commissioner, 54 T.C. 25 (1970); Hollman v. Commissioner,

38 T.C. 251, 260 (1962); Bialock v. Commissioner, 35 T.C. 649 (1961); Benoit v.

Commissioner, 25 T.C. 656 (1925), rev’d, 238 F.2d 485 (1st Cir. 1956); Flynn v.

Commissioner, 35 B.T.A. 1064 (1937).

757

Boulez v. Commissioner, 76 T.C. 209 (1981), aff’d, 810 F.2d 209 (D.C. Cir.

1987); Estate of Emerson v. Commissioner, 67 T.C. 612 (1977); Schwager v.

Commissioner, 64 T.C. 781, 788–89 (1975); Underwood v. Commissioner, 63 T.C.

468, 477–78 (1975), aff’d, 535 F.2d 309 (5th Cir. 1976); Fortugno v. Commissioner,

41 T.C. 316, 323–24 (1963), aff’d, 353 F.2d 429 (3d Cir. 1965); Saigh v.

Commissioner, 36 T.C. 395, 423–24 (1961); Diggs v. Commissioner, T.C. Memo.

1959-99, 18 T.C.M. (CCH) 443, 445, aff’d, 281 F.2d 326 (2d Cir. 1960); Kenyon

Instrument Co. v. Commissioner, 16 T.C. 732, 739–40 (1951); South Chester Tube

Co. v. Commissioner, 14 T.C. 1229, 1235 (1950); Agricultural Sec. Corp. v.

Commissioner, 39 B.T.A. 1103, 1114 (1939), aff’d, 116 F.2d 800 (9th Cir. 1941);

Stein-Bloch Co. v. Commissioner, 23 B.T.A. 1162, 1166–68 (1931); United States

Trust Co. of New York v. Commissioner, 13 B.T.A. 1074, 1077–78 (1928);

Couzens v. Commissioner, 11 B.T.A. 1040, 1151 (1928); Hayes v. Commissioner, 7

B.T.A. 936, 944–45 (1927).

758

See Schwartz v. Commissioner, 40 T.C. 191, 193–94 (1963); Lorain Ave.

Clinic v. Commissioner, 31 T.C. 141, 164 (1958); see also Stevens Bros. Foundation,

Inc. v. Commissioner, 39 T.C. 93, 108 (1962) (expressly avoiding jurisdictional

question by finding elements of estoppel lacking), modified, 324 F.2d 633 (8th Cir.

1963).

759

Schwartz v. Commissioner, 40 T.C. 191, 193 (1963) (citations omitted).

Foundational Parameters of the Court’s Jurisdiction 383

However, the determination that the Tax Court lacked jurisdiction to

entertain claims based on equitable estoppel and related theories absent

specific statutory authorization is suspect. Congress has supplied the court

with jurisdiction to, among other things, redetermine deficiencies in tax.

760

The redetermination contemplated clearly comprehends a judicial format,

and in this context it seems entirely appropriate that in exercising its

authority, absent some specific statutory bar, the Tax Court should apply

the same doctrines and rules of construction as would any other court.

Among other cases, the Tax Court in Schwartz relied on the Supreme

Court’s decision in Gooch Milling & Elevator Co. v. Commissioner,

761

in which

the Court held that the Board could not apply the doctrine of equitable

recoupment because it was a creature of statute and “[t]he Internal Revenue

Code, not general equitable principles, is the mainspring of” its

jurisdiction.

762

However applicable Gooch Milling may at first appear to be to

the estoppel problem, there are important distinctions that can be drawn.

Gooch Milling involved a specific jurisdictional provision barring the Board

from applying recoupment.

763

No similar provision exists with respect to

estoppel. Additionally, the provision prohibiting recoupment was in the

nature of a limitation on the Board’s subject matter jurisdiction, precluding

the determination of overpayments or underpayments for any year other

than the one for which a deficiency notice was issued. Such restrictions on

jurisdiction of the federal courts traditionally have been scrupulously

observed as limitations on judicial power, regardless of equitable

considerations.

764

Application of estoppel, on the other hand, neither

extends nor contracts subject matter jurisdiction; it is simply a doctrine

employed to decide a case already properly before the court. Finally, even if

Gooch Milling should be read as generally limiting the Board’s power to

exercise equitable powers, the present applicability of such a restriction is

now open to considerable doubt. Since 1969 the Tax Court has been a

legislative court organized under article I of the Constitution,

765

and it has

been recognized in several instances that legislative courts have inherent

power to exercise judicial functions.

766

The Tax Court’s rare expressions of its lack of jurisdiction to address

claims of equitable estoppel no longer reflect the prevailing view. As

mentioned above, subsequent to those decisions, the court has repeatedly

760

I.R.C. §§ 6213(a), 7442.

761

Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418 (1943).

762

Id. at 422.

763

See supra notes 648–649 and accompanying text supra.

764

See generally CHARLES ALAN WRIGHT, LAW OF FEDERAL COURTS § 7 (3d ed.

1976).

765

Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83 Stat. 730 (amending

I.R.C. § 7441).

766

See supra note 667 and accompanying text.

384 The United States Tax Court – An Historical Analysis

entertained invocations of estoppel by the taxpayer and Government alike,

merely assuming rather than examining its jurisdiction to do so.

767

Appellate courts adopted a similar approach of presuming the Tax Court’s

jurisdiction in this context.

768

Later, appellate courts expressly endorsed the

jurisdiction of the Tax Court to address estoppel related arguments. In

Reynolds v. Commissioner,

769

the Sixth Circuit cited the Tax Court’s jurisdiction

to apply the doctrine of equitable estoppel as a basis for finding that the

court was empowered to apply the doctrine of judicial estoppel against the

Government. Shortly thereafter, the Eleventh Circuit in Bokum v.

Commissioner reasoned that the Tax Court “must have the power to consider

an equitable estoppel claim, if considering the claim is necessary to the

appropriate disposition of the claim before it,”

770

noting that the taxpayer

would be unable to litigate an estoppel claim on a deficiency basis if the

case were otherwise.

771

However, the Seventh Circuit in Flight Attendants Against UAL Offset v.

Commissioner

772

supplied the most definitive and extensive assertion of the

Tax Court’s jurisdiction to address claims grounded in equitable estoppel.

Writing for the panel, Judge Posner placed considerable emphasis on the

judicial nature of the Tax Court following its transformation from an

executive agency to a legislative court:

The argument that the Tax Court cannot apply the doctrines of

equitable tolling and equitable estoppel because it is a court of

limited jurisdiction is fatuous. All federal courts are courts of limited

jurisdiction. We are given no reason to suppose that statutes of

limitations are intended to be administered differently in the Tax

Court than in the federal district courts, which share jurisdiction in

federal tax cases with the Tax Court. It is true that the predecessor

767

See id.

768

See Bokum v. Commissioner, 992 F.2d 1136, 1140 (11th Cir. 1993) (citing

Young v. Commissioner, 926 F.2d 1083, 1090 (11th Cir. 1991); Graff v.

Commissioner, 673 F.2d 784, 785 (5th Cir. 1982); Warner v. Commissioner, 526

F.2d 1, 2 (9th

Cir. 1975); Estate of Geiger v. Commissioner, 352 F.2d 221, 224, 230

(8th Cir. 1965)).

769

861 F.2d 469 (6th Cir. 1988). The Sixth Circuit’s decision in Reynolds

confirming the ability of the Tax Court to apply both equitable estoppel and

judicial estoppel is noteworthy in comparison to that court’s decision in Estate of

Mueller v. Commissioner, 153 F.3d 302 (6th Cir. 1998), holding that the Tax Court is

without jurisdiction to apply the doctrine of equitable recoupment. These two

decisions can be reconciled on the basis that § 6214(b)—prior to its amendment in

2006—supplied a statutory bar to the Tax Court’s recoupment jurisdiction.

770

992 F.2d 1136, 1140 (11th Cir. 1993).

771

Id. at 1140–41.

772

165 F.3d 572 (7th Cir. 1999).

Foundational Parameters of the Court’s Jurisdiction 385

bodies to the Tax Court, such as the Board of Tax Appeals, were

administrative agencies having more limited powers than a regular

court. But the present Tax Court operates pretty indistinguishably

from a federal district court. It differs in some respects—it has

specialized jurisdiction, obviously, and its judges are not Article III

judges. But none of the differences bear on whether the court is

empowered to recognize defenses to the statute of limitations. In

context, the Supreme Court’s dictum in Commissioner v. McCoy, 484

U.S. 3, 7 (1987) (per curiam), that the Tax Court lacks “general

equitable powers” means only that the Tax Court is not empowered

to override statutory limits on its power by forgiving interest and

penalties that Congress has imposed for nonpayment of taxes—but

then no court is, unless the imposition would be unconstitutional.

Without citing McCoy or United States v. Dalm, 494 U.S. 596, 611

and n.8 (1990), which reserves the issue of the Tax Court’s equitable

powers, the Supreme Court in Freytag v. Commissioner, supra, 501 U.S.

[868] at 891 [(1991)], pointed out that the Tax Court has been given

injunctive and other equitable powers; and numerous cases affirm

the Tax Court’s power to enforce equitable principles, such as

contract reformation and judicial estoppel, without express

congressional authorization. We are at a loss to understand why

equitable tolling and equitable estoppel shouldn’t be among the

equitable principles applicable to proceedings in the Tax Court.

Bokum v. Commissioner, [992 F.2d 1136, 1140-41 (11th Cir. 1993)],

holds that they are among them. The overlap between the district

court’s jurisdiction over refund suits and the Tax Court’s jurisdiction

over deficiency suits—both jurisdictions exclusive, but the taxpayer

allowed to choose between them—makes it anomalous and

confusing to multiply distinctions between the doctrines in the two

types of courts.

773

The Seventh Circuit’s opinion supplies the most definitive word on the

Tax Court’s jurisdiction to entertain estoppel related claims and, for that

matter, the Tax Court’s equitable jurisdiction in general. In short, the Tax

Court as a judicial body may entertain equitable claims arguments that arise

in the course of resolving cases that fall within its statutory grant of

jurisdiction, unless specifically precluded from doing so by statute.

Accordingly, taxpayers no longer need avoid the Tax Court to preserve

their equitable arguments.

773

Id. at 578 (citations omitted). But see Lederman, supra note 701, at 398, 411–

12 (contending that judicial economy does not provide an adequate basis for

extending the equitable jurisdiction of the Tax Court beyond that expressly

authorized by Congress).

386 The United States Tax Court – An Historical Analysis

Innovation in Remedies and Procedures 387

ART VII

ENHANCING THE EFFICIENCY OF TAX ADJUDICATION:

INNOVATION IN REMEDIES AND PROCEDURES

The Tax Court’s traditional jurisdiction over deficiencies and

overpayments continues to make up the bulk of its workload. However,

recognizing that taxpayers at times had pressing disputes with the Service

that did not result in an immediate increased tax liability, Congress

established and has periodically expanded the jurisdiction of the Tax Court

to issue declaratory judgments. In addition to providing new spheres of

Tax Court jurisdiction, Congress has taken a number of steps to improve

the efficiency of tax adjudication. These improvements often took the

form of procedural enhancements, as in the case of the unified partnership

audit procedures enacted in 1982. Other measures have conferred

supplemental jurisdiction to the Tax Court, permitting taxpayers to resolve

issues relating to both the underlying tax liability and the resulting interest

obligations in one proceeding before the court—obviating the need for the

taxpayer to resort to an alternate forum to resolve disputes over interest.

This Part addresses expansions of the Tax Court’s jurisdiction and

alterations to its procedures aimed at improving the tax adjudication regime.

A. Declaratory Judgments

With the important exception of the Tax Court’s deficiency jurisdiction,

Congress traditionally has been unwilling to provide judicial tax remedies

other than for refund of taxes already paid. Thus, the tax laws generally bar

suit to restrain assessment or collection of taxes,

and consistent with this

goal, the courts have refused to entertain refund litigation in the absence of

full payment of the disputed tax.

These limitations are based on the policy

that unlimited judicial remedies for aggrieved taxpayers could unduly

hamper the orderly collection of government revenues.

With the enactment of the Declaratory Judgment Act of 1934,

the

question arose whether the policy against liberal remedies in tax disputes

had been eroded. The broad statutory language was soon interpreted to

permit declaratory judgments with respect to tax matters even though

I.R.C. § 7421(a).

E.g., Flora v. United States, 362 U.S. 145 (1960).

See id. at 175.

Ch. 512, 48 Stat. 955, as amended, 28 U.S.C. §§ 2201–2202.

388 The United States Tax Court – An Historical Analysis

injunctive relief continued to be unavailable.

Given the similarity of

declaratory and injunctive relief, Congress, at the suggestion of the Justice

Department, fairly promptly amended the Declaratory Judgment Act to

preclude its application “with respect to Federal taxes.”

1. Early Subjects of Declaratory Judgment Jurisdiction

The bar on declaratory relief in tax controversies was rigidly observed

for nearly four decades.

However, it became apparent as years passed that,

in certain cases, existing remedies were inadequate to afford taxpayers a

practical judicial remedy. These matters typically involved situations in

which taxpayers were reluctant to proceed with planned activities in the

absence of advance approval of the Service. For example, the benefits

available with respect to qualified pension and profit-sharing plans were not

by statute dependent on advance approval of the Service.

However, the

statutory provisions governing these plans were complex and open to

divergent interpretations, and the risks involved in implementing and

funding a plan without such approval were great. If the Service chose to

contest a plan’s qualification, judicial review was available; but if the Service

ultimately prevailed, the tax benefits would be lost. Moreover, even if the

taxpayer ultimately prevailed, delays and expense incurred in administrative

and judicial litigation would offset the tax advantages of instituting the plan.

As a consequence, most taxpayers tailored their plans to meet Service

requirements, whether or not they agreed that such requirements were in

accordance with law. The problem was compounded since the absence of

litigation resulted in little in the way of judicial interpretations, which made

Service pronouncements even more important. Additionally, the traditional

remedies failed to provide employees with an opportunity to support or

challenge the qualification of a plan. Although employees were directly

affected by such plans, a deficiency or refund dispute generally would

involve only the employer; employees lacked standing to participate in such

litigation as parties.

Penn v. Glenn, 10 F. Supp. 483 (W.D. Ky. 1935), appeal dismissed, 84 F.2d

1001 (6th Cir. 1936).

Revenue Act of 1935, ch. 829, § 405, 49 Stat. 1027; 6A MOORE’S FEDERAL

PRACTICE ¶ 57.18 (2d ed. 1974) [hereinafter cited as MOORE’S].

See M. Carr Ferguson, Jurisdictional Problems in Federal Tax Controversies, 48 IOWA

L. REV. 312, 325 (1963).

H.R. REP. NO. 93-807, at 105 (1974).

Id. at 106.

Innovation in Remedies and Procedures 389

a. Qualification of Retirement Plans

As a result of these concerns, Congress, in the Employee Retirement

Income Security Act of 1974,

provided the Tax Court with authority to

issue declaratory judgments with regard to controversies arising from

Internal Revenue determinations or Internal Revenue failure to make

determinations, as to the initial and continuing qualification of employee

retirement plans.

In the instance of a controversy surrounding an Internal

Revenue determination, the Tax Court proceeding must be initiated by

filing a pleading before the 91st day following the day after the mailing of

the disputed determination.

Conversely, if the controversy results from

the failure of Internal Revenue to make a determination, the Tax Court

proceeding cannot be commenced before the expiration of 270 days

following the request for such determination.

The legislation provides

that an action for a declaratory judgment may be commenced in the Tax

Court by the employer, the plan administrator, an employee who is an

“interested party,” or the Pension Benefit Guaranty Corporation.

assure that interested party employees are given the opportunity to

participate in both administrative and judicial proceedings regarding plan

qualification, the statute further provides that the court may hold a petition

to be “premature” unless the petitioner has complied with notice

provisions, provided by Treasury regulation, for such parties.

Tax Court

decisions generally are appealable to the court of appeals for the circuit in

which the employer’s principal place of business, principal office or agency

is located.

In general, the declaratory judgment provision with respect to

retirement plans is similar to the Declaratory Judgment Act of 1934.

provides for a judicial determination of rights in situations in which the

traditional monetary remedy is inadequate. To preclude adjudication of

disputes that do not constitute cases or controversies within the meaning of

the Constitution, the 1974 legislation, as is the case with the Declaratory

Judgment Act, expressly makes the procedure applicable only in cases of an

Pub. L. No. 93-406, 88 Stat. 829.

Id. § 1041(a), 88 Stat. 949 (adding I.R.C. § 7476).

I.R.C. § 7476(b)(5).

I.R.C. § 7476(b)(3).

I.R.C. § 7476(b)(1).

I.R.C. § 7476(b)(2).

I.R.C. § 7482(b)(1)(C).

The committee report of the Ways and Means Committee states that “[i]t is

anticipated that the normal rules of the Federal courts as they relate to declaratory

judgments are to be applicable under the Tax Court declaratory judgment

procedure.” H.R.

REP. NO. 93-807, at 108 (1974).

390 The United States Tax Court – An Historical Analysis

“actual controversy.”

This requirement is incorporated in the statute by a

provision barring maintenance of the action unless the disputed plan has

been put into effect.

The procedure is also identical to the Declaratory

Judgment Act in specifying that declaratory relief “may” be provided.

connection with the Declaratory Judgment Act, the permissive “may” has

been interpreted to allow the denial of declaratory relief, otherwise within

the jurisdiction of the court, if in the exercise of its discretion the court

finds such relief to be inappropriate.

Reasons for denying relief have been

based on several grounds; among these are that a better alternative remedy

exists,

that declaratory relief will neither settle the issue in dispute nor

terminate the controversy giving rise to the action,

and that the procedure

is being employed as a method of procedural fencing.

Although the

legislative history of the 1974 enactment and the Tax Court rules are silent

on the significance of “may,” presumably the same interpretation given the

Declaratory Judgment Act will be applied to the Tax Court provision.

Despite the basic similarity with the federal Declaratory Judgment Act,

several aspects of the Tax Court’s declaratory judgment jurisdiction in this

setting are peculiar to the Tax Court. The first of these concerns is the

necessity of exhaustion of administrative remedies as a prerequisite for

obtaining declaratory relief. Unlike the federal Declaratory Judgment Act,

which is broadly stated and contains no explicit reference to the doctrine of

exhaustion,

the Tax Court provision specifically precludes the issuance of

a declaratory judgment unless the petitioner has exhausted the available

remedies within the Internal Revenue Service.

In case of Service inaction,

the statute requires the expiration of 270 days from the time of the ruling

I.R.C. § 7476(a); 28 U.S.C. § 2201.

I.R.C. § 7476(b)(4). Softening this requirement somewhat, the statute

provides that “[a] plan or amendment shall not be treated as not being in effect

merely because under the plan the funds contributed to the plan may be refunded if

the plan (or the plan as so amended) is found to be not qualified.” Id.

I.R.C. § 7476(a); 28 U.S.C. § 2201.

See generally MOORE’S, supra note 6, at ¶ 57.08.

Cunningham Bros. v. Bail, 407 F.2d 1165 (7th Cir. 1969); Larson v. General

Motors Corp., 134 F.2d 450 (2d Cir. 1943); Gregory v. United States Bd. of Parole,

308 F. Supp. 258 (W.D. Mo. 1969); Zenie Bros. v. Miskend, 10 F. Supp. 779 (S.D.

N.Y. 1935).

E DWIN BORCHARD, DECLARATORY JUDGMENTS 299 (2d ed. 1941).

See Kerotest Mfg. Co. v. C-O Two Co., 342 U.S. 180 (1952); Cunningham

Bros. v. Bail, 407 F.2d 1165 (7th Cir. 1969); Independent Tape Merchants Ass’n v.

Creamer, 346 F. Supp. 456 (M.D. Pa. 1972).

With regard to the court’s unwillingness to grant declaratory relief in the case

of a better alternative remedy, see infra notes 101–104 and accompanying text.

28 U.S.C. §§ 2201–2202.

I.R.C. § 7476(b)(3).

Innovation in Remedies and Procedures 391

request before exhaustion of remedies can be found to exist.

Although

the exhaustion doctrine is applied to cases arising under the Declaratory

Judgment Act, the doctrine in these cases is based on equitable principles.

Courts have held on this basis that the exhaustion doctrine may be waived

or that proceedings may be stayed pending completion of administrative

remedies.

Because the Tax Court provision is statutory and expressed in

mandatory language, the court has interpreted it to require exhaustion as a

jurisdictional prerequisite for maintenance of a proceeding.

In connection

with satisfaction of this requirement, the committee reports indicate that

the petitioner must have availed himself of all appeal rights within the

Internal Revenue Service and have complied with all Service requirements

for obtaining a ruling such as supplying information necessary for the ruling

process.

In the case of a petition by an employee who did not receive

initial notice of the Service’s determination procedure, the exhaustion

requirement will be satisfied if the employee exhausts all remedies available

after receiving such notice of the determination proceeding.

A second aspect peculiar to the Tax Court declaratory judgment

procedure in this setting involves the nature of the evidence that may be

adduced for purposes of the proceeding. Although the statute is silent on

this point, the Tax Court rules generally provide that the court’s

determination is to be based on the administrative record before the

Service.

Although the rules provide that the court may permit a party to

introduce evidence outside of this administrative record “for good cause

shown,”

the court’s explanation of this exception indicates that it will be

interpreted narrowly. The court envisioned the exception applying only to

permit the introduction of disputed facts necessary to establish the court’s

Id. The statute is phrased in the negative:

A petitioner shall not be deemed to have exhausted his administrative

remedies with respect to a failure by the Secretary to make a determination

with respect to initial qualification or continuing qualification of a

retirement plan before the expiration of 270 days after the request for such

determination was made.

Id. No implication is intended that the expiration of the 270 day period will be the

equivalent of exhaustion. Even after such expiration, exhaustion will not have

occurred if the petitioner did not otherwise satisfy the requirements of exhaustion.

H.R.

REP. NO. 93-807, at l09 (1974).

See MOORE’S, supra note 6, at ¶ 57.16.

Tucker v. Alexander, 275 U.S. 228 (1927).

Prentis v. Atlantic Coast Line Co., 211 U.S. 210 (1908).

T AX CT. R. 210(c)(4) (July 6, 2012 ed.).

H.R. REP. NO. 93-807, at 109 (1974).

Id.

T AX CT. R. 217(a) (July 6, 2012 ed.).

Id.

392 The United States Tax Court – An Historical Analysis

jurisdiction.

By contrast, the procedure under the Declaratory Judgment

Act does not contain any general rule limiting evidence to the administrative

record; rather, evidence ordinarily receivable at any trial is permitted to be

introduced.

The more restrictive approach in the Tax Court is predicated

on language in the committee reports indicating that the court’s function in

declaratory judgment proceedings is simply to review the accuracy of

Service determinations and not generally to inquire into the qualification of

retirement plans.

Thus, the administrative record and the reasons

advanced by the Service for its position generally mark the boundaries of

the proceeding, and it is assumed that these cases will be resolved without

the necessity of a trial.

The general approach of resolving these disputes based on the

administrative record, however, does not apply to cases involving the

revocation of qualified status of a retirement plan or, as later described,

cases involving the revocation of exempt status of an employee trust, the

valuation of a gift, or the eligibility of an estate to pay the estate tax on an

installment basis.

In those cases, a disposition will be made on the basis

of the administrative record alone only if the parties agree that the record

developed before the Service contains all facts relevant to the resolution of

the case and such facts are not in dispute.

A third noteworthy item with regard to declaratory judgment

proceedings in the Tax Court involves the question of burden of proof.

The Senate version of the Employee Retirement Income Security Act

provided special statutory burden of proof rules for declaratory judgment

proceedings.

Generally, the burden of proof would be on the petitioner,

In promulgating this exception, the court explained that there did not appear

at the time “any circumstances under which a trial will be held except as to disputed

jurisdictional facts or to resolve the disagreement between the parties as to the

contents of the administrative record.” See Rules Comm. Note, T

AX CT. R. 217(a)

(July 1, 1977 ed.), 68 T.C. 1048. Hence, the exception was inserted “merely out of

an abundance of caution to provide for the possibility of a trial on other facts or

the presentation of evidence in the event that a situation not now contemplated

might arise in which a trial would be appropriate.” Id.

See FED. R. CIV. P. 57.

H.R. REP. NO. 93-807, at 108 (1974); see also Rules Comm. Note, TAX CT. R.

210(a) (July 1, 1977 ed.), 68 T.C. 1048.

See TAX CT. R. 217(b) (July 6, 2012 ed.).

T AX CT. R. 210(b)(8), 217(a) (July 6, 2012 ed.). With respect to proceedings

involving revocations, the exception exists because such determinations usually are

made on the basis of the Service’s independent investigation rather than on the

basis of information furnished by the applicant for the determination. Rules

Comm. Note, T

AX CT. R. 217(a) (July 1, 1977 ed.), 68 T.C. 1048.

T AX CT. R. 217(a) (July 6, 2012 ed.).

H.R. REP. NO. 93-1280, at 331 (1974); S. REP. NO. 93-383, at 116 (1973).

Innovation in Remedies and Procedures 393

as is the case in most Tax Court proceedings.

However, the burden

would be on the Commissioner with respect to grounds that were not

advanced in the Commissioner’s determination.

Thus, if the

Commissioner changed the grounds of the determination, or if

Commissioner had not issued a determination, the Commissioner would, at

least partially, bear the burden of proof. The House bill eliminated the

statutory burden of proof passed by the Senate, and left the formulation of

burden of proof rules to the Tax Court.

The House provision ultimately

prevailed, and no reference to burden of proof is contained in the

legislation as enacted.

Tax Court rules originally promulgated pursuant to the declaratory

judgment provision contained rather elaborate burden of proof provisions

that generally followed the policy of the Senate bill.

In all cases the burden

of proof rested on the petitioner with respect to establishing the elements

of jurisdiction.

Thus, the petitioner had to establish that a petition was

filed within the statutory period, that the disputed plan was in effect, and

that administrative remedies had been exhausted.

The remaining

application of the burden of proof depended upon whether the

Commissioner had issued a determination on which the proceeding was

based. If such a determination had been issued and it concluded that a plan

did not qualify, the burden of proof was placed on the party challenging

such determination as to any ground specified in the determination.

If a

determination that a plan did not qualify was defended on a ground not

specified in such determination, the party seeking to defend the

determination bore the burden of proof as to the new ground.

If the

Commissioner had determined that a plan did qualify, any party challenging

such determination bore the burden of proof on every ground on which the

Commissioner relied to establish that the plan did not qualify.

If the

Commissioner had not issued a determination, any party, including the

Commissioner, seeking to establish that the plan did not qualify, bore the

burden of proof on every ground relied on to establish such

nonqualification.

See supra note 43.

Id.

H.R. REP. NO. 93-1280, at 331 (1974); H.R. REP. NO. 93-807, at 108 (1974).

I.R.C. § 7476; H.R. REP. NO. 93-1280, at 331 (1974).

T AX CT. R. 217(c)(1) (July 1, 1977 ed.).

TAX CT. R. 217(c)(1)(i) (July 1, 1977 ed.).

T AX CT. R. 210(c) (July 1, 1977 ed.).

T AX CT. R. 217(c)(1)(i) (July 1, 1977 ed.).

T AX CT. R. 217(c)(1)(ii) (July 1, 1977 ed.).

T AX CT. R. 217(c)(1)(i) (July 1, 1977 ed.).

T AX CT. R. 217(c)(1)(i)(B) (July 1, 1977 ed.).

394 The United States Tax Court – An Historical Analysis

The Tax Court deleted the burden of proof provisions applicable to this

and other areas of its declaratory judgment jurisdiction in 2003.

The court

did so out of an abundance of caution, recognizing that the burden of proof

provisions introduced through the enactment of § 7491 in 1998

could

apply to declaratory judgment actions. Whether this is in fact the case is not

readily clear. On one hand, the scope of the general rule under § 7491(a)

appears broad enough to encompass declaratory judgment proceedings

before the Tax Court, as it applies to “any court proceeding.”

However,

the provision has potential effect only if the taxpayer produces credible

evidence with respect to a factual issue “relevant to ascertaining the liability

of the taxpayer” for income taxes or for estate and gift taxes.

As a

declaratory judgment does not bear, at least immediately, on the tax liability

of the taxpayer, an argument exists that § 7491 is inapposite in this setting.

Indeed, to date, the court has managed to avoid squarely addressing

whether § 7491(a) applies to declaratory judgment proceedings.

Nonetheless, stating that it did not “wish to suggest by Rule that [§ 7491]

does not apply” in this context,

the court deleted the burden-of-proof

regime under former Rule 217(c) altogether.

Even assuming § 7491 applies to declaratory judgment proceedings

before the Tax Court, the provision does not purport to resolve all burden

of proof questions. Rather, the general provision of § 7491(a) places the

burden of proof on the Commissioner if the taxpayer first produces

“credible evidence” with respect to a factual issue relevant to ascertaining

the taxpayer’s liability for any income tax or estate and gift tax,

and even

then only if a series of limitations does not apply.

Section 7491(a)

therefore does not purport to articulate a broadly applicable general rule

See 120 T.C. 639–41 (2003) (amending Tax Court Rule 217 with a general

effective date of June 30, 2003).

See Internal Revenue Restructuring and Reform Act of 1998, Pub. L. No. 105-

206, § 3001(a), 112 Stat. 726–27 (enacting I.R.C. § 7491). The scope and

application of § 7491 is addressed in Part X.C.4.

I.R.C. § 7491(a).

Id.

In a retirement plan qualification proceeding, the court in Hollen v.

Commissioner, T.C. Memo. 2011-2, 101 T.C.M. 1004, stated that it “need not decide

whether § 7491(a) applies to declaratory judgment actions such as this,” citing the

taxpayer’s failure to argue the applicability of the provision. Id. at 1005 n.3.

Similarly, in an action concerning an organization’s ability to receive deductible

contributions, the court similarly avoided the question. See South Community

Ass’n v. Commissioner, T.C. Memo. 2005-285, 90 T.C.M. 568, 570 n.5 (“We need

not and do not decide whether sec. 7491(a)(1) applies in the setting of a declaratory

judgment action such as we have here.”).

Rules Comm. Note, TAX CT. R. 217 (June 30, 2003 ed.), 120 T.C. 641.

I.R.C. § 7491(a).

See I.R.C. § 7491(b).

Innovation in Remedies and Procedures 395

regarding the placement of the burden of proof. In declaratory judgment

actions following the elimination of Tax Court Rule 217(c) concerning a

challenge to an adverse agency determination, the court has placed the

burden of proof on the taxpayer (as was the case under former Tax Court

Rule 217(c)(1)(i)) under general principles.

Accordingly, the burden-of-

proof regime established under former Rule 217(c) may prove persuasive in

resolving future questions regarding the default allocation of the burden of

proof in declaratory judgment proceedings, should the allocation prove

critical to the disposition of the case.

b. Qualification of Tax Exempt Organizations and Classification of

Private Foundations

The exception to the general bar on declaratory judgments in tax

matters was further broadened by the Tax Reform Act of 1976.

This

legislation added to the permissible subjects of declaratory judgment action

disputes concerning the status of certain tax exempt organizations to which

contributions are deductible.

The purpose for and the pattern of the 1976

legislation closely resemble those involved in the earlier provision

authorizing declaratory judgments in the case of retirement plans.

The purpose of the exempt organization provision is virtually identical

to that for retirement plans. Although the statute generally does not require

prior administrative approval of tax exempt status, most organizations seek

such determinations to assure themselves and their contributors that

donations to the organization will be tax deductible.

Moreover, because

of the extremely unfavorable consequences that attend the denial or

revocation of exempt status, most organizations accede to Service views

with regard to their organization and operation. As is true with retirement

plans, these considerations have resulted in comparatively little judicial

litigation and an absence of precedent to guide both taxpayers and the

See Hollen v. Commissioner, T.C. Memo. 2011-2, 101 T.C.M. 1004, 1005;

South Community Ass’n v. Commissioner, T.C. Memo. 2005-285, 90 T.C.M. 568,

570.

Pub. L. No. 94-455, 90 Stat. 1520.

I.R.C. § 7428. The legislation also provided declaratory judgment jurisdiction

for disputes concerning the taxability of certain transfers of property from the

United States. The provision, formerly codified in § 7477, was repealed for

transfers and exchanges after 1984. See Deficit Reduction Act of 1984, Pub. L. No.

98-369, § 131(e)(1), 98 Stat. 664. A detailed analysis of this former provision is

provided in the original edition of this text. See H

AROLD DUBROFF, THE UNITED

STATES TAX COURT: AN HISTORICAL ANALYSIS 465–67 (1979).

H.R. REP. NO. 94-658, at 283 (1975); S. REP. NO. 94-938, at 585 (1976).

I.R.C. § 508(a) requires most § 501(c)(3) organizations, organized after Oct. 9,

1969, to apply for Service approval of exempt status.

396 The United States Tax Court – An Historical Analysis

Service. Difficulties occasioned by these problems have attracted the

critical comment of both the Supreme Court

and the Commissioner of

Internal Revenue.

In several respects the procedures for declaratory judgments for exempt

organizations are identical to those for retirement plans. Thus, the time

limits for commencing the proceeding are the same for both types of

proceedings—within 91 days following the day after the mailing of a

determination

or, if the Service makes no determination, no earlier than

270 days after the filing of the original determination request.

Additionally, each provision states that the court “may” make a declaration

with regard to the dispute

and thus leaves open the exercise of discretion

in cases in which a declaratory judgment, although authorized under the

letter of the law, would be inappropriate. In each type of proceeding,

exhaustion of administrative remedies is a jurisdictional prerequisite for

commencing suit,

and the same provision permitting flexible use of

special trial judges is applicable to each type of proceeding.

In other respects the two procedures have minor differences that mainly

reflect the various types of substantive issues involved. Thus, the category

of permissible petitioners in exempt organization proceedings is limited to

the organization the status of which is in question.

The necessity of an

actual controversy is common to both types of proceedings, but the

requirement is satisfied differently in each. In the case of retirement plans,

the statute requires that the plan be adopted;

for exempt organizations,

the organization in question must be in existence.

The general limitation

of evidence to the administrative record also is common to both

procedures. The primary exception to the limitation is that extrinsic facts

may be introduced with respect to the question of the court’s jurisdiction.

Also excepted in the case of retirement plans is evidence with respect to the

revocation of a plan’s qualified status and revocation of exempt status of an

Commissioner v. “Americans United” Inc., 416 U.S. 752, 774 (1974)

(Blackmun, J., dissenting); Bob Jones Univ. v. Simon, 416 U.S. 725, 749–50 (1974).

Randolph W. Thrower, I.R.S. Is Considering Far Reaching Changes in Ruling on

Exempt Organizations, 34 J. T

AX’N 168 (1971).

I.R.C. §§ 7428(b)(3), 7476(b)(5), 7477(b)(4).

I.R.C. §§ 7428(b)(2), 7476(b)(3), 7477(b)(2).

I.R.C. §§ 7428(a), 7476(a), 7477(a).

I.R.C. §§ 7428(b)(2), 7476(b)(3), 7477(b)(2).

I.R.C. §§ 7476(c), 7477(c).

I.R.C. § 7428(b)(1).

I.R.C. § 7476(b)(4).

I.R.C. § 7428(b)(1); TAX CT. R. 210(c)(2)(C) (July 6, 2012 ed.).

T AX CT. R. 217(a) and accompanying Rules Comm. Note (July 1, 1977 ed.),

68 T.C. 1048.

Innovation in Remedies and Procedures 397

employee’s trust.

In the case of exempt organizations, new evidence may

be introduced in connection with a determination that revokes exempt

status, or that determines status as a private foundation or as a private

operating foundation.

Although the two provisions have many areas of similarity, some

differences remain. One area of difference, at least partially necessitated by

the different nature of the substantive disputes, is the subject matter of the

court’s review. With respect to retirement plans, the court may review: (1)

the Service’s determinations with respect to the initial or continuing

qualification of a plan;

and (2) the Service’s failure to make determinations

with respect to the initial or continuing qualification of a plan, but only if

the dispute concerning continuing qualification arises from a plan

amendment or termination.

In the case of exempt organizations, the

court may review: (1) the Service’s determinations with respect to the initial

or continuing qualification of an organization as a charitable organization, a

private foundation, or a private operating foundation;

and (2) the Service’s

failure to make determinations with respect to such initial or continuing

qualification.

Although the language of the provisions in this regard

appears to be quite similar (taking into account the different substantive

issues involved), a dispute emerged concerning one aspect of the retirement

plan provision. In a 1976 decision, Sheppard & Myers, Inc. v. Commissioner,

the Tax Court held that the 1974 statute gave it no jurisdiction to review a

determination by the Commissioner that revoked the qualified status of a

retirement plan. The court’s decision was based on committee reports

accompanying the legislation, which indicated that the court’s jurisdiction

was limited to controversies arising from initial qualification of a plan, plan

amendments, and plan terminations.

The revocation in Sheppard & Myers

did not result from any of these matters. However, committee reports on

the Tax Reform Act of 1976, which authorized declaratory judgments with

respect to exempt organizations,

provided as follows:

As is the case regarding retirement plans (under sec. 7476) the courts are

to have jurisdiction to determine whether the Service has correctly

concluded that a previously exempt organization has lost its

See supra notes 41–42 and accompanying text.

T AX CT. R. 210(b)(10), 217(a) (July 6, 2012 ed.).

I.R.C. § 7476(a)(1).

I.R.C. § 7476(a)(2).

I.R.C. § 7428(a)(1).

I.R.C. § 7428(a)(2).

67 T.C. 26 (1976).

H.R. REP. NO. 93-807, at 343 (1974).

See Pub. L. No. 94-455, § 1306, 90 Stat. 1520 (adding I.R.C. § 7428).

398 The United States Tax Court – An Historical Analysis

charitable donee status because of changes in operation, changes in

the governing law, changes in the governing instrument, etc.

Thus, the committee reports indicated a congressional intent that both the

retirement plan and exempt organization provisions permit review of

Internal Revenue Service determinations revoking favorable treatment. The

court in Sheppard & Myers did not note these committee reports, even

though the 1976 legislation was enacted at approximately the same time as

the promulgation of the case.

Whether this was because of oversight or

because the court did not accept the committee’s interpretation of the 1974

legislation is unknown.

Not long after the decision in Sheppard & Myers was issued, Congress

signaled its disapproval of the Tax Court’s narrow interpretation of its

jurisdiction. Citing the committee reports accompanying the 1976

legislation excerpted above, the Senate Finance Committee in 1978

explained that Congress intended for the Tax Court to possess jurisdiction

over cases concerning the revocation of a prior favorable determination by

the Service in the retirement plan setting.

Although the technical

corrections bill proposing to make this grant of jurisdiction express in light

of Sheppard & Myers was not enacted, Tax Court rules issued subsequent to

the enactment of the 1976 legislation nonetheless indicate that the court

recognizes its jurisdiction over revocation disputes in general.

In addition to differences with regard to the subject matter and scope of

review of the declaratory judgment provisions governing retirement plan

actions and exempt organizations, the procedure with regard to the latter

has three other distinct characteristics. First, unlike retirement plans, the

Tax Court’s primary jurisdiction to review determinations with regard to

exempt organizations is not exclusive. Proceedings seeking declaratory

judgments with regard to these matters may be initiated as well in either the

Court of Claims or the United States District Court for the District of

Columbia.

A degree of consistency in the procedural rules applied by the

three fora is expected since the committee reports provide that the burden

of proof rules in all declaratory actions regarding exempt organizations

S. REP. NO. 94-938, at 589 (1976) (emphasis supplied); H.R. REP. NO. 94-

658, at 286 (1975).

The opinion in Sheppard & Myers was filed on Oct. 6, 1976. The Tax Reform

Act was enacted on Oct. 4, 1976.

See S. REP. NO. 95-745, at 65–66 (1978), accompanying the Technical

Corrections Act of 1978, H.R. 6715, 95th Cong. (1977). The bill passed the House

of Representatives and then was reported to the Senate out of the Senate Finance

Committee. Thereafter, no action was taken on the bill.

T AX CT. R. 210(b)(10), 212, 217(a) (July 6, 2012 ed.); Rules Comm. Note, TAX

CT. R. 213(a), 217(a) (July 1, 1977 ed.), 68 T.C. 1042–43, 1048.

I.R.C. § 7428(a).

Innovation in Remedies and Procedures 399

should conform, to the extent practicable, to those adopted by the Tax

Court for retirement plan actions.

A second unique aspect of the exempt organization provision deals with

interim relief for such organizations in connection with charitable status.

The Service maintains a list of those organizations that it has determined

are eligible to receive deductible contributions, and the Service now makes

this list available to the public in an electronically searchable format.

contributor to such an organization can be assured of the deductibility of

contributions so long as the Service’s determination is not publicly revoked

or suspended.

Since the Service’s revocation or suspension of an

organization’s tax-exempt status is an administrative action that may be

judicially overridden, Congress provided in the 1976 legislation that, in

certain circumstances, donors may be assured of the deductibility of

contributions to an organization even though the Service revokes or

suspends its advance assurance of deductibility.

In order to be eligible for

the continued assurance of charitable status, the organization must institute

the declaratory judgment proceeding within the statutory period.

If it

does so, then even if the court determines that the Service determination

was correct, deductible contributions of up to $1,000 per taxpayer (treating

husband and wife as one taxpayer) will be permitted during the pendency of

litigation.

The provision may only apply to individual contributors

who

do not share any responsibility for the revocation of charitable status.

Naturally, if it is judicially determined that the Service determination was

incorrect, the $1,000 limitation will not apply.

100

A final area of interest that may or may not be unique to exempt

organizations deals with the issue of duplicative litigation. To illustrate,

suppose that at the same time the Commissioner issues a determination

revoking an organization’s exempt-charitable status the Commissioner also

asserts a deficiency in income tax based on the withdrawal of such status.

The taxpayer commences an action for a declaratory judgment that the

H.R. REP. NO. 94-658, at 285–86 (1975); S. REP. NO. 94-938, at 588 (1976).

The Internal Revenue Service no longer publishes Publication 78, Cumulative

List of Organizations Described in Section 170(c) of the Internal Revenue Code. Rather, the

Service now provides this information through an on-line search tool entitled

“Exempt Organizations Select Check,” available at http://www.irs.gov/Charities-&-

Non-Profits/Exempt-Organizations-Select-Check.

Rev. Proc. 72-39, 1972-2 C.B. 818.

I.R.C. § 7428(c).

I.R.C. § 7428(c)(1)(B).

I.R.C. § 7428(c)(2)(A).

Id.

I.R.C. § 7428(c)(3).

100

H.R. REP. NO. 94-648, at 287 n.8 (1975); S. REP. NO. 94-938, at 589 n.8

(1976).

400 The United States Tax Court – An Historical Analysis

revocation of favorable status was incorrect and also either files a petition

with the Tax Court contesting the deficiency determination or pays the

deficiency and initiates a refund action to recover the tax paid. Because of

the choice of forum with regard to exempt organization declaratory

judgments, these actions may be in the same or in different courts. The

issue of exempt status probably will be the same in both the declaratory

judgment and deficiency or refund proceeding, and the question arises

whether both proceedings should proceed simultaneously or whether one

proceeding should be stayed or dismissed pending completion of the other.

The problem, similar to that which could formerly occur if the

Commissioner issued a deficiency notice with respect to a year for which a

refund proceeding had already been instituted,

101

is addressed in the

committee reports under the 1976 Act:

This provision is intended to facilitate relatively prompt judicial

review of the specified types of exempt organization issues; it is not

intended to supplant the normal avenues of judicial review

(redetermination of a deficiency or suit for refund of taxes) where

those normal procedures could be expected to provide opportunities

for prompt determinations. Consequently, it is expected that the

courts will not entertain a declaratory judgment suit with regard to a

period for which a notice of deficiency has already been issued,

except upon a showing by the organization that the declaratory

judgment route is likely to substantially reduce the time necessary to

attain a final judicial review of the Service’s determination. Also, it is

expected that in general a court which has accepted pleadings in a

declaratory judgment proceeding will yield to a court which has

accepted pleadings in a redetermination of deficiency or a tax refund

suit, unless the proceedings in the declaratory judgment suit are so

far along that it would facilitate interests of prompt justice for the

latter court to yield to the former. The committee’s decisions are not

to be permitted to create conflicting determinations on the parts of

different trial courts with regard to any of the questions that may be

determined in a declaratory judgment suit; nor are the committee’s

decisions to operate so as to require duplication of effort on the part

of parties, witnesses, or courts.

102

The committee reports thus generally require that the actual tax

controversy (whether it be in the form of a deficiency or refund

proceeding) take precedence over the declaratory judgment action.

Although the directive in the committee reports is not reflected specifically

101

See Part VI.B.2.

102

H.R. REP. NO. 94-658, at 286 (1975); S. REP. NO. 94-938, at 588–89 (1976).

Innovation in Remedies and Procedures 401

in the statute, no technical problems should be presented to the court

acting in accordance with congressional desires inasmuch as the statute

leaves ample room for judicial discretion in providing that the court “may”

issue a declaratory judgment.

103

Because the legislative history with regard to multiple actions expressly

deals only with exempt organization declaratory judgments,

104

a question

remains as to the treatment of this issue in connection with proceedings

involving retirement plans. In the case of retirement plans, the possibility

of dual actions would exist in a case in which an employer implements a

plan in an unqualified manner and then seeks a favorable ruling. A denial

of qualified status by the Service could be accompanied by an assertion of a

deficiency based on disallowance of deductions to the employer or taxation

of trust income. Theoretically, both a declaratory judgment and a

deficiency or refund proceeding could be commenced.

c. Tax-Exempt Status of Certain Government Obligations

The Tax Court’s declaratory judgment jurisdiction arose in the 1970s,

and the last grant of jurisdiction during this period provided the Tax Court

with authority to determine if interest paid on prospective obligations

issued by State and local governments would be excluded from the gross

income of the recipient pursuant to § 103.

105

The need for this declaratory

judgment procedure provided by § 7478 is perhaps obvious. Although the

exclusion from gross income will inure to the benefit of the bondholder,

the availability of the exclusion determines the nominal interest rate

provided under the instrument (thereby allowing the bond issuer to capture

at least a portion of the benefit of the gross income exclusion). Simply put,

the bond cannot be adequately priced until the tax-exempt status is

established, and any lack of clarity concerning the tax treatment of the bond

interest would make placement of the bonds difficult if not impossible.

106

The § 7478 procedure therefore allows the prospective issuer of the

103

I.R.C. § 7428(a). See supra notes 20–25 and accompanying text.

104

See supra note 102.

105

See Revenue Act of 1978, Pub. L. No. 95-600, § 336(a), 97 Stat. 2763, 2841

(adding § I.R.C. 7478). In its original form, the statute authorized the Tax Court to

determine if prospective obligations were “described in section 103(a).” Congress

amended the statute in 1988 to be more precise, identifying the issue to be whether

the interest on such obligations would be “excludable from gross income under

section 103(a).” See Technical and Miscellaneous Revenue Act of 1988, Pub. L.

No. 100-647, § 1013(a)(42)(A)–(B), 102 Stat. 3544–45.

106

See S. REP. NO. 95-1263, at 150 (1978) (noting that the uncertainty

surrounding the potential determination that the bond interest could not be

excluded from gross income “invariably makes it impossible to market the bonds”).

402 The United States Tax Court – An Historical Analysis

bonds—the only party permitted to invoke the procedure

107

—to litigate the

proper tax treatment of the bond interest prior to the bonds being issued.

Following issuance, the bond issuer is no longer permitted to litigate the tax

treatment of the interest paid to the bondholders.

108

The Tax Court’s

jurisdiction under § 7478 is permissive.

109

As in other areas of declaratory

relief, the court requires the existence of an actual controversy before

exercising its jurisdiction under this provision. In this context, the Tax

Court requires at a minimum the prospective issuer to have adopted a

resolution authorizing the issuance of the bonds under State or local law

prior to commencing a proceeding under § 7478.

110

As a procedural matter, a prospective bond issuer may not commence a

proceeding under § 7478 until the Service has made a determination

concerning the tax treatment of the interest to be paid under the

prospective bond or has failed to make such a determination.

111

Additionally, the court is precluded from issuing a declaratory judgment

under the provision unless it determines that the issuer has exhausted all

available administrative remedies within the Service.

112

The issuance of an

adverse notice of determination generally indicates that the prospective

bond issuer has exhausted all available administrative remedies.

113

In that

case, the issuer must commence the proceeding under § 7478 within 90

107

See I.R.C. § 7478(b)(1). Additional parties may not be joined in this context.

See T

AX CT. R. 215(c) (July 6, 2012 ed.).

108

The Tax Court lacks jurisdiction under § 7478 to review the tax treatment

of interest paid under state or local municipal bonds that already have been issued.

Village of Brown Deer v. Commissioner, 86 T.C. 59 (1986). In 1988, the Senate

proposed to amend § 7478 to permit the declaratory judgment procedure to be

invoked by issuers of outstanding bonds (in addition to prospective bond issuers).

See S.

REP. NO. 105-174, at 52–53 (1998). This provision was dropped at the

conference committee, however, in lieu of a directive to the Service to amend its

administrative procedures to permit bond issuers to appeal adverse determinations

with respect to existing bonds to the IRS Office of Appeals as a matter of right. See

H.R. R

EP. NO. 105-599, at 248 (1998).

109

The statute provides that the court “may” make a declaration concerning

the tax treatment of the interest to be paid under the bond. I.R.C. § 7478(a) (flush

language) (“the court may make a declaration . . .”); see also I.R.C. §§ 7428(a),

7476(a) (each employing permissive language).

110

TAX CT. R. 210(c)(2) (July 6, 2012 ed.).

111

I.R.C. § 7478(a)(1), (2).

112

I.R.C. § 7478(b)(2). Revenue Procedure 88-32, 1988-1 C.B. 833, provides

guidance on the steps an issuer must take to obtain a ruling from the Service in this

setting. In general terms, the issuer must request a determination that is

accompanied by a “complete and detailed statement” of all facts relating to the

prospective obligations. Id. § 3.

113

Id. § 6.02(1).

Innovation in Remedies and Procedures 403

days of the mailing of the notice of determination.

114

If the Service fails to

make a determination, the issuer generally will be considered to have

exhausted all available administrative remedies upon the expiration of 180

days after the request for a determination was made,

115

provided the issuer

has taken “all reasonable steps to secure such determination.”

116

Accordingly, the prospective bond issuer cannot manufacture Tax Court

jurisdiction through dilatory conduct that deprives the Service of the

information necessary to make the requested determination. Once the 180-

day period has expired, the bond issuer may commence a proceeding under

§ 7478 at any time.

Whereas resolution of declaratory judgment proceedings concerning the

qualification of retirement plans and the tax exempt status of organizations

is presumptively limited to the administrative record,

117

the Tax Court

contemplates a broader scope of review in the § 7478 setting. In

disposition of a government obligation proceeding, the Tax Court Rules

anticipate that the administrative record will be “augmented by additional

evidence to the extent the Court may direct.”

118

One distinguishing characteristic of declaratory judgment actions

concerning the tax treatment of interest paid under State and local

government bonds concerns the appeal of a Tax Court decision in this

setting. Appeal in these cases does not rest with the circuit court of appeals

in which the prospective issuer resides; rather, all appeals of actions

maintained under § 7478 are reviewable only by the Court of Appeals for

the District of Columbia.

119

2. Expansions of Declaratory Judgment Relief

Following the establishment and expansion of the Tax Court’s

declaratory judgment jurisdiction in the 1970s, the court’s jurisdiction on

this front remained fairly stable for the next two decades.

120

However,

Congress significantly expanded the court’s declaratory judgment

114

I.R.C. § 7478(b)(3).

115

Rev. Proc. § 88-32, § 6.02(2).

116

I.R.C. § 7478(b)(2).

117

See TAX CT. R. 217(a) (July 6, 2012 ed.).

118

Id.

119

I.R.C. § 7482(b)(3).

120

The most significant change in the declaratory judgment arena during this

period related to the elimination of the Tax Court’s jurisdiction over disputes

concerning the taxability of certain transfers of property from the United States.

The provision, formerly codified in § 7477, was repealed for transfers and

exchanges after 1984. See Deficit Reduction Act of 1984, Pub. L. No. 98-369,

§ 131(e)(1), 98 Stat. 664.

404 The United States Tax Court – An Historical Analysis

jurisdiction through the Taxpayer Relief Act of 1997.

121

This legislation

provided the court with declaratory judgment jurisdiction over the valuation

of gifts, the qualification of a decedent’s estate to pay tax on a deferred

basis under § 6166, and adjustments to an “oversheltered” tax return that

did not operate to increase the taxpayer’s current tax liability. The first two

areas of expanded jurisdiction are addressed below. As adjustments to

oversheltered returns arise in connection with distributive shares of losses

from business entities taxed as partnerships, this material will be addressed

later in this Part under the broader topic of innovations in the partnership

procedures.

122

a. Declaratory Judgments Concerning Gift Tax Valuations

Prior to the enactment of § 7477, donors of property often lacked

recourse to challenge the Service’s determination concerning the gift tax

value of transferred property. Specifically, any increase in the tentative gift

tax resulting from a determined increase in the value of transferred property

would be absorbed by application of the donor’s unified credit against the

gift tax—that is, until the donor’s cumulative lifetime taxable gifts exceeded

the considerable amount of transfers shielded by the credit.

123

Until the

donor reached that limit, the absence of a deficiency in gift tax precluded

the Tax Court’s general deficiency jurisdiction, and the donor could not

invoke the refund jurisdiction of federal courts to recover a tax that was

never paid. However, this is not to suggest that the Service’s determination

of an increase in the value of a gift was immaterial. Once the period of

limitations expired, the increased value would be binding upon the taxpayer

for purposes of determining the tax consequences of the donor’s future

gifts

124

as well as the estate tax liability due in the donor’s estate.

125

121

Pub. L. No. 105-34, 111 Stat. 788 (1997).

122

Declaratory relief in the context of an oversheltered return is discussed in

Section C.4 of this Part.

123

See I.R.C. § 2505(a). When § 7477 was enacted in 1997, the prevailing

unified credit for gift tax purposes permitted a transferor to make $600,000 of

taxable gifts (that is, gifts in excess of the annual gift tax exclusion under § 2503(b))

over the donor’s lifetime without the payment of gift tax. At that time, however,

the credit was scheduled to increase incrementally to shield gift tax on lifetime

taxable gifts of $1 million. Under current law in 2013, the amount of cumulative

lifetime gifts that are shielded from gift taxation by the unified credit stands at

$5.25 million.

124

See I.R.C. § 2502(a) (donor’s annual gift tax determined by calculating the

difference between (a) the gift tax on all of the donor’s current and prior year gifts

and (b) the gift tax on the donor’s prior year gifts), § 2504(c) (valuing gifts made in

prior years at their value as finally determined for gift tax purposes).

Innovation in Remedies and Procedures 405

As part of the Taxpayer Relief Act of 1997, Congress addressed the

above-described anomaly through the enactment of § 7477.

126

If an actual

controversy exists regarding the Service’s determination of the value of a

gift and the determination does not result in a deficiency or an increased

payment of tax, the Tax Court may make a declaration of the contested

value.

127

The Tax Court’s declaration of gift tax value carries the force and

effect of a regular Tax Court decision, and is reviewable in the same

manner.

128

The Tax Court’s jurisdiction to do so may be invoked only by the

donor,

129

and then only if the donor satisfies certain conditions. To start,

the donor must invoke the Tax Court’s jurisdiction in a timely manner.

Once the Service sends the donor a notice of determination concerning the

value of a gift,

130

the donor must petition the Tax Court before the 91st day

following the date of mailing.

131

In addition to this procedural requirement,

§ 7477 precludes the Tax Court from entering a declaratory judgment until

the donor has exhausted all available administrative remedies.

132

While the

statute does not elaborate on what is required of the taxpayer in this regard,

presumably the condition requires the taxpayer to pursue a protest of the

determined gift tax value with the IRS Office of Appeals, as outlined in the

§ 7477 regulations.

133

b. Declaratory Judgments Concerning Qualification for Section

6166 Elections

Although payment of federal estate tax generally is due nine months

following the death of the decedent, Congress recognized that prompt

payment of estate tax could pose an economic hardship on estates holding

interests in closely held businesses. Through § 6166(a), Congress has

authorized an estate to elect to pay the estate tax on a deferred, installment

125

See I.R.C. § 2001(b) (including a decedent’s adjusted taxable gifts in the tax

base for estate tax purposes), § 2001(f) (valuing gifts to be included in tentative

estate tax base at their value as finally determined for gift tax purposes).

126

Pub. L. No. 105-34, § 506(c), 111 Stat. 788, 855–56 (1997).

127

I.R.C. § 7477(a); see also Treas. Reg. § 301.7477-1(a) (interpreting the Tax

Court’s jurisdiction as being predicated on an adjustment in value that will not

result in a gift tax deficiency or a refund of gift tax).

128

I.R.C. § 7477(a).

129

I.R.C. § 7477(b)(1). Joinder of additional parties is not permitted. TAX CT.

R. 215(c) (July 6, 2012 ed.).

130

The Service typically provides its determination through the issuance of a

Letter 3569. See Treas. Reg. § 301.7477-1(b)(2).

131

I.R.C. § 7477(b)(3); see also TAX CT. R. 210(c)(3) (July 6, 2012 ed.).

132

I.R.C. § 7477(b)(2); see also TAX CT. R. 210(c)(4) (July 6, 2012 ed.).

133

See Treas. Reg. § 301.7477-1(b)(1).

406 The United States Tax Court – An Historical Analysis

basis if the value of the closely held business exceeds 35 percent of the

value of the adjusted gross estate. If the estate qualifies for the election, it

can defer the initial installment of tax for five years past the due date, and

the estate can spread the succeeding installments over ten years.

134

Prior to the enactment of the declaratory judgment procedure provided

in § 7479 in 1997,

135

an estate had little recourse if the Service determined

that the estate was ineligible to pay the estate tax on an installment basis

under § 6166. The Tax Court lacked jurisdiction to review the Service’s

determinations concerning the estate’s qualification under § 6166,

136

leaving

the estate to pay the tax on a present basis and to pursue a refund of such

payment.

137

This approach, however, required the estate to incur the

hardship resulting from its relative illiquid position—the very problem that

Congress sought to ameliorate through the enactment of § 6166.

138

Accordingly, Congress provided the Tax Court with jurisdiction under

§ 7479(a) to make a declaratory judgment regarding an estate’s qualification

to make an election under § 6166 or an estate’s continued qualification to

defer payment pursuant to § 6166 in the case of an actual controversy

involving the Service’s determination (or failure to make a determination) of

those issues. The court’s declaratory jurisdiction may be invoked only by

134

See I.R.C. § 6166(a)(3).

135

Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 505(a), 111 Stat. 788,

854 (1997). Congress contemplated providing the Tax Court with jurisdiction to

issue declaratory judgments concerning an estate’s qualification to pay the estate tax

on a deferred basis under § 6166 through proposed legislation in 1981, see H.R.

EP. NO. 97-201, at 182–83 (1981), but the provision did not survive to enactment.

136

See Estate of Sherrod v. Commissioner, 82 T.C. 523 (1984) (holding that the

Tax Court lacks jurisdiction to review the Service’s determination that an estate was

not eligible to make a § 6166 election); Estate of Meyer v. Commissioner, 84 T.C.

560 (1985) (following Estate of Sherrod even though the Service’s denial of the

estate’s § 6166 election resulted in increased estate tax attributable to the denial of

an administrative expense deduction attributable to the interest owed on the would-

be installments).

137

The estate’s ability to pursue refund litigation in this context was by no

means clear, as certain courts determined that the action was foreclosed by the

Anti-Injunction Act of § 7421(a). See Bauersfeld v. United States, 74 A.F.T.R.2d

6598 (D. Kan. 1994) (holding challenge to denial of § 6166 election barred by Anti-

Injunction Act). But see Parrish v. Loeb, 558 F. Supp. 921 (C.D. Ill. 1982) (suit to

challenge Service’s reversal of the estate’s § 6166 eligibility not barred by Anti-

Injunction Act, based in part on estoppel grounds).

138

See H.R. REP. NO. 105-148, at 358 (1997); STAFF OF THE JOINT COMM. ON

TAX’N, GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 1997, JCS-

23-97, at 74 (1997) (explaining that Congress enacted § 7479 to provide estates

“access to the courts to resolve disputes over an estate’s eligibility for the section

6166 election, without requiring potential liquidation of the assets the installment

provisions of section 6166 are designed to protect”).

Innovation in Remedies and Procedures 407

the estate or any person who has assumed the obligation to make the

§ 6166 installment payments of tax.

139

The petitioner must invoke the Tax

Court’s jurisdiction by filing a petition before the 91st day following the

Service’s mailing of the notice of determination concerning the estate’s

qualification under § 6166.

140

Even if the Tax Court’s jurisdiction is invoked in a timely manner, the

court may not make a declaration unless it first determines that the

petitioner has exhausted all available administrative remedies.

141

The statute

presumes the petitioner has done so if the Service fails to make a

determination within 180 days after the petitioner requested such

determination be made, provided the petitioner has taken all reasonable

steps in a timely manner to secure the determination.

142

Beyond this

statutory presumption, Revenue Procedure 2005-33

143

provides guidance on

the steps a taxpayer-estate must take to be considered to have exhausted all

available administrative remedies. Most significantly, if the Service makes a

preliminary determination that the estate does not qualify for the § 6166

election, the estate must request a conference with the IRS Office of

Appeals. The request must be submitted in writing within 30 days of the

mailing of the preliminary determination. Furthermore, the estate must

“participate fully” in the Appeals conference, which includes providing all

information relevant to the § 6166(a) election that is requested by the

Service.

144

In the event the Service does not issue a preliminary

determination or if the Service does not hold the requested Appeals

conference, a taxpayer-estate that receives a final notice of determination

will be considered to have exhausted its administrative remedies without

participating in the Appeals conference.

145

The Tax Court’s jurisdiction under § 7479 has been most extensively

analyzed by the court in Estate of Roski v. Commissioner.

146

In that case, the

Service had denied the estate’s § 6166(a) election through the application of

a bright-line rule that a § 6166(a) election would not be granted unless the

estate posted a § 6165 bond or agreed to a special lien under § 6324A as a

means of securing the estate’s payment obligation. The Commissioner

contended that the Tax Court lacked jurisdiction to review its determination

to impose a bond or lien requirement in the case, arguing that the court’s

declaratory jurisdiction was limited to examining whether the estate satisfied

139

I.R.C. § 7479(b)(1); see also TAX CT. R. 210 (July 6, 2012 ed.) (setting forth

procedure for declaratory judgment actions before the Tax Court).

140

I.R.C. § 7479(b)(3).

141

I.R.C. § 7479(b)(2).

142

Id.

143

2005 C.B. 1231.

144

Id. § 4.01(b)(2), 2005 C.B. at 1232.

145

Id. § 4.03, 2005 C.B. at 1233.

146

128 T.C. 113 (2007).

408 The United States Tax Court – An Historical Analysis

the conditions to make the election under § 6166(a) or whether the grounds

for termination of the election under § 6166(g) were implicated. The court

rejected this narrow interpretation of its declaratory judgment jurisdiction,

holding instead that its jurisdiction extended to reviewing the Service’s

broader determination that the estate was not entitled to § 6166 relief—for

any reason.

147

Having asserted its jurisdiction to review the Service’s

determination, the court set aside the Service’s determination on the basis

that the bright-line application of a bonding requirement that was not

included in the statute constituted an arbitrary abdication of agency

discretion.

148

B. Review of Worker Classification Determinations

Similar to the expansion of the Tax Court’s declaratory judgment

jurisdiction, Congress provided the court with jurisdiction to resolve

disputes concerning the classification of service providers for federal

employment tax purposes as part of the Taxpayer Relief Act of 1997.

149

Pursuant to § 7436(a), the Tax Court may review a determination by the

Secretary that (1) one or more individuals providing services to the taxpayer

constitute employees for federal employment tax and income tax

withholding purposes,

150

or (2) that the taxpayer is not entitled to the

beneficial tax treatment provided by § 530(a) of the Tax Reform Act of

1978 with respect to such individuals.

151

The Tax Court’s review of the

147

See id. at 123–24.

148

Id. at 130–31.

149

Pub. L. No. 105-34, § 1454(a), 111 Stat. 788, 1055 (enacting I.R.C. § 7436).

150

As a general rule, the determination of whether a service provider

constitutes an employee for federal tax purposes as opposed to an independent

contractor is made with reference to common law principles for determining the

presence of an employer-employee relationship. See I.R.C. § 3121(d)(2) (defining

employee for FICA tax purposes as an individual who has the status of an

employee “the usual common law rules in determining the employer-employee

relationship”); Treas. Reg. § 31.3401(c)-1(b) (detailing common law factors to be

considered in determining whether a worker is an employee for federal income tax

withholding purposes); see also S

TAFF OF THE JOINT COMM. ON TAX’N, PRESENT

LAW AND BACKGROUND RELATING TO WORKER CLASSIFICATION FOR FEDERAL

TAX PURPOSES, JCX-26-07, at 2–5 (2007) (describing common law analysis). For a

list of 20 factors identified by the Service as relevant under the common law test,

see Revenue Ruling 87-41, 1987-1 C.B. 296.

151

As explained by the Staff of the Joint Committee on Taxation, supra note

150, at 5–6, § 530 of the Tax Reform Act of 1978 (§ 530) generally permits a

taxpayer to treat a service provider as not being an employee for employment tax

purposes regardless of the status of the service provider under the prevailing

common law analysis unless the taxpayer has no reasonable basis for treating the

service provider as an independent contractor. See Revenue Act of 1978, Pub L.

Innovation in Remedies and Procedures 409

Secretary’s determination proceeds on a de novo basis,

152

and a

determination by the Tax Court is reviewed in the same manner as a

decision of the Tax Court.

153

The jurisdiction of the Tax Court in this context is predicated upon the

making of a worker classification determination by the Service and, if notice

of the determination is sent by certified or registered mail, the taxpayer’s

filing of a petition with the court within 90 days of such mailing.

154

Once

the determination has been made and notice has been mailed to the

taxpayer, § 7436 generally extends the benefits of deficiency litigation to the

federal employment tax arena. The Service is precluded from assessing or

collecting the employment tax attributable to an adverse worker

classification determination until the period for seeking a determination by

the Tax Court expires or, if the Tax Court’s jurisdiction is invoked, until the

court’s decision in the matter becomes final.

155

Section 7436 contains a few context-specific provisions. To start, the

only party permitted to file a petition with the Tax Court for a

determination of worker classification is the person for whom the relevant

services were performed.

156

The putative employee or other potentially

affected party therefore is precluded from disputing the determination

before the Tax Court. Additionally, § 7436 bars consideration of

subsequent changes to the taxpayer’s employment tax treatment of the

service provider. Specifically, if during the pendency of the § 7436

proceeding the taxpayer changes the federal employment tax treatment of a

service provider whose employment tax status is involved in the proceeding

No. 95-600, § 530(a), 92 Stat. 2763, 2885. For years after 1978, relief under § 530 is

available only if (1) all federal returns required to be filed by the taxpayer with

respect to the service provider for the relevant period have consistently treated the

service provider as not being an employee and (2) the taxpayer and any predecessor

has not treated any individual holding a position substantially similar to the service

provider as an employee for employment tax purposes for periods after 1977.

Section 530 originally was enacted as a short-term measure to provide Congress

sufficient time to legislatively address issues relating to worker classification.

However, the provision was extended indefinitely in 1982. See Tax Equity and

Fiscal Responsibility Act of 1982, Pub. L. No. 97-248 , § 269(c), 96 Stat. 552–53.

152

See H.R. REP. NO. 105-220, at 734 (1997) (explaining the Tax Court’s review

is not limited to the administrative record).

153

I.R.C. § 7436(a).

154

I.R.C. § 7436(b)(2); see also TAX CT. R. 290(c) (July 6, 2012 ed.).

155

See I.R.C. § 7436(d)(1) (incorporating principles of § 6213(a) into § 7436

proceedings). Prior to the enactment of § 7436, judicial review of the Service’s

assessment of employment taxes necessitated the payment of the tax in dispute

followed by a refund proceeding in the Federal district court or the Court of

Federal Claims. See Henry Randolph Consulting v. Commissioner, 112 T.C. 1, 3

n.2 (1999).

156

I.R.C. § 7436(b)(1).

410 The United States Tax Court – An Historical Analysis

or that of a person holding a similar position, the Tax Court may not take

such change into account in determining whether the Commissioner’s

worker classification determination is correct.

157

The taxpayer may elect, with the Tax Court’s consent, to apply the small

case procedures under § 7463 to the worker classification proceeding,

provided that the employment tax in dispute does not exceed $50,000 for

each calendar quarter involved.

158

In that event, the chief judge may assign

the proceeding to be heard by a special trial judge of the court.

159

determination by the Tax Court in a § 7436 proceeding that is heard under

the small case procedures is not reviewable by any other court, and such a

determination has no precedential value.

160

As originally enacted, § 7436 limited the jurisdiction of the Tax Court to

reviewing the relevant worker classification determinations made by the

Secretary.

161

In Henry Randolph Consulting v. Commissioner,

162

the court

determined that its jurisdiction under § 7436(a) did not extend to

determining the amount of employment tax owed by the taxpayer. Congress

corrected this defect in 2000, retroactively extending the Tax Court’s

jurisdiction under § 7436(a) to determine the proper amount of

employment tax that results from the worker classification determination.

163

The Tax Court’s jurisdiction to determine the amount of the taxpayer’s

employment tax obligations is, in a sense, ancillary. The court does not

possess jurisdiction to determine employment tax liabilities as a stand-alone

matter; rather, the court first must possess jurisdiction to review the

157

I.R.C. § 7436(b)(3). This provision is reminiscent of Federal Rule of

Evidence 407, barring the admissibility of evidence of subsequent remedial

measures.

158

I.R.C. § 7436(c)(1).

159

I.R.C. § 7443A(b)(5) (as added by the Pension Protection Act of 2006, Pub.

L. No. 109-280, § 857(a), 120 Stat. 1020).

160

I.R.C. § 7436(c)(2).

161

In Neely v. Commissioner, 115 T.C. 287 (2000), the Tax Court on its own

motion addressed whether the original grant of jurisdiction under § 7436(a)

extended to determining whether the Commissioner’s determination of worker

classification status was barred by the § 6501 statute of limitations on assessment.

The court resolved this question in the affirmative, reasoning that its jurisdiction to

review worker classification determinations necessarily extended to any affirmative

defense the taxpayer may properly raise (such as the limitations period) in response

to the worker classification determination.

162

112 T.C. 1 (1999).

163

I.R.C. § 7436(a), as amended by the Community Renewal Tax Relief Act of

2000, Pub. L. No. 106-554, § 314(f), 114 Stat. 2763A–643. The 2000 amendment

was made retroactive to the original August 5, 1997 effective date of the statute. Id.

§ 314(g).

Innovation in Remedies and Procedures 411

Secretary’s worker classification determination.

164

However, in Evans

Publishing, Inc. v. Commissioner,

165

the Tax Court reasoned that it possessed

jurisdiction to determine the employment tax obligations attributable to a

worker classification determination made by the Commissioner in an

answer filed in the § 7436 proceeding relating to service providers whose

status was not addressed in the original worker classification determination

notice. Citing the incorporation of the principles of § 6214(a) into the

§ 7436 arena by § 7436(d)(1), the court analogized the subsequent additional

worker classification determination to the Commissioner’s assertion of a

deficiency greater than that asserted in the statutory notice.

166

Accordingly,

the issuance of a Notice of Determination of Worker Classification from

the Commissioner does not necessarily serve to cap the taxpayer’s

employment tax exposure for the periods at issue.

C. Innovations in Partnership Proceedings

Perhaps no one field of tax law has seen a greater level of procedural

innovation in pursuit of greater adjudicative efficiency than the income

taxation of partnerships. As described below, as part of the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA),

167

Congress implemented an

ambitious procedural framework for adjusting tax items generated at the

partnership level that flow through to be reported at the partner level. The

intricate framework, in turn, led Congress to provide an alternative

streamlined procedure for “electing large partnerships.”

168

Additionally,

operation of the TEFRA partnership procedures gave rise to the need for

another arena of declaratory judgment jurisdiction for the Tax Court, this

164

See Menard v. Commissioner, 130 T.C. 54, 60–61 (court lacked jurisdiction

to redetermine Medicare tax liability due to absence of a determination concerning

worker classification); Salazar v. Commissioner, T.C. Memo. 2006-7, 91 T.C.M.

(CCH) 659 (court lacked jurisdiction to redetermine employment tax liabilities due

to absence of a valid notice of determination concerning employment status).

165

119 T.C. 242 (2002).

166

Id. at 247. However, similar to deficiencies asserted in excess of that

contained in the statutory notice, the Commissioner bears the burden of proof with

respect to worker classification determinations for service providers not addressed

in the original determination letter. Id. at 245 (Commissioner conceding that he

bears burden of proof); see also T

AX CT. R. 142(a) (July 6, 2012 ed.).

167

Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71 (adding I.R.C.

§§ 6221–6232); see also Deficit Reduction Act of 1984, Pub. L. No. 98-369,

§ 714(p)(1), 98 Stat. 494, 964 (adding I.R.C. § 6233 to the partnership provisions);

Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418,

§ 1941(b)(1), 102 Stat. 1107, 1323 (repealing I.R.C. § 6232, dealing with the

application of the TEFRA rules to windfall profits tax).

168

This alternative reporting and audit regime is discussed below in Section C.3

of this Part.

412 The United States Tax Court – An Historical Analysis

one governing proposed adjustments to a partner’s tax return that would

not generate a deficiency in tax due to the partner’s distributive share of

partnership losses or deductions (which create an “oversheltered return”).

169

This Section discusses the TEFRA partnership procedures and subsequent

procedural developments spawned by this framework.

1. Uniform Partnership Proceedings Under TEFRA

170

Prior to the procedural changes enacted as part of the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA),

171

the Service faced an often

difficult task in determining the tax liability of partners.

172

Because there

was no requirement of consistency between the partnership and its

partners’ returns, adjustments in the tax liability of partners were made

while the Service was auditing each individual partner rather than during an

audit of the partnership as a whole.

A significant burden was placed on the Service by requiring it to audit

each partner independently.

173

The statutory period within which the

Service could assess a tax against a partner was measured by reference to

the filing of the partner’s income tax return.

174

If the Service identified a

questionable partnership item on a particular partner’s return, and if the

Service desired to extend the statutory period for assessing a tax regarding

that item on the returns of all the partners, the Service would have to obtain

a waiver from each partner; the partnership had no authority to execute

such a waiver.

175

Obtaining the necessary waiver was particularly difficult in

cases involving large partnerships whose partners were located in many

169

The aspect of Tax Court’s declaratory judgment jurisdiction is discussed

below in Section C.4 of this Part.

170

This Section represents a condensed and slightly modified version of

Professor Dubroff’s prior extensive analysis of the TEFRA partnership procedures

and the Tax Court rules implementing them. See Harold Dubroff & Charles M.

Greene, Recent Developments in the Business and Procedures of the United States Tax Court;

Part Six: Partnership Proceedings, 52 A

LB. L. REV. 163 (1987).

171

Pub. L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71 (adding I.R.C.

§§ 6221–6232); see also Deficit Reduction Act of 1984, Pub. L. No. 98-369,

§ 714(p)(1), 98 Stat. 494, 964 (adding I.R.C. § 6233 to the partnership provisions);

Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418,

§ 1941(b)(1), 102 Stat. 1107, 1323 (repealing I.R.C. § 6232, dealing with the

application of the TEFRA rules to windfall profits tax).

172

STAFF OF THE JOINT COMM. ON TAX’N, GENERAL EXPLANATION OF THE

REVENUE PROVISIONS OF THE TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF

1982, at 268 (1982) [hereinafter JCT Explanation].

173

JCT Explanation, supra note 172, at 267–68; John B. Palmer, III, TEFRA

Treats Partnerships as Separate Entities Under its New Rules, 58 J.

TAX’N 34, 34 (1983).

174

JCT Explanation, supra note 172, at 267.

175

Id.; see also Palmer, supra note 173, at 34.

Innovation in Remedies and Procedures 413

jurisdictions, a difficulty exacerbated by the fact that Service efforts were

frequently impeded by inadequate and erroneous data on partnership

returns.

176

Consequently, the period of limitations could expire with regard

to some partners while others would have to pay an additional tax.

177

In addition to the substantial administrative burden created by the

requirement of independent audits, the Service could also become involved

in separate judicial proceedings with respect to the partners, with each such

proceeding generally being conclusive only with respect to the partners who

were parties to the litigation.

178

Any partner who disagreed with the

administrative determination of a partnership item could select separately

among three trial-level courts in which to litigate.

179

Taxpayers found that

settlements on partnership issues were sometimes difficult to obtain.

Unless an agreement could be reached that allowed the Service to treat

partnership items uniformly for all partners, the Service had little incentive

to settle with one partner when it might be forced to litigate the same issue

with others.

180

Thus, the determination of partnership tax liability often

resulted in the unnecessary duplicate expenditures of manpower as well as

administrative and judicial resources.

181

With the rise of large tax-shelter partnerships in the 1970s, the Service’s

burden intensified.

182

Encouraged by the problems encountered by the

Service in organizing effective audits, many promoters of tax-shelter

partnerships took aggressive reporting positions.

183

The Service increased

its efforts to audit these partnerships but contended that partnership-level

proceedings were needed as a solution to its problems.

184

Through TEFRA, Congress sought to ease the burdens arising from the

determination of the tax liability of partners by providing, with certain

exceptions,

185

for unified administrative and judicial proceedings at the

176

Palmer, supra note 173, at 34.

177

JCT Explanation, supra note 172, at 268.

178

Id. at 267; see also Palmer, supra note 173, at 34.

179

Tax litigation may be initiated by the taxpayer in either the Tax Court, the

Federal district court, or the Court of Federal Claims.

180

JCT Explanation, supra note 172, at 268.

181

Id.; see also Palmer, supra note 173, at 34.

182

Palmer, supra note 173, at 34.

183

Id.

184

Id.

185

An exception exists, for example, in the case of a partner whose

“partnership items” have become “nonpartnership items.” In such a case, the tax

liability of the partner would be determined apart from any partnership proceeding.

See infra notes 62–78 and accompanying text.

414 The United States Tax Court – An Historical Analysis

partnership level.

186

The unified procedures apply generally to

partnerships

187

and, through 1996, they applied to S corporations as well.

188

Under TEFRA, the partnership is treated as a distinct entity for

determining the tax liability of its partners. By providing for uniform audits

and judicial proceedings in regard to “partnership items,”

189

Congress

hoped to prevent the inconsistent treatment of partners with respect to the

same item and to avoid the duplicative use of administrative and judicial

resources.

190

The TEFRA procedures provide that a representative partner,

referred to as the tax matters partner (TMP), will guide the partnership

through consolidated administrative and judicial proceedings. This benefits

the individual partners, who need not participate in the proceedings unless

they so choose but who may nonetheless take part in any favorable

settlement. It also benefits the Service by permitting it, in general, to bind

every partner to the result in a single administrative and judicial proceeding

that directly involves only one or a limited number of partners. The

following discussion explores many of the details governing administrative

and judicial review of the tax liability of partners as established by TEFRA.

186

I.R.C. § 6221 (1982).

187

I.R.C. §§ 6221, 6231(a)(1) (1982). Certain small partnerships are excluded

from the TEFRA provisions unless they elect to have the procedures apply to

them. I.R.C. § 6231(a)(1)(B).

188

Sections 6241 through 6245 formerly provided that the partnership

administrative and judicial procedures applied to S corporations, except to the

extent modified or made inapplicable by regulations. However, Congress repealed

these provisions through the Small Business Job Protection Act of 1996. See Pub.

L. No. 104-188, § 1307(c)(1), 110 Stat. 1755, 1781 (1996). The repeal took effect

for tax years beginning after December 31, 1996. As discussed in Section C.2

below, a simplified S corporation procedure was enacted in its place. Given the

demise of the mass-marketed tax shelter industry, the need for the TEFRA audit

procedures in the partnership setting may too have passed. See Steve R. Johnson,

Reforming Federal Tax Litigation: An Agenda, 41 F

LA. ST. L. REV. 205, 258–64 (2013)

(contending that the TEFRA procedures are no longer necessary and, indeed, are

counterproductive as a result of their complexity).

189

The statute defines “partnership item” in the following manner:

the term “partnership item” means, with respect to a partnership, any item

required to be taken into account for the partnership’s taxable year under

any provision of subtitle A to the extent regulations prescribed by the

Secretary provide that, for purposes of this subtitle, such item is more

appropriately determined at the partnership level than at the partner level.

I.R.C. § 6231(a)(3).

190

JCT Explanation, supra note 172, at 268.

Innovation in Remedies and Procedures 415

a. Statute of Limitations

Generally, the period for assessing any partner with a tax attributable to

partnership items is no less than three years from the date the partnership

return is filed or, if later, the last day for filing the return.

191

By executing

an agreement with the Service, any partner may, prior to the expiration of

the statutory period, extend such period in regard to himself.

192

executing an agreement with the Service, the TMP may extend the statutory

period with respect to all partners.

193

Accordingly, a partner subject to the

TEFRA provisions may be subject to different statutes of limitations as to

partnership and nonpartnership items with respect to the same tax year.

b. Administrative Proceedings

In the absence of an inconsistency with the partnership return

194

or a

mathematical or clerical error

195

on the partnership return, the Service

generally is precluded from assessing any deficiencies against a partner with

respect to a partnership item until partnership-level administrative

proceedings are completed.

196

The Service is required to mail notice of the

beginning and completion of the proceedings to each partner whose name

191

I.R.C. § 6229(a). If the partnership items of any partner become

nonpartnership items before the expiration of the statutory period applicable to

partnership items, the period of limitations will not expire before one year from the

date the items become nonpartnership items. I.R.C. § 6229(f).

192

I.R.C. § 6229(b)(1)(B).

193

Id.

194

A partner is required to either: (1) treat partnership items on his return

consistently with their treatment on the partnership return; or (2) notify the Service

of any inconsistency. I.R.C. § 6222(a), (b). If the partner fails to notify the Service

of an inconsistency on his return, the Service may, without an administrative

proceeding, adjust the partner’s return to make the returns consistent. I.R.C.

§ 6222(c). Failure to observe the consistency requirement may subject a partner to

an addition to tax. See I.R.C. § 6222(d).

195

The Service may adjust a partner’s return to correct a mathematical or

clerical error without a partnership-level proceeding unless that partner files, within

60 days of the mailing of the notice of the correction, a request that the correction

not be made. I.R.C. § 6230(b).

196

I.R.C. § 6225(a). Section 6225 prohibits the Service from assessing any

asserted deficiency against a partner before the expiration of 150 days after mailing

of the “final partnership administrative adjustment” (FPAA), or if a proceeding is

commenced in the Tax Court, until the decision of the court has become final. In

addition, § 6223(a) requires that the Service mail notice to specified partners of the

beginning of an administrative proceeding and a FPAA “resulting from any such

proceeding:” I.R.C. § 6223(a).

416 The United States Tax Court – An Historical Analysis

and address has been furnished to it.

197

An exception to the notice

requirement exists for partners with less than one percent interest in a

partnership that has more than 100 partners, unless a group of such

partners with an aggregate of five percent or more interest in the

partnership profits combine for the purpose of notice.

198

In this event, the

“5-percent group”

199

must designate one of their members to receive

notice, and the Service is required to send notice to that partner.

200

All partners possess the right to participate in administrative

proceedings,

201

and any partner may enter into a separate settlement with

the Service.

202

If the Service enters into a settlement agreement with a

partner in regard to partnership items, it must also settle on “consistent”

203

terms with any other partner who so requests.

204

Generally, a settlement

agreement between the Service and one partner does not bind any other

partners who were not party to the agreement.

205

However, partners who

are not entitled to notice may be bound by the TMP if the TMP expressly

197

I.R.C § 6223(a). Notice of the beginning of a partnership proceeding must

be mailed at least 120 days before a FPAA is mailed to the tax matters partner

(TMP). I.R.C. § 6223(d)(1). Generally, the Service will use the names, addresses,

and profit interest shown on the partnership return. I.R.C. § 6223(c)(1). A partner

is not entitled to notice unless the Service has received, at least 30 days before

notice is mailed to the TMP, sufficient information to enable the Service to

determine that such partner is entitled to notice and to provide such notice to the

partner. I.R.C. § 6223(a).

198

I.R.C. § 6223(b).

199

I.R.C. § 6231(a)(11) (defining a “5-percent group” as a group of partners

who collectively possessed an interest in partnership profits of five percent or

more).

200

I.R.C. § 6223(b)(2).

201

I.R.C. § 6224(a).

202

I.R.C. § 6224(c)(1).

203

I.R.C. § 6224(c)(2); see also Treas. Reg. § 301.6224(c)-3(b)(1) (providing

guidance on what constitutes a consistent settlement).

204

I.R.C. § 6224(c)(2). The TMP presumably would inform the other partners

of any separate settlement agreement entered into between the Service and an

individual partner. Since there does not appear to be any general requirement that

either the Service, or a partner with whom it settles, notify the TMP of such

settlement, it may be difficult to charge the TMP with a duty to notify partners of

all settlements with the Service. In cases docketed in Tax Court, Rule 248(c)

requires the Service to notify the TMP within seven days of any settlement

agreement with a partner. T

AX CT. R. 248(c)(2) (July 6, 2012 ed.).

205

I.R.C. § 6224(c)(1). The TMP may enter into a stipulated decision with the

Service after a petition is filed with the Tax Court and all partners will be bound by

the decision. The signature of the TMP serves as a certification that no partner

with an interest in the outcome of the action objects to entry of the decision. T

CT. R. 248(a) (July 6, 2012 ed.).

Innovation in Remedies and Procedures 417

states that the agreement shall bind the other partners,

206

and if such

partners have not filed a statement denying the TMP’s authority to bind

them 30 days prior to the agreement between the TMP and Service.

207

Because the TMP is generally required to keep all partners informed of the

progress of administrative proceedings,

208

presumably such partners would

be aware of any agreement entered into between the Service and the TMP

prior to the time it was made. Whether such partners would learn of the

agreement 30 days before the day on which the agreement is entered into is

unclear. To protect themselves from being bound by a settlement between

the TMP and the Service, non-notice partners may file a statement denying

the TMP’s authority to bind them at the beginning of administrative

proceedings.

c. The Tax Matters Partner

Generally, a tax matters partner serves as the representative of the

partnership in administrative and judicial proceedings.

209

The TMP may be

designated by the partnership in accordance with the regulations.

210

In the

absence of such a designation, the statute provides that the general partner

having the largest interest in the partnership will be considered the TMP.

211

If no TMP is designated by the partnership and the Service concludes that

it is impracticable for the largest-interest general partner to be designated as

the TMP, the Service may designate a partner of its choice to represent the

partnership.

212

The regulations require that the person designated as the

TMP for a taxable year have been a general partner during that taxable year

or at the time the designation is made.

213

The TMP is required to keep all partners informed of the progress of

administrative and judicial proceedings.

214

This includes informing partners

not entitled to notice from the Service of the beginning of administrative

proceedings.

215

It also includes informing both notice and non-notice

partners with respect to a closing conference with the examiner, proposed

206

I.R.C. § 6224(c)(3)(A).

207

I.R.C. § 6224(c)(3)(B).

208

See I.R.C. § 6223(g).

209

See, e.g., I.R.C. §§ 6223(g), 6225(a), 6226(a), (b), 6227(b), 6228(a); Rev. Proc.

88-16, 1988-1 C.B. 691.

210

I.R.C. § 6231(a)(7)(A).

211

I.R.C. § 6231(a)(7)(B).

212

I.R.C. § 6231(a)(7) (flush language); see also Treas. Reg. § 301.6231(a)(7)-1(o)

(providing conditions under which it is impracticable for the largest-interest general

partner to be designated as the TMP).

213

Treas. Reg. § 301.6231(a)(7)-1(b)(1).

214

I.R.C. § 6223(g).

215

Treas. Reg. § 301.6223(g)-1(a)(1).

418 The United States Tax Court – An Historical Analysis

adjustments, appeal rights, protest requirements, scheduling information

regarding an appeals conference, Service acceptance of any settlement offer,

any consent binding all partners to the extension of the period of

limitations, the filing of any request for administrative adjustment on behalf

of the partnership, the filing by any partner of a petition for judicial review,

and any appeal and final judicial determination.

216

However, the failure of

the TMP to provide any required notice does not affect the validity of any

administrative or judicial determination.

217

d. Partnership and Nonpartnership Items

Only “partnership items” are determined at the partnership level and

therefore subject to partnership-level proceedings.

218

Partnership items are

those income tax items designated by regulations as more appropriately

determined at the partnership level, rather than the partner level.

219

Also

treated as partnership items are factors affecting the determination of a

partnership item, such as the partnership’s accounting practices and the

legal and factual bases of the partnership items.

220

Partnership items

include the partnership aggregate and each partner’s share of income, credit,

gain, loss, and deductions of the partnership; expenditures that are

nondeductible in computing taxable income; tax-exempt income;

partnership liabilities; and contributions to and distributions from the

partnership.

221

Certain nonpartnership items may be affected by partnership items, and

the tax treatment of such “affected items”

222

will thus depend on a

partnership-level determination.

223

The Tax Court has identified two types

of affected items: (1) those that are affected items only because of a

computational adjustment that cannot be made until a partnership-level

proceeding is completed; and (2) those that require a factual determination

at the partner level. In the former case, the Service may make a

“computational adjustment”

224

necessary to reflect items determined in the

216

Treas. Reg. § 301.6223(g)-1(b)(1).

217

I.R.C. § 6230(f).

218

I.R.C. § 6221.

219

I.R.C. § 6231(a)(3).

220

Treas. Reg. § 301.6231(a)(3)-1(b).

221

Treas. Reg. § 301.6231(a)(3)-1(a)(1), (4).

222

An “affected item” is “any item to the extent such item is affected by a

partnership item.” I.R.C. § 6231(a)(5).

223

See N.C.F. Energy Partners v. Commissioner, 89 T.C. 741 (1987); Maxwell

v. Commissioner, 87 T.C. 783 (1986).

224

A computational adjustment is “the change in the tax liability of a partner

which properly reflects the treatment under this subchapter of a partnership item.”

I.R.C. § 6231(a)(6). The usual procedures associated with assessing a tax deficiency

Innovation in Remedies and Procedures 419

partnership-level proceeding, without issuing a notice of deficiency.

225

the latter case, the Service must mail a notice of deficiency to the partner

determining any deficiency attributable to “affected items.”

226

If a notice of

deficiency has already been mailed to a partner for the particular taxable

year in issue, the Service is not precluded from mailing a second notice with

respect to affected items for that taxable year.

227

If treating certain items as partnership items will interfere with the

effective and efficient enforcement of the tax laws, the Service may treat

those partnership items as nonpartnership items.

228

The circumstances

under which such authority may be exercised are termination assessments,

jeopardy assessments, criminal investigations, indirect methods of proof of

income, foreign partnerships, and other areas determined by regulation to

present special enforcement concerns.

229

Other situations in which

partnership items may or will be considered nonpartnership items occur

when the Service has entered into a settlement agreement with a partner

with respect to such items,

230

or fails to provide required notice to a partner

of the beginning or termination of partnership-level administrative

proceedings.

231

The Service may mail a partner notice that the partnership items of that

partner will be considered nonpartnership items if (1) such partner has

notified the Service that there is an inconsistency between that partner’s

return and the partnership return, and (2) such partner has not, as of the

do not apply to the assessment or collection of a computational adjustment. I.R.C.

§ 6230(a)(1). Excepted from this general rule is any deficiency attributable to (1)

“affected items which require partner level determinations”; or (2) “items which

have become nonpartnership items and are described in section 6231(e)(1)(B).”

I.R.C. § 6230(a)(2).

225

I.R.C. § 6230(a)(1).

226

I.R.C. § 6230(a)(2)(B).

227

I.R.C. § 6230(a)(2)(C).

228

I.R.C. § 6231(c)(2).

229

I.R.C. § 6231(c)(1).

230

I.R.C. § 6231(b)(1)(C).

231

I.R.C. §§ 6223(e), 6231(b)(1)(D). Section 6223(e) governs generally the

effect of the failure of the Service to provide required notice. If the partnership

proceedings are finished at the time the Service mails notice of the administrative

proceedings, the partner may elect to have any adjustment or court decision apply

to him or he may participate in any settlement. I.R.C. § 6223(e)(2). If he does not

so elect, the partnership items of such partner will be considered nonpartnership

items. Id. If the proceedings are still going on at the time the partner receives

untimely notice, the partner will be a party to the proceeding unless he elects to

settle or to have his partnership items treated as nonpartnership items. I.R.C.

§ 6223(e)(3).

420 The United States Tax Court – An Historical Analysis

date such notice is mailed, filed a request for administrative adjustments

that would make the items consistent.

232

If a partnership item becomes a nonpartnership item before the

expiration of the period of limitations for assessing a tax imposed with

respect to that item on the affected partner, the period for assessing a tax

attributable to such item will not expire before one year from the date the

item becomes a nonpartnership item.

233

e. Final Partnership Administrative Adjustment and Petition for

Readjustment

If the parties are unable to reach an agreement during administrative

proceedings, the Service is required to mail to those partners entitled to

notice a final partnership administrative adjustment (FPAA) resulting from

the proceedings.

234

The FPAA is the equivalent of a “notice of deficiency”

and is a prerequisite to the assessment of a tax attributable to partnership

items.

235

The Service is precluded from assessing a deficiency against a

partner for 150 days following mailing of the FPAA or, if an action is

brought in the Tax Court, until a final decision.

236

In the absence of fraud,

malfeasance, or misrepresentation of a material fact, only one FPAA may

be mailed to a partner for a partnership taxable year.

237

During the 90 days immediately subsequent to the mailing of the FPAA,

the TMP, and only the TMP, may commence an action to review the FPAA

by filing a “petition for readjustment” in the Tax Court, the Court of

Federal Claims, or the district court for the district in which the

232

I.R.C. § 6231(b)(2)(A). Notice that the partnership items will be treated as

nonpartnership items must be mailed before notice of the beginning of

administrative proceedings is mailed to the TMP. I.R.C. § 6231(b)(3).

233

I.R.C. § 6229(f).

234

I.R.C. § 6223(a)(2).

235

See I.R.C. § 6212. As explained by the Tax Court,

The FPAA is to the litigation of partnership items and affected items

pursuant to the partnership audit and litigation provisions of section 6221 et

seq., what the statutory notice of deficiency is to tax controversies before

this Court that involve respondent’s determination of a deficiency, i.e., it is

the notice to affected taxpayers that respondent has made a final

administrative determination for particular tax years. Issuance of a FPAA is

a prerequisite to an assessment arising out of partnership items or affected

items.

Clovis I v. Commissioner, 88 T.C. 980, 982 (1987) (citation omitted).

236

I.R.C. § 6225(a).

237

I.R.C. § 6223(f). Cf. I.R.C. § 6212(c) (similar restriction on deficiency

letters).

Innovation in Remedies and Procedures 421

partnership’s principal place of business is located.

238

Any partner with an

interest in the outcome may participate in the action.

239

If the TMP does not file a petition to review a FPAA during the 90-day

period immediately subsequent to its mailing, any “notice partner”

240

“5-percent group”

241

may file a petition in the above-mentioned forums

within the next 60 days.

242

Even if the TMP fails to file a petition for

readjustment within the 90-day period following the mailing of a FPAA, he

may, as a “notice partner,” file a readjustment petition during the

succeeding 60-day period.

243

If several actions are commenced in different

forums during the 60-day period, the first action brought in the Tax Court

will have priority.

244

If one or more actions are commenced but none are

brought in the Tax Court, the first action brought will proceed.

245

Even

though the TMP fails to bring an action during the 90-day period, the TMP

may nonetheless intervene in any action brought by another partner.

246

As a jurisdictional prerequisite to filing a “petition for readjustment” in a

district court or the Court of Federal Claims, the partner filing, including

the TMP, must deposit with the Service an amount equal to that partner’s

increased tax that would result from treating the FPAA as correct.

247

In the

case of a petition filed by a 5-percent group, the deposit requirement applies

to each member of the group.

248

If the TMP does not petition for a

readjustment during the 90-day period following mailing of the FPAA, and

if during the succeeding 60-day period a petition is filed in the district court

or the Court of Federal Claims, the deposit required by such petition will be

refunded on request of the taxpayer if during the 60-day period a petition is

also filed in the Tax Court.

249

The refund is allowed because only the Tax

Court proceeding will go forward.

250

If, however, the 150-day period

expires and either no readjustment action is commenced or a readjustment

action proceeds in a district court or the Court of Federal Claims, the

238

I.R.C. § 6226(a).

239

I.R.C. § 6226(c)(2).

240

I.R.C. § 6231(a)(8).

241

I.R.C. § 6231(a)(11).

242

I.R.C. § 6226(b)(1).

243

See Barbados #6 Ltd. v. Commissioner, 85 T.C. 900 (1985) (court-reviewed

opinion holding that even though the TMP failed to file a petition during the

90-day period, it qualified as a notice partner and was not precluded from filing a

petition in that capacity during the remainder of the 150-day period).

244

I.R.C. § 6226(b)(2).

245

I.R.C. § 6226(b)(3).

246

I.R.C. § 6226(b)(6).

247

I.R.C. § 6226(e)(1).

248

Id.

249

I.R.C. § 6226(e)(2).

250

Id.

422 The United States Tax Court – An Historical Analysis

Service may not only apply the deposited amounts against the deficiency of

the depositor, but may assess and collect deficiencies from the other

partners while a decision on the merits is pending.

251

Essentially, then, a

petition for readjustment of a FPAA is converted into a refund action if

brought in the district court or the Court of Federal Claims. Thus, the Tax

Court, which was created to provide a forum for the taxpayer to contest a

tax deficiency asserted by the Service prior to paying the tax, remains the

only forum in which a taxpayer may challenge an alleged tax deficiency

before paying it.

All partners who have an interest in the outcome of the litigation will be

bound by a decision of the court, whether the action is commenced by the

TMP, a notice partner, or a 5-percent group.

252

A decision of the court will

not apply, however, to (1) a partner who has previously settled with the

Service, (2) a partner who has received notice that partnership items for a

taxable year will be treated as nonpartnership items in regard to that

partner, or (3) a partner to whom the Service has failed to provide required

notice of the proceeding before a final decision of the court.

253

f. Requests for Administrative Adjustment and Petition for

Adjustment

Essentially, the request for an administrative adjustment (RAA) is a

formal request that the Service make the requested adjustment or

commence a partnership-level proceeding to determine the proper

treatment of the items in issue.

254

Generally, a partner is not allowed to

commence an action for refund of an overpayment attributable to a

partnership item unless such partner has filed a RAA in respect of such

item with the Service.

255

However, if an overpayment is attributable to

251

I.R.C. § 6225(a).

252

I.R.C. § 6226(c)(1). The dismissal of an action brought under the

partnership provisions will be considered as a decision by the court that the FPAA

is correct. I.R.C. § 6226(h). An exception is provided if the case is dismissed on

the grounds that an action in another court has priority.

253

I.R.C. §§ 6226(d)(1)(A), 6231(b)(1), 6223(e)(2).

254

See John B. Palmer, III, How the TEFRA Partnership Procedures Affect Partners’

Adjustments and Limitations, 58 J. T

AX’N 74, 74 (1983) [hereinafter Palmer Part II].

Any partner, including the TMP, may file a request for an administrative

adjustment of partnership items, provided that it is filed within three years after the

later of either the date on which the partnership return was filed or the last day for

doing so. I.R.C. § 6227(a)(1). No bar exists on filing a RAA during administrative

proceedings. Palmer Part II, supra, at 74. However, a partner may not file a RAA

after a FPAA has been mailed to the TMP. I.R.C. § 6227(a)(2).

255

I.R.C. § 7422(h); see also Palmer Part II, supra note 254, at 74.

Innovation in Remedies and Procedures 423

certain types of erroneous computations by the Service,

256

or to a failure by

the Service to make a previously determined refund,

257

a partner may file a

claim for refund without filing a RAA.

Although any partner may file a RAA with the Service,

258

only the TMP

may do so on behalf of the partnership.

259

If the TMP requests that the

treatment shown on the RAA be substituted for the treatment of

partnership items on the partnership return, the Service may treat the

changes shown on the RAA as corrections of mathematical or clerical

errors without holding a partnership-level proceeding.

260

These

adjustments, however, do not apply to any partner who within 60 days after

notice of the correction of error is mailed files a request that the

adjustments not be made.

261

In such a case, the Service would probably be

forced to hold partnership-level proceedings in regard to the requested

changes.

262

If the Service does not treat a RAA filed by the TMP as a substituted

return, it may, without conducting any partnership proceeding, make all the

requested adjustments resulting in credit or refund to partners.

263

In this

event, the adjustments will not apply to a partner whose partnership items

are being treated as nonpartnership items.

264

The Service may also conduct

a partnership proceeding in response to a RAA filed by the TMP,

265

or, if it

chooses, take no action at all on the request.

266

If the Service decides to

hold a partnership-level proceeding in regard to a RAA filed by the TMP, it

must provide notice to all those partners entitled to notice of the beginning

256

I.R.C. §§ 6230(c)(1)(A), 7422(h). The erroneous computational adjustments

referred to are those necessary to (1) conform the partner’s return to the

partnership return, and (2) apply a settlement, a FPAA or a court decision to the

partner.

257

I.R.C. §§ 6230(c)(1)(B), 7422(h). The refunds referred to are those resulting

from a settlement, a FPAA or a court decision.

258

I.R.C. § 6227(a).

259

I.R.C. § 6227(c). Cf. Palmer Part II, supra note 254, at 74 (suggesting that

the TMP may only file a RAA on behalf of the partnership).

260

I.R.C. §§ 6227(c)(1), 6230(b).

261

I.R.C. § 6230(b)(2).

262

See Palmer Part II, supra note 254, at 74.

263

I.R.C. § 6227(c)(2)(A)(i).

264

I.R.C. § 6227(c)(2)(B). One difference between treating a RAA as a

substituted return and simply providing the requested refund or credit is that, in the

case of the former alternative, the Service may assess any additional tax appearing

on the RAA without issuing a FPAA, simply by treating the adjustment as the

correction of a mathematical or clerical error. See I.R.C. §§ 6225(a), 6227(c)(1),

6230(b)(1).

265

I.R.C. § 6227(c)(2)(A)(ii).

266

I.R.C. § 6227(c)(2)(A)(iii).

424 The United States Tax Court – An Historical Analysis

and completion of the administrative proceedings.

267

Although only the

TMP may file a RAA on behalf of the partnership, any other partner,

apparently including the TMP,

268

may file a RAA on his own behalf.

269

When a RAA is filed on behalf of an individual partner, the Service may (1)

process the request in the same manner as a claim for credit or refund of

items that are not partnership items, (2) assess any additional tax resulting

from the requested adjustment, (3) provide notice to the requesting partner

that all partnership items to which the request relates will be treated as

nonpartnership items, or (4) conduct a partnership proceeding.

270

If all or part of a RAA filed on behalf of the partnership by the TMP is

not allowed by the Service, the TMP, and only the TMP, may file a petition

for an adjustment of the partnership items in the Tax Court, the Court of

Federal Claims, or the district court for the district in which the

partnership’s principal place of business is located.

271

Generally, this

petition may be filed during the 18-month period commencing six months

after filing the RAA,

272

but the TMP may not petition for judicial review of

a RAA after the Service has mailed notice of the beginning of

administrative proceedings in regard to the partnership year to which the

petition relates.

273

A petition for adjustment may not be filed after a FPAA has been

mailed to the TMP.

274

Moreover, if the Service mails a FPAA to the TMP

after a petition for review of a RAA has been filed but before the hearing of

that petition, then the petition will be treated as one for readjustment of the

FPAA, rather than a review of the adjustments requested in the RAA.

275

267

I.R.C. § 6223(a).

268

See I.R.C. § 6227(c). Because the TMP acts as a fiduciary, see Computer

Programs Lambda, Ltd. v. Commissioner, 89 T.C. 198, 205 (1987), a TMP filing

such a request on his own behalf to the detriment of the partnership (for example,

if the period of limitations for filing by other partners expires) presumably could be

subject to damages.

269

I.R.C. § 6227(a), (d).

270

I.R.C. § 6227(d).

271

I.R.C. § 6228(a)(1).

272

I.R.C. § 6228(a)(2)(A); see also TAX CT. R. 249 (July 6, 2012 ed.) (action for

adjustment of partnership items will be treated as an action for readjustment of

partnership items). The TMP and the Service can agree to extend this time period.

I.R.C. § 6228(a)(2)(D). If the Service mails notice of the beginning of

administrative proceedings before two years expires following filing of the RAA,

but fails to mail a FPAA before the three-year limitation for assessing an additional

tax expires, see I.R.C. § 6229(a), then the period for filing a petition for review of a

RAA will be extended at least six months beyond the period prescribed for making

assessments of tax. I.R.C. § 6228(a)(2)(C).

273

I.R.C. § 6228(a)(2)(B).

274

I.R.C. § 6228(a)(3)(A).

275

I.R.C. § 6228(a)(3)(B).

Innovation in Remedies and Procedures 425

this event, the deposit otherwise required in the district court or the Court

of Federal Claims Court for review of a FPAA is not required.

276

If the TMP files an adjustment petition on behalf of the partnership, all

partners with an interest in the outcome will be considered parties to the

action and, thus, will be bound by a decision of the court.

277

Any partner

wishing to participate in the action must be allowed to do so by the court

with jurisdiction over the case.

278

Judicial review of the RAA is limited to those disallowed partnership

items that were included in the RAA and items that the Service may have

asserted as offsets to the adjustments requested by the TMP.

279

In a

situation in which the RAA petition is converted into a hearing on a FPAA

mailed prior to the RAA hearing, judicial review includes any issues raised

in the FPAA.

280

There are no provisions prohibiting the filing of multiple

RAAs or petitions in regard to the RAAs—the statute provides that no

judicial determination with respect to a partnership item raised in a RAA

filed by the TMP will be a bar to any adjustment in any other partnership

item.

281

Any partner, other than the TMP acting on behalf of the partnership,

seeking to petition for judicial review of all or any part of a RAA that was

disallowed by the Service must follow the usual refund procedures pursuant

to § 7422.

282

Thus, a refund action based on a RAA filed by a partner other

than the TMP, or filed by the TMP on his own behalf, may not be brought

in the Tax Court, but must be brought in district court or Court of Federal

Claims, and all the partnership items at issue will be treated as

nonpartnership items.

283

Such an action is barred after a partnership

proceeding has begun,

284

and is subject to the same time limits as an

adjustment petition filed on behalf of the partnership by the TMP.

285

If the Service mails notice to a partner that all partnership items to

which a RAA relates will be treated as nonpartnership items, judicial review

is available in a refund action under § 7422 within two years of mailing of

the notice.

286

It appears that a partner to whom such notice is mailed may

bring a refund action, even if the Service subsequently initiates partnership

276

Id.

277

I.R.C. § 6228(a)(4)(A)(i).

278

I.R.C. § 6228(a)(4)(A)(ii).

279

I.R.C. § 6228(a)(5).

280

See I.R.C. § 6228(a)(3)(B), (a)(5).

281

I.R.C. § 6231(e)(2); see also Palmer Part II, supra note 254, at 75 .

282

I.R.C. § 6228(b)(2)(A)(i).

283

I.R.C. § 6228(b)(2)(A)(ii).

284

I.R.C. § 6228(b)(2)(C).

285

I.R.C. § 6228(b)(2)(B).

286

I.R.C. § 6228(b)(1).

426 The United States Tax Court – An Historical Analysis

proceedings or the TMP files a RAA and an adjustment petition with

respect to the RAA.

287

g. Relationship Between Partnership Proceedings and Regular

Proceedings

The legislative history of the uniform partnership audit and litigation

procedures indicates that Congress intended that proceedings regarding

partnership and nonpartnership tax deficiencies remain separate.

288

some cases, however, the procedures for assessing personal tax deficiencies

and the procedures for assessing deficiencies attributable to partnership

items may necessarily interact. For example, if the partnership items of a

partner become nonpartnership items, then any tax deficiency attributable

to those must be determined in regular deficiency proceedings.

289

As a prerequisite to assessing and collecting taxes attributable to

nonpartnership items (regular proceedings), the Service is required to mail a

notice of deficiency informing the taxpayer of the administrative

determination of tax liability.

290

Following the mailing of such notice, the

taxpayer has 90 days in which to petition the Tax Court for a

redetermination of the deficiency.

291

The Service may not assess or collect

the alleged deficiency until the 90-day period has expired or, if a petition is

filed with the Tax Court, until a final decision of the Court.

292

If the taxpayer does not file a petition with the Tax Court during the

90-day period and the Service subsequently collects the tax, the taxpayer

may commence an action for refund in a district court or the Court of

Federal Claims, provided he has first filed a refund claim with the Service.

293

Here lies a significant difference between partnership and regular

proceedings. Following the mailing of a FPAA, the partners have only one

opportunity for judicial review of the partnership items—the 150-day

period provided by § 6226.

294

For partners other than the TMP, only the

287

See Palmer Part II, supra note 254, at 75.

288

See H.R. REP. NO. 97-760, at 409, 611 (1982).

289

I.R.C. § 6230(a)(2)(A)(ii).

290

See I.R.C. §§ 6211(a), 6212(a).

291

I.R.C. § 6213(a). If the notice of deficiency is addressed to a taxpayer

outside the United States, the period for petitioning the Tax Court is extended to

150 days. Id.

292

Id. Exceptions to the restrictions on assessment of a deficiency are

provided in the case of termination assessments of income tax, I.R.C. § 6851(a),

and jeopardy assessments of income, estate, gift, and certain excise taxes, I.R.C.

§ 6861(a).

293

I.R.C. § 7422(a).

294

See I.R.C. § 6226(a), (b)(1). This premise assumes (1) that the Service has

held administrative proceedings and provided notice of the beginning and

Innovation in Remedies and Procedures 427

last 60 days of the 150-day period are available for filing a petition for

readjustment.

295

If no petition for readjustment is filed during the 150-day

period, the Service may collect the tax and, with limited exceptions, the

partners may not thereafter seek a refund or otherwise petition for judicial

review.

296

h. The Problem of Affected Items

Unique questions of interaction between the regular deficiency

procedures and the partnership procedures occur in the case of “affected

items.”

297

The final resolution of disputes over affected items have to await

a partnership-level determination.

298

In some cases, the Service may merely

make a computational adjustment conforming the tax treatment of the

affected item with that of the affecting partnership item.

299

In others, the

Service must issue a notice of deficiency to resolve questions regarding the

affected item at the partner level.

300

Ordinarily, if the Service has mailed the

taxpayer a notice of deficiency and the taxpayer files a petition with the Tax

Court for a particular tax year, the Service is prohibited from determining

any additional deficiency for such year.

301

However, if the treatment of an

affected item depends on a partnership-level determination, the Service is

authorized to issue an additional notice of deficiency with respect to such

item at the partner level.

302

It is not difficult to hypothesize a case in which

a taxpayer might receive a first notice of deficiency, a FPAA (in effect, itself

a notice of deficiency), and a second notice of deficiency covering affected

items—all related to the same taxable year and all subject to separate

judicial proceedings. Moreover, if the taxpayer is a partner in more than

one partnership, there may be separate FPAAs, and separate notices of

deficiency for affected items, related to each partnership.

The Tax Court examined the interaction between partnership-level

proceedings and regular proceedings in cases involving “affected items” in

completion of the proceedings to the partners entitled to notice, and (2) that the

partnership items of a partner have not become nonpartnership items. See generally

I.R.C. §§ 6223(a), 6228(b)(1).

295

I.R.C. § 6226(b)(1).

296

See I.R.C. § 7422(h).

297

An “affected item” is defined as “any item to the extent such item is

affected by a partnership item.” I.R.C. § 6231(a)(5).

298

See N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 744–45 (1987);

Maxwell v. Commissioner, 87 T.C. 783 (1986).

299

N.C.F. Energy Partners, 89 T.C. at 744.

300

Id. at 745.

301

I.R.C. § 6212(c).

302

I.R.C. § 6230(a)(2)(C).

428 The United States Tax Court – An Historical Analysis

Maxwell v. Commissioner,

303

a case reviewed in conference. Mr. and Mrs.

Maxwell and eleven others were partners in VIMAS, LTD. (VIMAS), a

limited partnership with Mr. Maxwell as the general partner and the

TMP.

304

In February 1985, the Service began a partnership-level audit of

VIMAS; the requisite notice of the beginning of the administrative

proceedings was properly mailed to the notice partners.

305

Subsequently, in

April 1985, before a FPAA was mailed to VIMAS but after partnership-level

proceedings regarding partnership items of VIMAS were commenced, the

Service mailed a statutory notice of deficiency to the Maxwells determining

deficiencies and additions to tax for their 1979, 1980, 1981, and 1982

taxable years.

306

The 1982 deficiency was partially attributable to the

disallowance of the Maxwell’s distributive share of the loss and investment

tax credit claimed by VIMAS for 1982.

307

The 1979 and 1980 deficiencies

resulted from disallowance of investment tax credit carryback from 1982.

308

The Service also determined additions to tax against the Maxwells for the

deficiency years.

309

Since the Service had not yet mailed a FPAA

determining partnership items of VIMAS, the Tax Court had no jurisdiction

to readjust the VIMAS partnership items, and the Service was precluded

from assessing a tax attributable to these items until a FPAA was issued.

310

The Maxwells filed a timely petition for the redetermination of the

deficiencies determined against them, and the Service promptly moved to

strike from the petition the deficiencies and additions to tax arising from

the adjustment of the VIMAS items, alleging that they were, in fact,

partnership items and the Tax Court thus lacked jurisdiction for

readjustment.

311

The Service’s posture amounted to a concession that it

was not justified in including the partnership items in the notice of

deficiency. Its motion to strike may have been motivated by the fact that

Mr. Maxwell, as TMP, had consented to extend the statute of limitations as

to VIMAS subsequent to the mailing of the notice of deficiency.

312

The Tax Court stated that “[t]his case presents the dichotomy between,

on the one hand, the procedures applicable to the determination and

redetermination of deficiencies and, on the other hand, the procedures

applicable to the administrative adjustment and judicial readjustment of

303

87 T.C. 783 (1986) (court reviewed).

304

Id. at 785.

305

Id. at 786.

306

Id. at 785.

307

Id.

308

Id.

309

Id.

310

Id. at 789; I.R.C. § 6225(a).

311

Maxwell, 87 T.C. at 784, 786.

312

Id. at 786.

Innovation in Remedies and Procedures 429

partnership items.”

313

In TEFRA, Congress intended to separate partnership

audit and litigation procedures from proceedings regarding nonpartnership

tax matters.

314

Application of this policy was central to the court’s

disposition of the Service’s motion to strike.

First, the Tax Court held that the loss and the investment tax credit

claimed for 1982 were partnership items and were thus outside the

jurisdiction of the court until a FPAA was mailed.

315

Second, the court held

that,

[a]lthough the existence or amount of the carryback cannot be

determined without reference to the VIMAS, LTD. investment tax

credit to which VIMAS, LTD. partners were entitled for 1982, the

amount of credit to be carried back is not a “partnership item”

because a partnership does not take into account any carryback for

any taxable year. Rather, the carryback is peculiar to each partner’s

own tax posture.

316

The court further held, however, that the carryback was an “affected item”

because “its existence or amount is ‘affected by’ the investment tax credit

that is a partnership item.”

317

Since affected items depend on partnership-

level determination, those items could not be tried as part of the personal

tax case, and had to await the outcome of the partnership proceeding.

318

Third, the court considered whether the additions to tax for the

deficiency years should be considered partnership or nonpartnership

items.

319

The court noted that the additions to tax asserted against the

petitioners for negligence would, if sustained, apply to the entire

deficiencies for the year and could be attributable either to a negligent

partnership reporting position or to the partner’s own negligent reporting

313

Id. at 787 (emphasis in original).

314

Id. Legislative history provides the following guidance:

Existing rules relating to administrative and judicial proceedings, statutes of

limitations, settlements, etc., will continue to govern the determination of a

partner’s tax liability attributable to nonpartnership income, loss,

deductions, and credits. Neither the Secretary nor the taxpayer will be

permitted to raise nonpartnership items in the course of a partnership

proceeding nor may partnership items, except to the extent they become

nonpartnership items under the rules, be raised in proceedings relating to

nonpartnership items of a partner.

H.R. R

EP. NO. 97-760, at 611 (1982).

315

Maxwell, 87 T.C. at 790.

316

Id.

317

Id.

318

Id.

319

Id. at 79l.

430 The United States Tax Court – An Historical Analysis

position.

320

In order to conform to congressional intent that partnership

tax issues be resolved without hindering, or being hindered by, the

resolution of nonpartnership tax issues, the Tax Court announced that it

would “treat[] as an ‘affected item’ (1) any addition to tax for negligence

found in the partnership action or (2) where negligence is found in the

personal case, any increased addition to tax on a deficiency resulting from

partnership adjustments.”

321

The court held:

As an “affected item,” the addition to tax for negligence resulting

from partnership reporting positions cannot be an issue joined in a

partner’s personal tax case because a deficiency determined by

reference to such an affected item requires a partnership level

determination—i.e., whether the partnership reported partnership

items negligently. Such affected items cannot be considered in the

course of deciding petitioners’ personal case without trespassing the

line of demarcation drawn by Congress between the audit and

litigation of partnership tax matters and the resolution of all other

tax items of the partner. Any other principle would inextricably tie

the two together and remove the statutory dichotomy whenever an

addition to tax affected by partnership items has been determined by

respondent.

322

The 90-day letter mailed by the Service was thus invalid as to the VIMAS

items, and the Tax Court dismissed those items for lack of jurisdiction.

323

In Maxwell, the dichotomy existing between the partnership procedures

and the procedures for determining deficiencies in a taxpayer’s personal tax

case worked to the detriment of the taxpayer. The striking of the

partnership items and affected items from the petition resulted in the

collapse of a settlement that the petitioners believed they had

constructed.

324

In some cases, however, the dichotomy described above

may work to the advantage of the taxpayer. If, for example, the Service

fails to mail notice of the beginning or end of partnership-level

administrative proceedings to a partner entitled to notice, that partner has

the option of participating on consistent terms in any settlement between

the Service and the other partners, accepting the terms of the FPAA, or, if a

final court decision is reached in regard to the partnership items, applying

such decision.

325

Alternatively, such a partner may elect to have the

partnership items to which the proceedings relates treated as

320

Id. at 791–92.

321

Id. at 792.

322

Id. at 793.

323

Id. at 793.

324

Id. at 786, 793.

325

I.R.C. § 6223(e).

Innovation in Remedies and Procedures 431

nonpartnership items.

326

In such a case, any deficiency attributable to these

items will have to be determined in regular deficiency proceedings, and such

a partner may be able to achieve a more advantageous settlement overall

than would have otherwise been possible.

In N.C.F. Energy Partners, Bingham Petroleum, Inc. v. Commissioner,

327

the Tax

Court was again presented with a motion by the Service to strike affected

items from a petition for lack of jurisdiction. Here, however, the motion

was submitted in the context of a partnership proceeding.

328

The Service

argued that additions to tax determined in regard to partnership

adjustments were “affected items” that could not be determined in

partnership proceedings but only in subsequent partner-level

proceedings.

329

On the other hand, the petitioner, asserting that the Service

erred in determining the additions to tax, contended that, although the

additions to tax were “affected items,” Congress intended that questions

regarding partnership adjustments be resolved in a single partnership-level

proceeding “even though the computation of the amounts due from each

partner cannot be made at the partnership level.”

330

If the motion to strike

the additions to tax were granted, the petitioner argued, the result would be

the unnecessary and duplicate litigation that Congress intended to

prevent.

331

The Tax Court disagreed.

332

The court identified two types of affected items: (1) items that are

affected items simply because a computational adjustment is required after

the partnership-level proceeding is completed; and (2) items that require

additional factual determinations at the partner level following the

partnership proceeding.

333

Both types of affected items require adjustments

subsequent to a partnership proceeding and cannot be tried either as part of

the partnership proceeding or a prior personal tax case.

334

Petitioner’s contention that resolving all issues relating to the

partnership in a single proceeding effectuates Congress’ intent is . . .

erroneous. Congress enacted the partnership audit and litigation

procedures . . . to provide a unified proceeding for determination of

the tax treatment of items of partnership income, loss, deductions,

326

Id. Depending on whether partnership proceedings have finally terminated

when the Service mails notice of the proceedings, the partner’s option may be

either to elect consistent treatment or to elect nonpartnership item treatment. Id.

327

Maxwell, 89 T.C. 741 (1987).

328

Id. at 742.

329

Id. at 743.

330

Id.

331

Id.

332

Id. at 746–47.

333

Id. at 744.

334

Id. at 744–45.

432 The United States Tax Court – An Historical Analysis

and credits. A partnership proceeding is designed to resolve only

disputes over the proper treatment of partnership items. Congress,

moreover, recognized the need to preserve this rule by providing

separately for determining deficiencies attributable to nonpartnership

items or to affected items.

. . . .

We appreciate petitioner’s concern for avoiding repetitive

litigation. We doubt, however, that the litigation will be repetitive; it

has been organized by statute to avoid chaotic and disparate results.

Any future litigation will not be repetitive of the partnership level

proceeding. The doctrine of res judicata will apply to preclude the

parties from relitigating any issue already resolved in the partnership

proceeding . . . .

335

As part of the Taxpayer Relief Act of 1997,

336

Congress fundamentally

altered the handling of penalties under the TEFRA audit procedures and, in

the process, overturned the result reached by the Tax Court in N.C.F.

Energy Partners. In particular, Congress amended § 6221 to expressly

provide that “the applicability of any penalty, addition to tax, or additional

item which relates to an adjustment to a partnership item” shall be

determined along with all partnership items in a partnership-level

proceeding.

337

Consistent with this approach, Congress precluded the Tax

Court from considering penalties and similar items in a partner-level

deficiency proceeding.

338

Instead, the 1997 amendments left the individual

partner to raise any partner-level defense through a claim for refund.

339

The

report of the House Ways and Means Committee explained the justification

for these changes as follows:

335

Id. at 746–47 (emphasis in original) (citations omitted).

336

Pub. L. No. 105-34, 111 Stat. 787. The Tax Court provided a thorough

explanation of the 1997 amendments to the penalty jurisdiction of the Tax Court in

the TEFRA unified audit procedures setting in Tigers Eye Trading, LLC v.

Commissioner, 138 T.C. 67, 88–93 (2012).

337

Id. § 1238(a), 111 Stat. at 1026 (amending I.R.C. § 6221). Congress

correspondingly expanded the scope of judicial review following the filing of a

petition for review of a final partnership administrative adjustment to include “the

applicability of any penalty, addition to tax, or additional amount which relates to

an adjustment of a partnership item.” Id. § 1238(b)(1), 111 Stat. at 1026 (amending

I.R.C. § 6226(f)).

338

Id. § 1238(b)(2), 111 Stat. 1026–27 (amending I.R.C. § 6230(a)(2)(A)(i)).

339

Id. § 1238(b)(4), 111 Stat. 1027 (addition I.R.C. § 6230(c)(1)(C), which

permits a partner to file a claim for refund on the grounds that Secretary

“erroneously imposed any penalty, addition to tax, or additional amount which

relates to an adjustment of a partnership item”).

Innovation in Remedies and Procedures 433

Many penalties are based upon the conduct of the taxpayer. With

respect to partnerships, the relevant conduct often occurs at the

partnership level. In addition, applying penalties at the partner level

through deficiency procedures following the conclusion of the

unified proceeding at the partnership level increases the

administrative burden on the IRS and can significantly increase the

Tax Court’s inventory.

340

In this manner, Congress proved receptive to the judicial economy points

asserted by the taxpayer in the N.C.F. Energy Partners case.

2. Tax Treatment of Subchapter S Items

Prior to their repeal by the Small Business Job Protection Act of 1996,

341

§§ 6241 to 6244 provided a corporate-level audit regime for subchapter S

corporations similar to the TEFRA uniform audit procedures that apply in

the partnership context. The repeal of these procedures in the S

corporation context became effective for corporate tax years beginning

after December 31, 1996.

342

Congress’ stated justification for repealing the

S corporation audit procedures was its belief that the TEFRA-like

provisions should not apply to entities with a limited number of owners.

343

In lieu of the repealed audit procedures applicable to S corporations,

Congress enacted § 6037(c) to require shareholders of an S corporation to

treat any “subchapter S item”

344

in a manner consistent with the treatment

of such item on the corporation’s informational return.

345

The shareholder

is relieved of this consistency requirement only if the shareholder files a

statement with the Service that identifies the inconsistency.

346

340

H.R. REP. NO. 105-148, at 594 (1997).

341

Pub. L. No. 104-188, § 1307(c)(1), 110 Stat. 1755, 1781 (1996).

342

Id. § 1317, 110 Stat. at 1787.

343

H.R. REP. NO. 104-586, at 87 (1996). By way of reference, the 1996

legislation increased the maximum number of shareholders of an S corporation

from 35 to 75. Pub. L. No. 104-188, § 1301, 110 Stat. at 1777.

344

A “subchapter S item” is defined as any tax item of an S corporation to the

extent that regulations provide that the tax treatment of such item is more

appropriately determined at the corporate level.

345

I.R.C. § 6037(c)(1).

346

I.R.C. § 6037(c)(2)(A).

434 The United States Tax Court – An Historical Analysis

3. Electing Large Partnership Provisions

Also as part of the Taxpayer Relief Act of 1997,

347

Congress created a

simplified informational reporting and audit regime for “electing large

partnerships”—that is, entities classified as partnerships for purposes of

subchapter K with more than 100 owners in the prior taxable year that elect

to be subject to the modified procedures.

348

The primary theme of these

modifications was to tilt further toward the entity treatment of partnerships,

recognizing that investments in large partnerships often are

indistinguishable from those made in corporate stock.

349

On the

informational reporting side, the modified procedures provided in §§ 771

through 777 significantly reduced the number of tax items that the

partnership must separately report to its partners. This simplified regime

was intended to reduce the reporting burden placed on partners while

assisting the Service in matching partnership items on partners’ individual

returns.

350

As discussed below, the statutory departure from the TEFRA

audit procedures for electing large partnerships also was intended to reduce

the administrative burden imposed on partners, while enhancing the

Service’s ability to effectively audit partnerships having numerous owners.

The audit procedures governing electing large partnerships are contained

in §§ 6240 through 6255. Perhaps the most significant aspect of the

modified regime relates to the consistency of reporting required by the

partnership and its owners. Under the TEFRA audit procedures, a partner

may take a reporting position inconsistent with that of the partnership so

long as the partner provides the Service with a statement identifying the

inconsistency.

351

This option is not available to partners of an electing large

partnership. Rather, partners are required to treat each partnership item in

a manner consistent with the reporting of that item on the partnership

return, and the Service may treat any failure to do so as a mathematical or

clerical error on the part of the partner.

352

The modified audit procedures that apply to electing large partnerships

severely constrain the participation of partners in the audit process.

Whereas a partner is entitled to notice of partnership-level proceedings

347

Pub. L. No. 105-34, §§ 1221–1224, 111 Stat. 788, 1001–19 (1997). These

provisions took effect for partnerships having taxable years ending on or after

December 31, 1997. Id. § 1226, 111 Stat. at 1020.

348

See I.R.C. § 775 (providing definition of an electing large partnership for

purposes of the subchapter K flow-through regime); I.R.C. § 6255 (incorporating

the definition of an electing large partnership under § 775 for purposes of the

modified audit procedures).

349

See H.R. REP. NO. 105-148, at 571.

350

See id. at 571–72.

351

I.R.C. § 6226(a), (b)(1).

352

I.R.C. § 6241(a), (b).

Innovation in Remedies and Procedures 435

under the TEFRA audit procedures, the Service is not required to notify a

partner of an electing large partnership that a partnership-level

administrative proceeding has been commenced or that a final

administrative adjustment has been made.

353

Additionally, a partner of an

electing large partnership lacks the right to participate in settlement

conferences concerning the partnership-level proceeding,

354

and the partner

may not seek an administrative adjustment or a refund of the partner’s

separate tax liability—both of which represent departures from the TEFRA

model. The electing large partnership provisions therefore envision an

administrative proceeding between the Service and the partnership alone

that can achieve conclusive results.

The adjustments resulting from the partnership-level administrative

proceedings are designed to minimize the effect at the partner level. Under

the TEFRA procedures, any adjustment relating to a partnership item must

be taken into account at the partner level for the taxable year to which the

adjustment relates. In contrast, the electing large partnership provisions

adopt an integration model that generally operates on a going-forward basis.

Rather than incorporating the adjustment on the partners’ returns for the

taxable year to which the adjustment relates, an adjustment made in the

course of an electing large partnership proceeding is taken into account at

the partner level for the taxable year in which the adjustment “takes

effect.”

355

In other words, the adjustment is treated as a partnership item

arising in the year of the adjustment.

356

The choice to take partnership-level adjustments into account at the

partner level on a going-forward basis under the electing large partnership

353

I.R.C. § 6245(b)(1); H.R. REP. NO. 105-220, at 673 (1997); cf. I.R.C.

§ 6223(a) (requirement that Service provide partners notice of partnership-level

proceedings under TEFRA audit procedures).

354

H.R. REP. NO. 105-220, at 671 (1997); cf. I.R.C. § 6224(a) (right of partner

to participate in partnership-level proceedings under TEFRA audit procedures).

355

I.R.C. § 6242(a)(1). As a general rule, a partnership-level adjustment in this

context takes effect in the taxable year in which the adjustment is made or is finally

determined. I.R.C. § 6242(d)(2). If the partnership-level adjustment triggers an

adjustment in a taxable year following the one to which the adjustment relates but

prior to the year of the adjustment (e.g., disallowance of deduction in favor of

capitalization, which in turn gives rise to cost recovery deductions), only the net

adjustment is considered to take effect in the year of the adjustment. I.R.C.

§ 6242(a)(3).

356

I.R.C. § 6242(a)(1). An exception exists in the event the adjustment relates

to the relative distributive shares of the partners. An alteration of a partner’s

distributive share of partnership tax items under § 704(b) (e.g., one made because

the allocation provided in the partnership agreement lacks substantial economic

effect and is not otherwise consistent with the partners’ interests in the partnership)

must be taken into account by the partner for the taxable year to which the

adjustment relates. I.R.C. § 6241(c)(2)(A).

436 The United States Tax Court – An Historical Analysis

provisions creates the possibility for a partner to benefit from the adjusted

items without facing the consequence of the adjustment. To do so, the

partner must exit prior to the year in which the partnership-level adjustment

takes effect—an outcome that is altogether plausible given the protracted

nature of administrative proceedings conducted at the partnership level.

Conversely, partners who have joined the entity in the interim may suffer

the detriment of a partnership-level adjustment without ever enjoying the

original tax benefit.

To avoid highlighting the consequence at the partner level, an electing

large partnership may elect to not take the adjustment into account as a

partnership item for the year of adjustment and instead pay an imputed tax

resulting from the adjustment.

357

The downside of centralizing the effect of

the adjustment at the entity level is the forfeiture of the marginal tax rate

profile of the partners. The imputed tax is calculated based on the highest

marginal rate in effect under § 1 (individual rates) or § 11 (corporate rates)

for the year of the adjustment.

358

Whereas the partnership may elect to pay

an imputed tax attributable to the adjusted item, the partnership is required

to pay any interest or penalties that relate to the adjustment.

359

The

partnership’s exposure to penalties is determined by treating the partnership

in the same manner as an individual.

360

In this manner, the electing large

partnership procedures avoid the confusion over whether defenses to the

assertion of penalties must be raised and resolved in the partnership

proceeding or at the partner level—an issue that at one point caused a

considerable level of consternation under the regular TEFRA audit

regime.

361

An electing large partnership may contest a proposed partnership

adjustment either before the Tax Court, the Federal district court, or the

357

I.R.C. § 6242(a)(2)(A).

358

I.R.C. § 6242(b)(4)(A).

359

I.R.C. § 6242(b)(1). The payment of interest or penalties by the partnership

will not give rise to a deduction. I.R.C. § 6242(e).

360

I.R.C. § 6242(b)(3).

361

See, e.g., Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012);

Petaluma FX Partners, LLC v. Commissioner, T.C. Memo. 2012-42, 103 T.C.M.

(CCH) 1769. The Supreme Court eliminated any ambiguity in the regular TEFRA

audit procedures on this issue in United States v. Woods, 134 S. Ct. 557 (2013). In

Woods, the Court explained that the trial court possessed jurisdiction under

§ 6226(f) to determine the applicability of the valuation misstatement penalty (and,

indeed, any penalty) that could result from the adjustment of a partnership item,

even if imposing the penalty also would require determining affected or non-

partnership items such as a partner’s basis in the partnership interest. Id. at 564.

The court noted that this approach avoided duplicative proceedings and the

potentially inconsistent results of partner-level determinations of an issue that

applied equally to all of the partners. Id. at 564–65.

Innovation in Remedies and Procedures 437

Court of Federal Claims.

362

In keeping with the theme of limiting partner

involvement in the proceedings, only the partnership may petition for such

judicial review; unlike the TEFRA audit procedures, a judicial proceeding to

review the partnership-level adjustment may not be commenced by a

partner alone. Pursuant to § 6247(a), the partnership must file a petition for

readjustment within 90 days of the mailing of the notice of partnership

adjustment by the Service. This period of limitations on the filing of a

petition serves as the only jurisdictional prerequisite for Tax Court

review.

363

However, to litigate before the Federal district court or Court of

Claims, the partnership also must deposit with the Service a good faith

estimate of the imputed tax under § 6242(b) attributable to the partnership

item adjustment, together with any interest and penalties resulting from

such adjustment, on or before the date on which the petition for

readjustment is filed.

364

Accordingly, the Tax Court serves as the sole

judicial forum in which to challenge a partnership-level adjustment on a

pre-payment (technically, pre-deposit

365

) basis. Once a court acquires

jurisdiction to review a partnership-level adjustment, the reviewing court

may review all partnership items to which the notice of adjustment relates,

even if those items are not contested by the partnership.

366

Additionally,

the court may review the allocation of partnership items among the partners

for that year, as well as the applicability of any penalty or addition to tax.

367

The electing large partnership provisions also provide a procedure for a

partnership to pursue a refund attributable to a partnership item. Pursuant

to § 6251, a partnership may request an administrative adjustment of

partnership items within three years after the later of the date the

partnership return was filed or the date the return was due (determined

without regard to extensions), provided the Service has not first issued the

partnership a notice of adjustment.

368

If the Service disallows any part of

the requested administrative adjustment, the partnership may seek judicial

review in the Tax Court, the federal district court, or the Court of Federal

Claims.

369

The petition for adjustment under § 6252 is not timely unless it

is filed after six months from the date on which the request for

administrative adjustment was filed with the Service, but before two years

of such date.

370

A benefit of invoking judicial review through the § 6252

362

I.R.C. § 6247(a).

363

See TAX CT. R. 300(c)(1) (July 6, 2012 ed.).

364

I.R.C. § 6247(b)(1).

365

I.R.C. § 6247(b)(2) (clarifying that the required deposit is not treated as a

payment of tax).

366

I.R.C. § 6247(c).

367

Id.

368

I.R.C. § 6251(a), (c)(1).

369

I.R.C. § 6252(a); see also TAX CT. R. 300(c)(2) (July 6, 2012 ed.).

370

I.R.C. § 6252(b).

438 The United States Tax Court – An Historical Analysis

refund procedure is that the scope of the court’s review is limited to the

adjustment requested by the partnership that is not allowed by the Service,

as well as any items the Service asserts as an offset to the requested

adjustment. Unlike a petition for readjustment of partnership items, the

reviewing court may not consider all partnership items for the year to which

the predicate notice of adjustment relates. The partnership’s ability to limit

the scope of judicial review is forfeited if the Service issues the partnership

a notice of adjustment under § 6245(b) before a hearing is held on the

partnership’s petition for adjustment under § 6252(a). In that case, the

§ 6252 petition filed by the partnership is retroactively converted to a

petition for readjustment of partnership items under § 6247,

371

which in

turn expands the scope of judicial review.

4. Declaratory Judgments Relating to “Oversheltered” Returns

The TEFRA partnership-level audit procedures created a potential trap

for the Government with respect to its ability to assess a deficiency in tax

relating to a taxpayer’s nonpartnership items. Because a taxpayer’s

distributive share of loss from a partnership subject to the TEFRA

procedures is not subject to adjustment until the conclusion of the TEFRA

proceeding, a proposed adjustment in tax relating to the taxpayer’s

nonpartnership tax items could prove meaningless in isolation. That is, any

additional taxable income resulting from the adjustment of nonpartnership

items could continue to be fully offset by the amount of the partnership

loss claimed on the return, negating any deficiency in tax. If the proposed

adjustments to the nonpartnership items later proved meaningful as a result

of a reduction in the distributive share of loss achieved through the

successful prosecution of a TEFRA proceeding, assessment of the resulting

deficiency likely would be barred by the expiration of the period of

limitations on assessment.

Prior to 1989, the Service left itself exposed to the incongruent

application of the TEFRA partnership procedures and the normal

deficiency procedures through its practice of assuming the propriety of all

TEFRA partnership items when examining a taxpayer’s return. However,

in the 1989 case of Munro v. Commissioner,

372

the Service attempted to shift

this risk of loss to the taxpayer. The Service in Munro took the position

that, in determining a deficiency in tax at the individual level, it could

assume that its proposed adjustments to partnership items subject to the

TEFRA proceedings were correct for “computational purposes” only.

373

371

I.R.C. § 6252(c)(2).

372

92 T.C. 71 (1989).

373

Id. at 73.

Innovation in Remedies and Procedures 439

this manner, the Service determined the deficiency in tax at the individual

level based on its best-case resolution of the TEFRA litigation.

The Tax Court was not willing to indulge the Commissioner to this

extent, holding that TEFRA partnership adjustments proposed by the

Commissioner could not be taken into account in the deficiency

proceeding.

374

Nonetheless, the Tax Court’s resolution of this issue in

Munro remained largely favorable to the Service. Stressing the statutory

directive that partnership items are to be kept separate from the taxpayer’s

individual proceeding and resolved solely at the partnership level, the court

reasoned that deficiency proceedings relating to the taxpayer must address

nonpartnership items exclusively. Accordingly, the court held that

partnership items subject to the TEFRA procedures were to be ignored in

their entirety in the deficiency proceeding.

375

In the context of a taxpayer

claiming a distributive share of loss from a partnership, the Tax Court’s

approach in Munro prevented the Service’s adjustment of nonpartnership

items from being “sheltered” by a partnership loss claimed on the return.

376

Congress did not react favorably to the approach adopted by the Tax

Court in Munro.

377

As part of the Taxpayer Relief Act of 1997,

378

Congress

enacted § 6234 to “overrule” Munro and to allow the Service to reinstate its

original practice of computing a taxpayer’s deficiency by assuming that all

partnership items whose tax treatment had not been finally determined in a

TEFRA proceeding were correctly reported on the taxpayer’s return.

379

However, in doing so, Congress supplied a mechanism to prevent the

Service from being whipsawed by the expiration of the period of limitations

in cases where the tax treatment of partnership items on the taxpayer’s

return did not withstand scrutiny. Section 6234 does so by creating a

declaratory judgment procedure in the Tax Court pertaining to an

“oversheltered return”—that is, a return that shows no taxable income for

374

Id. at 74.

375

Id. (“[P]artnership items must be ignored in deficiency proceedings, which

relate exclusively to nonpartnership items.”).

376

While the mutually exclusive treatment of partnership and nonpartnership

items in Munro would generally favor the Service, the conference committee report

accompanying the enactment of § 6234 explains that the approach could operate to

the detriment of the Service if the partnership items consisted of income items

rather than losses. H.R. R

EP. NO. 105-148, at 585–86 (1997).

377

In particular, Congress viewed the prospect of a taxpayer having to pay a

deficiency attributable to nonpartnership item adjustments that later would be

offset by partnership losses that were upheld in a TEFRA proceeding (generating a

refund for the taxpayer) as effectively denying the taxpayer the ability to litigate the

partnership items on a prepayment basis. Id. at 586.

378

Pub. L. No. 105-34, § 1231, 111 Stat. 788, 1020–23 (1997).

379

H.R. REP. NO. 105-148, at 586 (1997).

440 The United States Tax Court – An Historical Analysis

the taxable year while also showing a net loss from partnership items.

380

Pursuant to this procedure, if the Service proposes an adjustment with

respect to the nonpartnership items of a taxpayer that would have given rise

to a deficiency in the absence of partnership items reported on the

taxpayer’s return that are subject to the TEFRA partnership proceedings,

the Service may issue a “notice of adjustment” to reflect its

determination.

381

In many respects, the notice of adjustment is subject to the same

restrictions and triggers the same procedures as a notice of deficiency.

382

particular, the notice must be mailed prior to the expiration of the period of

limitations on assessment of a deficiency,

383

and the taxpayer has the same

period (generally 90 days) to petition the Tax Court for a redetermination of

the proposed adjustments.

384

If the taxpayer files a petition for review, the

Tax Court has jurisdiction to make a “declaration” with respect to the

taxpayer’s nonpartnership items for the taxable year to which the notice of

adjustment relates.

385

The Tax Court’s declaration in this context has the

same force and effect as a decision of the court and is subject to appellate

review in the same manner.

386

Adjustments to the nonpartnership items of a taxpayer that are obtained

through the § 6234 declaratory judgment procedure do not trigger an

immediate tax liability. Rather, these adjustments are preserved to be taken

into account upon the resolution of the TEFRA partnership-level

proceeding. The heart of the § 6234 response to the whipsaw problem

380

I.R.C. § 6234(b). The procedural details of § 6234 declaratory judgment

proceedings are addressed in Rules 310 through 316 of the Tax Court Rules of

Practice and Procedure.

381

I.R.C. § 6234(a).

382

Indeed, in certain situations, a notice of adjustment issued under § 6234 will

be treated as a notice of deficiency under § 6212. This conversion occurs if,

following the mailing of the notice of adjustment but prior to the expiration of the

period for petitioning the Tax Court for review, the treatment of any partnership

item for the taxable year is finally determined or the item ceases to be a partnership

item and a deficiency can be determined with respect to the items that serve as the

subject of the notice of adjustment. I.R.C. § 6234(g)(3). Additionally, if the Service

mistakenly issues a notice of adjustment pursuant to § 6234 in lieu of a notice of

deficiency under § 6212 and vice versa, the mistakenly issued notice shall be treated

as the type of notice that should have been issued. See I.R.C. § 6234(h).

383

I.R.C. § 6234(e)(1).

384

I.R.C. § 6234(c). The Service is barred from making an assessment of the

deficiency during this filing period and, if a petition is filed with the Tax Court,

until the decision of the Tax Court becomes final. I.R.C. § 6234(e)(3).

385

I.R.C. § 6234(c). If the taxpayer fails to invoke the Tax Court’s jurisdiction

to review the notice of adjustment, the determination made by the Service set forth

in the notice shall be considered correct as a general rule. I.R.C. § 6234(d)(1).

386

I.R.C. § 6234(c).

Innovation in Remedies and Procedures 441

identified in Munro lies in § 6234(g), which permits the adjustments with

respect to nonpartnership items to be taken into account upon resolution

of the partnership-level proceedings free of any restriction otherwise

imposed by the statute of limitations on the assessment of a deficiency.

Because the issuance of a notice of adjustment does not lead to the

imposition of an immediate tax liability (and, indeed, may never lead to an

additional tax liability if the taxpayer’s claimed treatment of partnership

items is sustained through the partnership-level proceedings), a taxpayer

does not have an immediate financial incentive to contest the Service’s

determination reflected in the notice of adjustment. If the taxpayer fails to

petition the Tax Court for redetermination of the items addressed in the

notice of adjustment, the determinations reflected in the notice are deemed

to be correct as a general rule.

387

However, in recognition of the

diminished incentive for the taxpayer to invoke the Tax Court’s jurisdiction

in this context,

388

this general rule does not apply if the taxpayer pursues a

claim for refund of the tax attributable to the items that were adjusted in

the § 6234 proceeding.

389

In this manner, the taxpayer is permitted to take a

wait-and-see approach with respect to the determination concerning

nonpartnership items reflected in the notice of adjustment. The price for

such hindsight, however, is the forfeiture of a prepayment forum in which

to later contest that determination.

D. Supplemental Tax Court Jurisdiction

Through legislation originally enacted in 1988, Congress responded to

two anomalies in proceedings before the Tax Court relating to interest on

an underlying tax liability.

Through the enactment of § 7481(c), Congress expanded the Tax

Court’s jurisdiction to provide the court with jurisdiction over

determinations of interest relating to a deficiency determination made by

the court. The goal of this legislation was to permit a taxpayer who had

previously invoked the Tax Court’s jurisdiction to resolve the taxpayer’s

resulting liability for interest without having to resort to another forum.

Through the enactment of § 7481(d), Congress addressed a conundrum

arising from interest paid on payments of estate tax deferred pursuant to

§ 6166. Because interest could not be deducted as an administrative

expense for estate tax purposes in advance of actual payment, the court in

387

I.R.C. § 6234(d)(1).

388

H.R. REP. NO. 105-148, at 587 (1997) (“Although a refund claim is not

generally permitted with respect to a deficiency arising from a TEFRA proceeding,

such a rule is appropriate with respect to a defaulted notice of adjustment because

taxpayers may not challenge such a notice when issued since it does not require the

payment of additional tax.”).

389

I.R.C. § 6234(d)(2).

442 The United States Tax Court – An Historical Analysis

§ 6166 cases was essentially forced to keep the estate tax case open until the

last installment of estate tax had been paid. Section 7481(d) provides a

procedure tailored to address this issue, one that permits the court to enter

a decision and then subsequently modify it solely on account of later

payments of interest.

These two areas of supplemental jurisdiction are addressed below.

1. Post-Decision Interest Determinations

The Tax Court’s jurisdiction to redetermine deficiencies does not

authorize the court to make determinations concerning interest, as the

definition of a deficiency does not extend to interest thereon.

390

Beyond

this definitional matter, interest is not assessable by the Commissioner with

respect to a deficiency until the Tax Court’s redetermination decision

becomes final.

391

Hence, the question of interest owed on a deficiency does

not ripen until the Tax Court concludes its jurisdiction over the matter.

392

In the refund setting, the Tax Court possesses jurisdiction under § 6512(b)

to determine if the taxpayer has made an overpayment, and interest may be

part of an overpayment if the interest was paid prior to the time the

overpayment was claimed.

393

However, the overpayment jurisdiction of the

Tax Court does not extend to the determination of interest owed upon an

overpayment once determined.

394

Recognizing the absence of Tax Court jurisdiction over interest

determinations in the deficiency setting, Congress attempted to address the

defect through the enactment of § 7481(c) as part of the Technical and

390

See I.R.C. § 6211(a).

391

See Commissioner v. Estate of Kilpatrick, 140 F.2d 887 (6th Cir. 1944) (in a

deficiency proceeding, “interest is assessable under the statute only after the Board

has acted”). As explained by the Tax Court in Estate of Baumgardner v. Commissioner,

85 T.C. 445, 452 (1985), interest under § 6601 does not accrue on a deficiency but

rather on an underpayment, and an underpayment of tax does not arise until a

deficiency is assessed or assessable. Where the Tax Court’s deficiency jurisdiction

has been invoked, § 6213(a) restrains assessment of a deficiency until the Tax Court

decision becomes final.

392

Congress provided the following explanation of the prevailing landscape

prior to the introduction of § 7481(c) in 1998:

Following a decision by the Tax Court, the IRS assesses the entire amount

redetermined as the deficiency by the Tax Court and adds to the deficiency

interest computed at the statutory rate. If the taxpayer disagrees with the

IRS’ interest computation, however, the Tax Court does not have

jurisdiction to resolve that dispute.

H.R. R

EP. NO. 100-1104 at 232 (1998).

393

Estate of Baumgardner, 85 T.C. at 452.

394

Id. at 453 (“[W]e remain unable to enter a decision for interest upon an

overpayment.”).

Innovation in Remedies and Procedures 443

Miscellaneous Revenue Act of 1988.

395

In its original form, § 7481(c)

permitted the taxpayer to file a subsequent petition with the Tax Court for a

determination that the interest assessed by the Commissioner under § 6215

with respect to a deficiency exceeded the amount of interest properly due.

To invoke the court’s jurisdiction in this subsequent proceeding, the

taxpayer first had to pay the entire amount of the deficiency plus the

interest claimed by the Commissioner, and the taxpayer then had to file a

petition within one year of the date on which the original decision of the

Tax Court became final. In that event, the Tax Court possessed jurisdiction

solely to determine whether the taxpayer had made an overpayment of

interest.

396

As part of the Taxpayer Relief Act of 1997, Congress streamlined and

clarified the Tax Court’s jurisdiction under § 7481(c).

397

Rather than

requiring the taxpayer to file a subsequent petition with the Tax Court,

Congress fashioned the court’s jurisdiction under § 7481(c) as supplemental

to the original proceeding that the taxpayer could invoke by motion.

398

Additionally, Congress clarified that the Tax Court’s jurisdiction under

§ 7481(c) extended not only to interest determinations made with respect to

a deficiency in tax (where the taxpayer had first paid the deficiency and all

interest claimed by the Commissioner) but also to interest determinations

arising in the context of refund litigation under § 6512(b).

399

Section

7481(c) therefore authorizes the Tax Court to determine if the taxpayer has

overpaid interest on a deficiency or if the Secretary has underpaid interest

on an overpayment. If the court finds either scenario implicated, the

395

Pub. L. No. 100-67, § 6246(a), 102 Stat. 3751 (enacting § 7481(c)). Section

7481(c) applied to the assessment of deficiencies redetermined by the Tax Court

after the November 10, 1988 effective date of the legislation.

396

I.R.C. § 7481(c) (prior to amendment by the Taxpayer Relief Act of 1997).

397

Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 1452(a), 111 Stat. 1452–

53. The amendment had an effective date of August 5, 1997, but that effective date

did not refer to a particular action. See id. § 1452(b), 111 Stat. 1453. In Hallmark

Cards, Inc. v. Commissioner, 111 T.C. 266, 270 (1998), the court reasoned that the

statute as amended “undoubtedly” applied to motions to redetermine interest filed

after the effective date of the amendment.

398

I.R.C. § 7481(c)(1); see also H.R. REP. NO. 105-148 at 638 (1997) (“A

motion, rather than a petition, is a more appropriate pleading for relief in these

cases.”).

399

I.R.C. § 7481(c)(2)(B). Congress couched this amendment as a

“clarification” of the Tax Court’s jurisdiction under § 7481(c). See H.R. R

EP. NO.

105-220, at 732–33 (1997) (“The House bill also clarifies that the Tax Court’s

jurisdiction to redetermine the amount of interest under section 7481(c) does not

depend on whether the interest is underpayment interest or overpayment

interest.”). However, the clarification was more in the nature of an expansion, as

the statute prior to its amendment made no mention of overpayment interest.

444 The United States Tax Court – An Historical Analysis

court’s determination is treated under § 6512(b) as a determination of an

overpayment of tax.

400

The Tax Court does not serve as the exclusive forum to resolve disputes

regarding the determination of underpayment or overpayment interest.

401

Yet, once invoked, the Tax Court’s jurisdiction under § 7481(c) to

redetermine interest becomes exclusive—just as it does in other areas.

402

Similarly, the court may not decline to exercise its jurisdiction to

redetermine interest once its supplemental jurisdiction has been properly

invoked.

403

In Hallmark Cards, Inc. v. Commissioner,

404

the taxpayer sought to

dismiss its motion for a redetermination of interest under § 7481(c)

following the issuance of adverse Tax Court authority in another case.

Pointing to the specific reference in § 6512(a) to a petition to redetermine

interest under § 7481(c), the court reasoned that Congress intended for a

motion under § 7481(c) to have the same effect as the filing of a petition to

redetermine a deficiency. Accordingly, the court denied the taxpayer’s

motion to withdraw on grounds that the court was obligated to dispose of

the matter on the merits.

405

Ordinarily, a proceeding to redetermine interest under § 7481(c) can be

resolved on the record supporting the Tax Court’s final decision in the

case.

406

Nonetheless, Tax Court Rule 261(d) contemplates the possibility of

a “bona fide factual dispute” that will require an additional evidentiary

hearing. The court therefore may accept new facts to resolve interest

determination disputes, provided the substance of the court’s final decision

concerning the underlying deficiency or overpayment remains

unchanged.

407

In that regard, the court’s jurisdiction under § 7481(c) is not

limited to determining the applicable interest rates for the relevant

400

I.R.C. § 7481(c)(3). The Tax Court’s redetermination of interest under

§ 7481(c) is reviewable in the same manner as a decision of the Tax Court. Id.

401

See Exxon Mobil Corp. v. Commissioner, 136 T.C. 99, 110 (2011).

402

See I.R.C. §§ 6512(a), 7422(e).

403

Cf. § 7459(d) (decision of Tax Court dismissing proceeding for

redetermination of deficiency considered its decision that the deficiency is that

determined by the Secretary); see also Coninck v. Commissioner, 100 T.C. 495, 498

(1993) (“This Court . . . is not free to ‘deny its jurisdiction’ once it has attached by

means of a valid petition.”).

404

111 T.C. 266 (1998).

405

Id. at 272 (citing Estate of Ming v. Commissioner, 62 T.C. 519 (1974)

(denying taxpayer’s motion to withdraw petition for redetermination of deficiency

without prejudice) and Dorl v. Commissioner, 57 T.C. 720 (1972) (denying

taxpayer’s motion to remove case from the Tax Court to the U.S. District Court)).

406

See TAX CT. R. 261(d) (July 6, 2012 ed.) (making this observation).

407

See Bankamerica Corp. v. Commissioner, 109 T.C. 1, 8–9 (1997) (“[W]e

note that the existence of a final decision does not tie our hands in this case. . . .

[A]s long as we do not change the substance of the final decision, we are free to act

under section 7481(c).”).

Innovation in Remedies and Procedures 445

periods—a position advanced by the Commissioner in Exxon Mobil Corp. v.

Commissioner

408

to no avail. The court in Exxon Mobil explained that

determining the amount of interest under § 7481(c) requires the court to

analyze not only the applicable interest rate but also the relevant principal

amount and length of time such amount remained outstanding. The court’s

jurisdiction under § 7481(c) therefore necessarily extends to resolving the

various items that factor in the interest determination.

409

The Tax Court’s decision in Exxon Mobil also addressed the extent to

which the Tax Court may consider facts relating to years that are not before

the court in the § 7481(c) proceeding. The taxpayer in Exxon Mobil invoked

the court’s jurisdiction under § 7481(c) to determine interest netting under

§ 6221(d) for overpayment years before the court in the § 7481(c)

proceeding based on prior underpayments in years not before the court.

The Tax Court resolved the matter by analogizing to § 6214(b). Section

6214(b) authorizes the court to consider facts relating to taxable years not

before the court in redetermining a deficiency for a year over which the

court possesses jurisdiction, while making clear that the ability to consider

facts from other years does not extend the court’s jurisdiction to those

years. The Tax Court in Exxon Mobil incorporated the § 6214(b) rule into

the § 7481(c) arena, explaining that merely considering the underpayments

of tax in years prior to those before the court in the § 7481(c) proceeding

did not require the court to disturb the determination of those

underpayments. Accordingly, the factual record available to the Tax Court

in redetermining interest under § 7481(c) is not necessarily limited to the

taxable years over which the court possesses § 7481(c) supplemental

jurisdiction.

2. Continuing Jurisdiction Over Estate Tax Cases

If an estate is entitled to defer payment of estate tax under § 6166(a), the

deferred tax payments accrue interest under § 6601.

410

The estate’s future

interest obligation created a hurdle to the Tax Court entering a final

decision in an estate tax deficiency case, as highlighted in Estate of Bailly v.

Commissioner.

411

The estate in that case had elected to defer payment of the

estate tax under § 6166(a) and sought to deduct its future interest expense

under § 6601 as an administrative expense for estate tax purposes. In a

prior proceeding, the Tax Court determined that the estate could deduct

this interest only as the interest was paid. However, if the Tax Court had

entered a final decision in the proceeding, the estate would be precluded

408

136 T.C. 99 (2011).

409

Id. at 114.

410

See I.R.C. § 6166(f).

411

81 T.C. 949 (1983).

446 The United States Tax Court – An Historical Analysis

under § 6512(a) from pursuing a refund of estate tax resulting from

deductions attributable to future interest payments. To avoid the harsh

result of the estate forfeiting administrative expense deductions, the court

in Estate of Bailly agreed to postpone entry of its decision in the case until

the final § 6166 installment payment was due or paid, whichever occurred

first.

412

In reaching this resolution of the conundrum raised in Estate of Bailly, the

Tax Court remarked that a congressional solution was required.

413

Congress obliged by introducing § 7481(d) as part of the Technical and

Miscellaneous Revenue Act of 1988.

414

Pursuant to § 7481(d), the Tax

Court is authorized to enter a decision regarding an estate tax deficiency

and later reopen the case upon the taxpayer’s motion solely to modify the

court’s decision to reflect the estate’s entitlement to an administrative

expense deduction under § 2053 on account of the estate’s payment of

interest on the deferred estate tax obligation.

To invoke this special procedure, the taxpayer estate must file a motion

with the court after the entry of decision but before that decision becomes

final requesting that the court retain its official case file.

415

Thereafter, the

taxpayer estate may move the court to modify its decision to reflect the

consequences of a later interest payment by filing a proposed form of

decision along with its motion.

416

If the Service disagrees with the estate’s

motion, it must file a response along with its proposed form of decision

within 60 days.

417

Motions to modify a decision pursuant to § 7481(d)

generally are resolved without an evidentiary hearing, unless one is required

due to the existence of a bona fide factual dispute.

418

The practical effect of the § 7481(d) procedure has been limited

significantly by subsequent estate tax legislation. In 1997, Congress

amended § 2053 to disallow an administrative expense deduction for

interest accruing on payments of federal estate tax that are deferred

pursuant to § 6166.

419

Hence, the problem that gave rise to the § 7481(d)

congressional remedy has been eliminated. Nonetheless, payments of

interest attributable to deferred payments of estate, inheritance, or

succession taxes levied at the state or local level may give rise to subsequent

administrative expense deductions that necessitate the § 7481(d) procedure.

The provision therefore has lasting, albeit limited, relevance.

412

Id. at 958.

413

See id.

414

Pub. L. No. 100-647, § 6247(a), 102 Stat. 3342, 3751–52 (1988).

415

TAX CT. R. 157 (July 6, 2012 ed.).

416

See TAX CT. R. 262(a) (July 6, 2012 ed.).

417

TAX CT. R. 262(c) (July 6, 2012 ed.).

418

TAX CT. R. 262(d) (July 6, 2012 ed.).

419

See I.R.C. § 2053(c)(1)(D), added by The Taxpayer Relief Act of 1997, Pub.

L. No. 105-34, § 503(b)(1), 111 Stat. 788, 853 (1997).

Prominence in Judicial Review of Taxpayer Rights 447

ART VIII

TAX COURT PROMINENCE IN JUDICIAL

REVIEW OF TAXPAYER RIGHTS

Congress has steadily expanded the jurisdiction of the Tax Court beyond

its traditional province to determine deficiencies and overpayments

following the Government’s issuance of a notice of deficiency. The court’s

expanded jurisdictional reach at times stems from Congress seeking to

provide a greater degree of oversight of administrative action. The Tax

Court’s jurisdiction to restrain premature assessments under § 6213(a) and

to review jeopardy assessments under § 7429, previously discussed in

connection with the court’s deficiency jurisdiction,

present two such

examples. More often, the court’s jurisdiction has been expanded in

connection with the creation of new taxpayer rights, a series of which have

been introduced in recent decades. Having created the right, Congress

often is not content to entrust the administration of the right to the Service

alone. Congress therefore typically provides for the availability of judicial

review of agency determinations and, increasingly, the Tax Court is

designated as the forum for such review. The Tax Court’s jurisdiction to

review denials of innocent spouse relief, determinations made in response

to a collection due process hearing, denials of requests for reimbursement

of costs incurred in contesting the Service’s position at the administrative

level, and determinations of whistleblower awards all fall within this

category. This Part will explore these and other provisions that fall within

the broad umbrella of taxpayer rights, detailing the remedy provided by

Congress and the Tax Court’s jurisdiction to enforce it.

A. Disclosure Actions

Since enactment of the Freedom of Information Act in 1967,

increasing

attention has focused on Internal Revenue Service policies with regard to

the confidentiality of its rulings.

Except for a small minority of rulings that

are published in the Internal Revenue Bulletin (and which are, in published

form, devoid of reference to the specific taxpayer and transaction involved),

these interpretations at one point had been treated as confidential by the

These provisions are discussed in Part VI.A. and VI.C., respectively.

Pub. L. No. 90-23, 81 Stat. 54 (codified at 5 U.S.C. § 552 (1977)).

See Fruehauf Corp. v. Internal Revenue Serv., 522 F.2d 284 (6th Cir. 1975),

vacated, 429 U.S. 1085 (1977); Tax Analysts & Advocates v. Internal Revenue Serv.,

505 F.2d 350 (D.C. Cir. 1974).

448 The United States Tax Court – An Historical Analysis

Service.

Justification for confidentiality was based on the fact that public

disclosure of the identity of taxpayers and their transactions would

discourage taxpayers from seeking rulings

and might violate provisions of

the Code prohibiting publication of tax returns.

Additionally, even if

private rulings were sanitized by removal of references to the taxpayer and

transaction involved, publication would be inappropriate because the great

number of such rulings precluded the type of careful review that would

justify their use as precedent. Although the Service generally treats the

specific transaction giving rise to a private ruling in accordance with its

determination,

it does not feel constrained to maintain a consistent

position with regard to other taxpayers or even other transactions involving

the same taxpayer.

Several questions emerged with regard to ruling confidentiality. First, it

was maintained that the private ruling procedure operated unfairly since,

despite Service precautions, sophisticated tax practitioners frequently knew

the position adopted by the Service in these determinations.

Such a system

of privileged access to government pronouncements did not bolster public

confidence in the equity of the tax laws. Second, the secrecy surrounding

private rulings led to suspicions that the tax laws were not being

administered uniformly as to all taxpayers.

These suspicions, whether or

not well-founded, also had disturbing implications for public confidence.

Finally, questions were raised with regard to the legality, under the Freedom

of Information Act, of barring public access to administrative

interpretations of the tax laws.

Courts began to hold that statutory

provisions barring the publication of tax returns did not justify withholding

public access to private rulings under the Freedom of Information Act.

To address these problems, Congress enacted § 6110 as part of the Tax

Reform Act of 1976,

providing a comprehensive legislative scheme

prescribing procedures for Internal Revenue Service disclosure of rulings.

Additionally, the legislation created specific judicial remedies for persons

objecting to Service action with regard to disclosure.

In this regard,

H.R. REP. NO. 94-658, at 312 (1975); S. REP. NO. 94-938, at 303 (1976).

See H.R. REP. NO. 94-658, at 317 (1975); S. REP. NO. 94-938, at 309 (1976).

I.R.C. §§ 6103, 7213.

Treas. Reg. § 601.201(l)(5).

Treas. Reg. § 601.201(l)(1), (6).

H.R. REP. NO. 94-658, at 314 (1975); S. REP. NO. 94-938, at 305 (1976).

See supra note 9.

See supra note 3.

Fruehauf Corp. v. Internal Revenue Serv., 522 F.2d 284 (6th Cir. 1975),

vacated, 429 U.S. 1085 (1977); Tax Analysts & Advocates v. Internal Revenue Serv.,

505 F.2d 350 (D.C. Cir. 1974).

Pub. L. No. 94-455, § 1201(a), 90 Stat. 1520, 1660 (1976).

Id.

Prominence in Judicial Review of Taxpayer Rights 449

remedies are provided for those objecting to disclosure

as well as for

those seeking additional disclosure.

Pursuant to § 6110, the Commissioner is required to make available for

public inspection written determinations as well as so-called “background

file documents.”

The latter consist of communications, written or

otherwise, between the Service and others, regarding a determination; they

include the ruling request, materials submitted in support of the request,

and other communications from the taxpayer and others.

The statute provides various exceptions to the general directive of

disclosure.

Of primary importance, the Commissioner is directed to

excise from the public record the name, address, and other identifying

details of any person identified in the determination or background file

documents.

Also excepted from disclosure is certain material dealing with

foreign policy and national defense,

material excepted from disclosure by

specific statutory provision not contained in title 26,

trade secrets,

material “the disclosure of which would constitute a clearly unwarranted

invasion of personal privacy,”

certain material connected with agencies

responsible for the supervision of financial institutions,

and geological

material concerning wells.

Codifying earlier practice, the statute also

provides that rulings will have no precedential weight unless otherwise

provided by the Service.

The procedure for disclosure of determinations is automatic. Upon

issuance of a determination, the Service is required to mail notification of

its intention to disclose to the person to whom the determination pertains.

As indicated above, the statute requires that portions of the determination

be excised from that which is made public.

Pursuant to statutory

directive, procedures must be established by the Service under which

disputes regarding the excisions may be resolved administratively within a

See I.R.C. § 6110(f)(3).

See I.R.C. § 6110(d)(3),(f)(4).

I.R.C. § 6110(a).

I.R.C. § 6110(b)(2).

I.R.C. § 6110(c).

I.R.C. § 6110(c)(1). This exception does not apply to persons identified as

third-party contacts. I.R.C. § 6110(c)(1), (d)(1). See infra notes 37–40 and

accompanying text.

I.R.C. § 6110(c)(2).

I.R.C. § 6110(c)(3).

I.R.C. § 6110(c)(4).

I.R.C. § 61l0(c)(5).

I.R.C. § 61l0(c)(6).

I.R.C. § 6110(c)(7).

I.R.C. § 6110(k)(3).

I.R.C. § 6110(f)(1).

See supra notes 19–26 and accompanying text.

450 The United States Tax Court – An Historical Analysis

60-day period from the mailing of notice.

If the person to whom the

determination pertains does not commence suit in the Tax Court within the

60-day period to restrain disclosure,

the determination is made available

for public inspection between 75 and 90 days after mailing of the notice of

intention to disclose.

If disputes regarding disclosure cannot be resolved

administratively and a Tax Court suit to restrain disclosure is commenced,

the determination will be made available for public inspection, in

accordance with the court’s decision, within 30 days after that decision

becomes final.

The procedure for disclosure of background file documents parallels

that for determinations with one exception. Instead of automatic initiation

of the disclosure procedure as accompanies the issuance of a determination,

background file documents will not be made available for inspection unless

a written request is made therefor.

Upon the receipt of such request, the

Service must mail notification of an intention to disclose to any person to

whom the determination pertains,

and from that point on the procedure

for disclosure is the same as that for determinations.

As a protection against impropriety and undue influence in the ruling

procedure, special disclosure rules are provided for so-called third party

contacts.

The statute requires that a written notation be made on the

determination open to public inspection of any communication with the

Service by any person, other than the taxpayer or his representative, with

regard to the determination.

Such notation identifies the contacting party

by category only (e.g., congressional, White House, Treasury, trade

association, etc.), and not by name.

Despite this limitation and the usual

limitations on disclosing the names of those involved in a determination,

the statute requires the Service to disclose the identity of third party

contacts as part of the background file documents.

In connection with the disclosure provisions, Congress authorized three

distinct judicial proceedings. The first of these, mentioned above, provides

for actions to restrain disclosure.

The Tax Court has exclusive jurisdiction

I.R.C. § 6110(f)(2)–(3).

I.R.C. § 6110(f)(3).

I.R.C. § 6110(g)(1)(A).

I.R.C. § 6110(g)(1)(B).

I.R.C. § 6110(e), (f)(1); S. REP. NO. 94-938, at 310 (1976).

I.R.C. § 6110(f)(1).

I.R.C. § 6110(f)(3), (g).

I.R.C. § 6110(d).

I.R.C. § 6110(d)(1).

Id.; S. REP. NO. 94-938, at 308 (1976).

I.R.C. § 6110(a), (b)(2), (c); S. REP. NO. 94-938, at 308 (1976).

I.R.C. § 6110(f)(3). To aid the Service in complying with § 6110, a request for

a private letter ruling must be accompanied by a statement (a “deletions

Prominence in Judicial Review of Taxpayer Rights 451

of these actions, which may be initiated by any person “to whom a written

determination pertains . . . or who has a direct interest in maintaining the

confidentiality of any such written determination or background file

document” and who disagrees with a Service refusal to make deletions in

material to be opened to public inspection.

Such an action must be

instituted within 60 days after the mailing by the Service of a notice of

intention to disclose.

A second category of proceeding authorizes actions to obtain additional

disclosure.

Initial jurisdiction for these actions is in either the Tax Court

or the United States District Court for the District of Columbia, and they

may be commenced by any person who seeks additional disclosure with

respect to any determination or background file document.

Such an

action must be instituted within three years after any portion of the

determination is opened for public inspection.

A final action is authorized in connection with the special provisions

dealing with third-party contacts.

As stated above, the existence of a

third-party contact must be noted on any determination made public with

the category of the contacting party.

Additionally, the Code requires that

the name of the contacting party be made available on request as part of the

background file documents.

A further provision authorizes a court action

to compel disclosure of the identity of any person to whom the

determination pertains.

Such an action may be brought by any person in

either the Tax Court or the United States District Court for the District of

Columbia.

Disclosure of identity will be ordered if the court concludes

that evidence exists “from which one could reasonably conclude that an

impropriety occurred or undue influence was exercised . . . by or on behalf

statement”) of the items that should be redacted from the version of the ruling to

be made public. See Rev. Proc. 2007-4, § 9.02(9), 2007-1 C.B. 118, 133.

I.R.C. § 6110(f)(3)(A). However, this remedy does not authorize a taxpayer to

enjoin public disclosure of a determination in its entirety. See Anonymous v.

Commissioner, 134 T.C. 13 (2010) (rejecting taxpayer argument that the

Administrative Procedure Act permitted the Tax Court to enjoin publication of a

private letter ruling).

Id.

I.R.C. § 6110(f)(4).

I.R.C. § 6110(f)(4)(A).

The three-year statute of limitations is not provided for in the statute. Id

Rather, this restriction is found only in the accompanying legislative materials. See

REP. NO. 94-938, at 314 (1976); H.R. REP. NO. 94-658, at 324 (1975).

I.R.C. § 6110(d).

See supra notes 38–39 and accompanying text.

See supra note 40 and accompanying text.

I.R.C. § 6110(d)(3).

Id.

452 The United States Tax Court – An Historical Analysis

of” the person whose identity is sought.

The court also may order the

disclosure of other deleted material if it finds such material to be in the

“public interest.”

This type of action must be commenced within three

years after the determination is initially opened for public inspection.

The doctrine of exhaustion of administrative remedies figures in two of

the three proceedings. The statute requires the establishment of

administrative procedures with regard to disclosure,

and specifically

requires the exhaustion of remedies for actions to restrain disclosure

and

actions to obtain additional disclosure.

The Tax Court rules specify that

exhaustion is a jurisdictional prerequisite for bringing these types of

actions.

The statute does not, however, provide for the exhaustion of

administrative remedies in the case of third-party contact actions. The

court apparently has not adopted the position that, in these cases,

exhaustion is necessary,

or even desirable.

A question may be anticipated with regard to exhaustion of

administrative remedies in actions to restrain disclosure. The statute clearly

requires exhaustion, but it also requires that the Tax Court action be

commenced within 60 days after the Commissioner mails the notice of

intention to disclose.

This relatively short period may be incompatible

with the time required for full exhaustion of administrative remedies, and

the court may have to adopt a liberal policy with regard to the exhaustion

requirement in order not to bar the institution of Tax Court proceedings.

Although the objectives of the three proceedings differ, in several

respects they parallel one another. For example, one aspect common to all

three actions is that they may involve the interests of persons other than

those who figure directly in the initiation of the proceedings. Thus, an

action to restrain disclosure may be commenced by any person to whom a

determination pertains or who has a direct interest in preserving the

Id.

I.R.C. § 6110(d)(4).

I.R.C. § 6110(f)(2).

I.R.C. § 6110(f)(3)(A)(iii).

I.R.C. § 6110(f)(4)(A).

T AX CT. R. 220(c)(1), (2)(C) (July 6, 2012 ed.).

See TAX CT. R. 220(c)(3) (July 6, 2012 ed.).

The petition in a third-party contact action need not contain a statement that

the petitioner has exhausted administrative remedies. T

AX CT. R. 221(e) (July 6,

2012 ed.). Cf. Rules Comm. Note, T

AX CT. R. 221(d)(6) (Aug. 1, 1977 ed.), 68 T.C.

1055 (indicating that a statement of exhaustion of remedies is necessary in some

circumstances, not relating to third-party contact actions, even if the statute does

not require such exhaustion as a condition of suit).

I.R.C. § 6110(f)(3)(A).

Prominence in Judicial Review of Taxpayer Rights 453

confidentiality of the determination or background file documents.

preserve the rights of all such parties and reduce the potential for multiple

suits, the statute requires the Commissioner, within 15 days of receiving a

petition in an action to restrain disclosure, to mail notice of the

commencement of the action to any person to whom the determination

pertains (other than the petitioner in the action).

Any person to whom

such notice is given may intervene in the proceeding but may not thereafter

institute an independent action to restrain disclosure with respect to any

determination or background file document that is the subject of the

original action.

Similar notice and intervention provisions are applicable to actions to

obtain additional disclosure and third-party contact actions. In the case of

an action to obtain additional disclosure, the Commissioner, within 15 days

after service of notice of the petition, is required to mail notice of the filing

of the petition to any person who is identified by name and address in any

determination or background file document that is the subject of the

petition.

Any person so notified may intervene in the proceeding.

Failure to intervene carries significant risk, as the statute relieves the

Commissioner of the responsibility of defending the action if such notice is

sent.

As a result, the additional disclosure can be obtained without

objection. If the Commissioner elects not to defend the action, Tax Court

rules require the Commissioner to give notice thereof to every person

notified of the filing of the petition, who may intervene within 30 days after

mailing of the notice of the Commissioner’s election.

The notice and

intervention provisions applicable to actions to obtain additional disclosure

are incorporated by reference into third-party contact actions, with the

requirement that notice be given to both the person whose identity is

subject to disclosure and the person who made the third-party contact.

The statute is unclear as to the effect of giving the notice on the

Commissioner’s duty to defend this type of action, but the Tax Court

I.R.C. § 6110(f)(3)(A)(i).

I.R.C. § 6110(f)(3)(B).

Id.

I.R.C. § 6110(f)(4)(B). The statute does not require notification of persons

just identified by name. One wonders whether this is consistent with the purpose

to permit parties to demonstrate the need for confidentiality. Obviously,

notification would be a hardship for the Commissioner if no address is given, but

query whether this is a burden that the Commissioner ought to shoulder to protect

rights to anonymity.

Id.

T AX CT. R. 225(b) (July 6, 2012 ed.).

I.R.C. § 6110(d)(3).

454 The United States Tax Court – An Historical Analysis

apparently has taken the position that the Commissioner must defend the

action even if notice is given.

A unique aspect, insofar as the Tax Court is concerned, of the disclosure

procedures has to do with the anonymity of parties and the confidentiality

of court proceedings and documents. Since 1924, the statute has provided

that the proceedings of the court and evidence adduced before it are to be

open to the public.

Such openness has been regarded as important in

assuring public confidence in the fairness of the court’s decisions.

In the

case of disclosure actions, however, the ultimate issue for decision is

whether certain material should be kept confidential. Obviously, the

proceedings to determine that question cannot be fully public without

defeating the very purpose of the litigation. Accordingly, the statute

provides that intervenors in actions to obtain additional disclosure and in

third-party contact actions, and petitioners and interveners in actions to

restrain disclosure, may proceed anonymously if appropriate.

Although

there is no specific indication in either the statute or the Tax Court rules as

to the meaning of “appropriate” for this purpose,

the issue should not

prove troublesome in light of the statutory purpose to preserve

confidentiality in the absence of either an uncontested Service

determination or a final court decision.

The Tax Court rules provide that a party who proceeds anonymously

shall be designated as “Anonymous.”

Such party is required to submit a

separate paper, accompanying his initial pleading, stating his name and

address and the basis for anonymity.

Consistent with the prospect of

proceeding anonymously, the statute authorizes the court to adopt rules

providing for the confidentiality of disclosure proceedings.

In this

connection, court rules require that petitions and all other papers submitted

to the court in a disclosure action are to be kept in a confidential file and

not opened for public inspection unless specifically permitted by the

court.

Additionally, the rules provide for the issuance of court orders

Cf. TAX CT. R. 225(b) (July 6, 2012 ed.) (suggesting that only in actions to

obtain additional disclosure may the Commissioner elect not to defend).

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337 (now codified at I.R.C.

§§ 7458, 7461); see also Willie Nelson Music Co. v. Commissioner, 85 T.C. 914, 917

(1985) (“As a general rule, common law, statutory law, and the United States

Constitution support the proposition that official records of all courts, including

this Court, shall be open and available to the public for inspection and copying.”).

See 65 CONG. REC. 8133 (1924) (remarks of Sen. Jones).

I.R.C. § 6110(d)(3), (f)(3)(B), (f)(4)(B).

See TAX CT. R. 227 (July 6, 2012 ed.).

T AX CT. R. 227(c) (July 6, 2012 ed.).

Id.

I.R.C. § 6110(f)(6).

T AX CT. R. 228(a) (July 6, 2012 ed.).

Prominence in Judicial Review of Taxpayer Rights 455

barring public access to the hearings, testimony, evidence, and reports

involved in a disclosure case.

The court has recognized that most

disclosure cases will involve related material, some of which may be public

and other of which may be in dispute.

The court generally expects to

keep all such material confidential during the course of an individual

litigation, because of the difficulty of maintaining an ongoing two-file

system.

However, once litigation is completed, the court contemplates

establishing such a system by court order that would divide the material

into two separate files, one of which would be available to the public.

In general, the statute and Tax Court rules adopt burden of proof rules

that favor disclosure. Thus, in actions to restrain disclosure, the burden of

proof is on the party seeking restraint.

In actions to obtain additional

disclosure, the burden of proof is on the party (the Commissioner or an

intervenor) who opposes additional disclosure.

An exception to this bias

in favor of disclosure applies in third-party contact actions seeking

disclosure of the identity of the person to whom a determination pertains.

Likely due to the drastic nature of the remedy sought (identification of the

person involved in a ruling)

and the serious charge of misconduct that

must necessarily be involved in the case,

the burden rests on the petitioner

to establish the reasonable conclusion of an impropriety or undue influence

by or on behalf of the person sought to be identified.

No rule has yet

been expressed with regard to the burden of proof in third-party contact

actions that seek disclosure of material other than the identity of the person

to whom the ruling pertains.

The statute provides that the court may

order such disclosure if it is in the “public interest.”

Notes to the Tax

Court rules expressly reserve decision on this matter.

T AX CT. R. 228(b) (July 6, 2012 ed.).

Rules Comm. Note, TAX CT. R. 228 (Aug. 1, 1977 ed.), 68 T.C. 1060.

Id.

H.R. REP. NO. 94-658, at 324 (1975); S. REP. NO. 94-938, at 313 (1976); TAX

CT. R. 229(b) (July 6, 2012 ed.); see also I.R.C. § 6110(f)(4)(A).

I.R.C. § 6110(f)(4)(A); H.R. REP. NO. 94-658, at 325 (1975); S. REP. NO. 94-

938, at 314 (1976); T

AX CT. R. 229(a) (July 6, 2012 ed.).

I.R.C. § 6110(d)(3).

Id.

T AX CT. R. 229(c) (July 6, 2012 ed.).

Rules Comm. Note, TAX CT. R. 229 (Aug. 1, 1977 ed.), 68 T.C. 1061.

I.R.C. § 6110(d)(3).

Rules Comm. Note, TAX CT. R. 229 (Aug. 1, 1977 ed.), 68 T.C. 1061 (noting

that the absence of a specific rule in this context of disclosures in furtherance of

the public interest “is not to be taken as indicative of where the burden of proof

lies in respect of such issue”). Nonetheless, under the articulated general rule, the

burden of proof would appear to rest on the petitioner seeking disclosure. See T

456 The United States Tax Court – An Historical Analysis

A final feature common to all three types of disclosure proceedings

involves appellate review. Generally, decisions in all types of actions may

be appealed only to the Court of Appeals for the District of Columbia.

This applies to both decisions of the Tax Court and the United States

District Court for the District of Columbia.

According to the committee

reports, an exception to this rule applies in appeals from the Tax Court if,

in the words of these reports, the Commissioner and “the person involved

[agree] to review by another court of appeals (sec. 7482(b)).”

B. Relief from Spousal Joint and Several Liability

Section 6013(a) permits married couples to file a single tax return

reporting their income on a joint basis.

While joint reporting of income

by spouses can yield considerable tax savings through the application of

broadened marginal rate brackets,

the filing of a joint return carries a

potentially significant practical disadvantage. Pursuant to § 6013(d)(3), each

spouse bears joint and several liability for the tax attributable to the couple’s

combined income. The imposition of joint and several liability upon

spouses to a joint return can prove particularly inequitable at times, such as

when one spouse was unaware of income generated by the other that was

not disclosed on the return.

In cases where the “consenting” spouse did

CT. R. 229 (July 6, 2012 ed.) (incorporating the approach under Rule 142 unless an

exception applies).

I.R.C. § 7482(b)(1) (providing appellate venue for appeals from the Tax

Court); 28 U.S.C. § 1291(a) (providing appellate venue for appeals from the United

States district courts).

See supra note 91.

H.R. REP. NO. 94-658, at 324–25 (1975); S. REP. NO. 94-938, at 313–14

(1976).

Congress first introduced the joint return in 1918. See Revenue Act of 1918,

§ 223, 40 Stat. 1057, 1074. Following disputes concerning the extent of each

spouse’s liability, Congress subsequently clarified that spouses to a joint return bore

joint and several liability for the resulting tax 20 years later. See Revenue Act of

1938, Pub. L. No. 75-289, § 51(b), 52 Stat. 447, 476.

The income tax savings from the application of a beneficial rate structure did

not originate as a trade-off for the imposition of joint and several liability. Rather,

the beneficial marginal rate structure for married couples filing jointly was not

introduced until 1948, ten years after the statutory imposition of joint and several

liability. See Revenue Act of 1948, Pub. L. No. 80-471, § 301, 62 Stat. 110, 114; see

also Bryan T. Camp, The Unhappy Marriage of Law and Equity in Joint Return Liability,

108 T

AX NOTES 1307 (2005) (detailing origins of joint income tax reporting).

See S. REP. NO. 91-1537, at 2 (1971) (noting instances of “grave injustice”

where “the innocent spouse has been deserted by her husband and the funds

gained by embezzlement or theft have been squandered and spent by the

wrongdoer”).

Prominence in Judicial Review of Taxpayer Rights 457

not know or have reason to know of the couple’s true combined income,

that spouse necessarily lacked knowledge of the financial exposure the

spouse assumed by signing the joint return.

Prior to 1971, relief from joint and several liability was afforded on

extremely narrow grounds that pertained to the propriety of the joint return

itself. For instance, a spouse who signed a joint return under duress

or by

mistake

could be exempted from joint and several liability on the theory

that no joint return had been effectively filed. In 1971, Congress

introduced the first remedial doctrine aimed at absolving a spouse of joint

and several liability through the enactment of § 6013(e).

Commonly

referred to as “innocent spouse” relief, § 6013(e) primarily required the

consenting spouse to establish the existence of a substantial understatement

of income attributable to the other spouse of which the consenting spouse

lacked knowledge or reason to know. Accordingly, a spouse could seek

§ 6013(e) relief only as an affirmative defense in a deficiency proceeding.

Congress restructured and expanded the innocent spouse provisions

through the enactment of § 6015 as part of the IRS Restructuring and

Reform Act of 1998.

100

First, Congress modified and restated the relief

formerly provided by § 6013(e) through § 6015(b). Congress then provided

an additional avenue for obtaining relief from joint and several liability

relating to a deficiency. Through § 6015(c), a spouse whose marriage has

ended—not only legally but also functionally through the failure to maintain

a common household—may elect to have a separate determination of that

spouse’s liability for the deficiency. In addition to these remedies in the

deficiency setting, Congress provided an open-ended remedy from joint and

several liability that extends to self-reported but unpaid taxes. Pursuant to

§ 6015(f), the Service may determine that it is inequitable to hold a

requesting spouse liable for any portion of a deficiency or tax liability based

on the facts and circumstances of the case.

In addition to clarifying and expanding the innocent spouse relief

provisions, Congress expressly addressed the Tax Court’s jurisdiction in this

context through § 6015(e). This Section first outlines the evolution of the

innocent spouse provisions before examining the Tax Court’s jurisdiction

to determine a requesting spouse’s entitlement to relief.

Furnish v. Commissioner, 262 F.2d 727 (9th Cir. 1958). Current law

continues to treat a return filed under duress as not constituting an effective joint

return. See Treas. Reg. § 1.6013-4(d).

Payne v. Commissioner, 247 F.2d 481 (8th Cir. 1957).

Pub. L. No. 91-679, 84 Stat. 2063 (1971).

100

Pub. L. No. 105-206, § 3201(a), 112 Stat. 734 (1998).

458 The United States Tax Court – An Historical Analysis

1. Relief Under Former Section 6013(e)

The first innocent spouse statute, § 6013(e), applied from 1971 until it

was superseded by the enactment of § 6015 in 1998. Prior to 1984,

§ 6013(e) provided relief from joint and several liability only in cases where

the deficiency was attributable to an omission from gross income.

Congress amended § 6013(e) in 1984 to expand the scope of available relief

to deficiencies resulting from erroneous claims of deduction, credit, or

basis.

101

In its post-1984 form, § 6013(e) provided relief from joint and

several liability resulting from the filing of a joint return where the following

conditions were satisfied: (1) there existed a “substantial understatement” of

tax on the return that was attributable to “grossly erroneous items” of the

other spouse; (2) the requesting spouse established that, in signing the

return, he did not know and did not have reason to know of the existence

of the substantial understatement; and (3) it was inequitable to hold the

requesting spouse liable for the deficiency in tax attributable to the

substantial understatement.

102

If the requesting spouse carried his burden

of establishing these elements,

103

he was entitled to relief from joint and

several liability for the tax attributable to the substantial understatement

only.

104

The statute did not provide a remedy for joint and several liability

of unpaid tax attributable to items reported on the joint return.

The definition of a “substantial understatement” turned on the basis for

the understatement. With respect to omissions from gross income, an

understatement was substantial if it exceeded $500.

105

However, if the

understatement was attributable to an erroneous deduction, credit, or

statement of basis, the understatement had to exceed a stated percentage of

the requesting spouse’s gross income for the preadjustment year—generally

25 percent.

106

The innocent spouse remedy therefore was not only limited

to deficiencies in tax, but often to deficiencies of considerable amounts.

A “grossly erroneous item” attributable to the non-requesting spouse

referred to an unreported item of gross income or a claim of deduction,

credit, or basis for which there existed “no basis in fact or law.”

107

Given

that a spouse could seek relief under § 6013(e) only in the course of a

deficiency proceeding, this requirement placed a consenting spouse in an

101

See Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 424, 98 Stat. 494,

801–03 (1984).

102

I.R.C. § 6013(e), as amended by the Deficit Reduction Act of 1984, Pub. L.

No. 98-369, § 424, 98 Stat. 494, 801–03 (1984).

103

See Shea v. Commissioner, 780 F.2d 561, 565 (6th Cir. 1986).

104

I.R.C. § 6013(e)(1)(D) (1984).

105

I.R.C. § 6013(e)(3) (1984).

106

I.R.C. § 6013(e)(4) (1984). The 25 percent figure applied if the spouse’s

adjusted gross income for the pre-adjustment year exceeded $20,000.

107

I.R.C. § 6013(e)(2) (1984).

Prominence in Judicial Review of Taxpayer Rights 459

awkward litigating position. The requesting spouse was effectively forced

to choose between contesting the underlying deficiency on the merits (an

approach surely favored by the other spouse) or conceding the deficiency

and pursuing § 6013(e) relief. Advancing both theories in the alternative

would undermine the latter, as any argument that the contested item of

gross income, deduction, credit, or basis did not give rise to a deficiency

necessarily undermined the § 6013(e) condition that no basis in law or fact

existed to support the position.

Litigation under § 6013(e) frequently turned on whether the requesting

spouse possessed knowledge or reason to know of the substantial

understatement in signing the joint return. From the outset, the requesting

spouse’s failure to comprehend the tax consequences of a transaction did

not serve as a basis for establishing the absence of knowledge of the

understatement.

108

The knowledge contemplated by § 6013(e) did not

pertain to “knowledge of the tax consequences of the transaction but rather

knowledge of the transaction itself.”

109

Knowledge of the transaction

giving rise to the substantial understatement therefore was tantamount to

knowledge of the understatement for innocent spouse relief purposes.

110

The Tax Court applied this same “knowledge of the transaction” standard

to all innocent spouse cases, regardless of whether the substantial

understatement was attributable to an omission of income or an erroneous

deduction.

111

Certain courts of appeals, however, adopted a more lenient

standard in the context of erroneous deduction cases. For example, the

Ninth Circuit Court of Appeals in Price v. Commissioner

112

explained that any

knowledge of the transaction giving rise to the deduction did not alone

preclude innocent spouse relief.

113

Rather, according to this view, the

relevant inquiry was whether the spouse knew or had reason to know “that

108

See Sanders v. United States, 509 F.2d 162, 169 (5th Cir. 1975); McCoy v.

Commissioner, 57 T.C. 732, 734 (1972).

109

Quinn v. Commissioner, 524 F.2d 617, 626 (7th Cir. 1975).

110

Jonson v. Commissioner, 118 T.C. 106, 115 (2002) (citing Purcell v.

Commissioner, 826 F.2d 470, 473–74 (6th Cir. 1987)). Other courts viewed

knowledge of the transaction giving rise to the deficiency as supplying constructive

knowledge of the substantial understatement as opposed to actual knowledge. See,

e.g., Price v. Commissioner, 887 F.2d 959, 964 (9th Cir. 1989) (reasoning that “if a

spouse knows virtually all of the facts pertaining to the transaction” giving rise to

the substantial understatement, then “she is considered as a matter of law to have

reason to know of the substantial understatement”). The difference is a matter of

semantics, however, as either actual or constructive knowledge of the substantial

understatement was sufficient to preclude innocent spouse relief.

111

See Bokum v. Commissioner, 94 T.C. 126, 151 (1990); see also Park v.

Commissioner, 25 F.3d 1289 (5th Cir. 1994).

112

887 F.2d 959 (9th Cir. 1989).

113

Id. at 963 n.9.

460 The United States Tax Court – An Historical Analysis

the deduction would give rise to a substantial understatement.”

114

Intimate

knowledge of the transaction giving rise to the erroneous deduction could

supply knowledge that the claimed deductions were not proper; superficial

knowledge of the transaction did not.

If the requesting spouse was sufficiently unaware of the transaction that

gave rise to the substantial understatement, the inquiry turned to whether

the spouse “had reason to know” the return contained the understatement.

Courts approached this inquiry from the standpoint of an objective third

party. That is, a spouse possessed the prohibited constructive knowledge if

“a reasonably prudent person in her position at the time she signed the

return could be expected to know that the return contained the substantial

understatement.”

115

The following factors informed the constructive

knowledge inquiry: (1) the requesting spouse’s level of education, (2) such

spouse’s involvement in the couple’s business and financial affairs, (3) the

presence of lavish or out-of-the ordinary consumption patterns, and (4) the

level of evasiveness and deceit perpetrated by the other spouse concerning

the couple’s finances.

116

In the context of substantial understatements attributable to erroneous

deductions, courts articulated an additional basis for constructive

knowledge of the understatement. Even if the requesting spouse did not

possess reason to know of the understatement under the factors outlined

above, the spouse may have known sufficient facts to put him on notice

that the understatement existed. This “on notice” element of the

constructive knowledge inquiry generally was triggered by the sheer size of

the claimed deduction.

117

If a reasonably prudent person would have

questioned the legitimacy of the deduction, the spouse was charged with

whatever knowledge such an inquiry would reveal.

118

114

Id. at 963; see also Reser v. Commissioner, 112 F.3d 1258, 1267 (5th Cir.

1997); Resser v. Commissioner, 74 F.3d 1528, 1536 (7th Cir. 1996) (each following

Price).

115

Price, 887 F.2d at 965.

116

See, e.g., Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989).

117

See Levin v. Commissioner, T.C. Memo. 1987-67, 53 T.C.M. (CCH) 6, 8–9

(explaining that a spouse cannot qualify for innocent spouse relief “simply by

turning a blind eye to

—by preferring not to know of—facts fully disclosed on the

return, of such a large nature as would reasonably put such spouse on notice that

further inquiry would need to be made”). A requesting spouse could not avoid the

duty to inquire by failing to know the extent of the deductions by failing to review

the return. Rather, the spouse was charged with knowledge of the items reflected

on the return. See Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993).

118

See Reser v. Commissioner, 112 F.3d 1258, 1267–68 (5th Cir. 1997). A

requesting spouse could satisfy the duty to inquire by questioning the other spouse

about the accuracy of the relevant item and receiving a plausible explanation. See,

e.g., Estate of Killian v. Commissioner, T.C. Memo. 1987-365, 53 T.C.M. (CCH)

1438, 1441.

Prominence in Judicial Review of Taxpayer Rights 461

The final hurdle to § 6013(e) relief rested in the evaluation concerning

the equity of imposing joint and several liability for the substantial

understatement on the requesting spouse. Certain of these factors

overlapped with the constructive-knowledge inquiry—that is, whether the

requesting spouse benefitted significantly from the understatement through

consumption patterns that exceeded customary support.

119

Other equitable

considerations included in the spouse’s well-being at the time relief was

sought, such as whether the spouse had been deserted by the other spouse

and whether the spouse would suffer economic hardship in the absence of

relief.

120

2. Section 6015(b) Relief

As part of the IRS Reform and Restructuring Act of 1998, Congress

enacted § 6015 to address relief from spousal joint and several liability in a

more comprehensive fashion. The statute, which superseded § 6013(e),

applies to taxes that arose after June 22, 1998, and to tax liabilities

attributable to a prior period that remained unpaid as of such date.

Generally speaking, Congress intended the enactment of § 6015 to make

innocent spouse relief more broadly available.

121

The first avenue to relief under § 6015 represents a modified version of

the relief formerly offered under § 6013(e). Pursuant to § 6015(b), relief

from joint and several liability is available if: (1) an “understatement” of tax

attributable to “erroneous items” of one individual filing the joint return

existed on the return; (2) the other spouse filing the return, in signing the

return, did not know and had no reason to know of the understatement;

and (3) taking into account all of the facts and circumstances, it is

inequitable to hold the other spouse liable for the deficiency in tax

attributable to the understatement.

122

While the terms of § 6015(b) largely mirror those of former § 6013(e),

the statutory replacement contains slight modifications designed to expand

119

See Purcell v. Commissioner, 86 T.C. 228, 242 (1986) (noting that, under

regulations then in effect, the presence of a significant benefit beyond normal

support served as a factor to be considered in weighing the equities), aff’d, 826 F.2d

470 (6th Cir. 1997).

120

See Treas. Reg. § 1.6013-5(b) (prior to removal by T.D. 9003 (July 18, 2002),

2002-2 C.B. 294); see also Terzian v. Commissioner, 72 T.C. 1164, 1173 (1979)

(desertion); Estate of Klein v. Commissioner, 63 T.C. 585, 593 (1975) (economic

hardship); Michaels v. Commissioner, T.C. Memo. 1995-294, 69 T.C.M. (CCH)

3056, 3060 (1995) (economic hardship).

121

See H.R. REP. NO. 105-364, pt. 1, at 60–62 (“The bill generally makes

innocent spouse status easier to obtain.”); see also H.R.

REP. NO. 105-599, at 53

(1998); S.

REP. NO. 105-174, at 65, 68 (1998).

122

I.R.C. § 6015(b)(1).

462 The United States Tax Court – An Historical Analysis

the availability of relief. For instance, § 6015(b) potentially applies to any

understatement of tax attributable to the other spouse;

123

the

understatement no longer need be “substantial” as formerly required by

§ 6013(e).

124

Additionally, § 6015(b) dropped the requirement that the

understatement related to “grossly erroneous” items of the other spouse.

Instead, the understatement need only relate to “erroneous” items, which

eliminates this additional restriction as a practical matter.

125

The remaining conditions to relief under § 6015(b) match those of

former § 6013(e), with the most significant being the requirement that the

requesting spouse have neither actual nor constructive knowledge of the

understatement in signing the return. In issuing regulations under

§ 6015(b), the Treasury Department explained that the standards for

determining knowledge or reason to know that were developed under

§ 6013(e) were to apply in interpreting § 6015(b).

126

In Cheshire v.

Commissioner,

127

the Tax Court reasoned that the constructive knowledge

inquiry applicable under former § 6013(e)(1)(C) extended to § 6015(b)(1)(C)

in the context of an omission of income. Accordingly, the taxpayer’s

knowledge of the transaction that gave rise to the omitted income

precluded § 6015(b) relief.

128

In affirming the Tax Court decision, the Fifth

Circuit Court of Appeals reasoned that cases interpreting the knowledge or

reason to know standards under § 6013(e)(1)(C) remain instructive for

purposes of § 6015(b).

129

123

I.R.C. § 6015(b)(1)(C) (cross referencing the definition of an

understatement under § 6662).

124

The requirement that the understatement be substantial under § 6013(e)

posed a meaningful constraint in the context of omitted income cases due to the

percentage floor (generally 25 percent). Additionally, the requirement imposed an

administrative burden upon the requesting spouse through the necessity of

calculating such spouse’s adjusted gross income for the pre-adjustment year for

purposes of determining the baseline against which the understatement would be

measured.

125

An “understatement” in tax presumably will be attributable to an

“erroneous” item of income that should have been correctly stated on the return.

126

See T.D. 9003 (July 18, 2002) (preamble to final regulations interpreting

§ 6015); see also Butler v. Commissioner, 114 T.C. 276, 283 (2000) (“[C]ases

interpreting old section 6013(e) remain instructive as to our analysis of whether a

taxpayer ‘knew or had reason to know’ of an understatement pursuant to new

section 6015(b).”).

127

115 T.C. 183 (2000).

128

This approach is confirmed by the regulations. See Treas. Reg. §§ 1.6015-

2(c), 1.6015-3(c)(2)(i)(A). Regulation § 1.6015-2(c), which addresses knowledge of

an “understatement,” incorporates the actual knowledge standard of Regulation

§ 1.6015-3(c)(2), which clarifies when a requesting spouse possesses actual

knowledge of an erroneous “item” giving rise to a deficiency.

129

Cheshire v. Commissioner, 282 F.3d 326, 333 n.15 (5th Cir. 2002).

Prominence in Judicial Review of Taxpayer Rights 463

The regulations articulate a different standard for determining when a

requesting spouse possessed knowledge of an understatement in tax

attributable to an erroneous deduction or credit. Knowledge of the

deduction or credit giving rise to the understatement alone is not sufficient.

Instead, the spouse must possess knowledge of the facts pertaining to the

claimed deduction or credit that render the item not allowable as a legal

matter.

130

Note that this standard does not raise ignorance of the law as a

permissible defense for the requesting spouse. Instead, the inquiry focuses

on whether the spouse knew sufficient facts that, if he also possessed

adequate knowledge of prevailing law, would have led him to determine

that the deduction or credit was not proper.

The regulations articulating the standard for constructive knowledge of

an understatement incorporate themes that prevailed in case law

interpreting § 6013(e). Relevant factors include the requesting spouse’s

educational background and business experience, the extent of the

requesting spouse’s participation in the activity that resulted in the

erroneous item, the couple’s financial condition, and whether the erroneous

item represented a departure from patterns established in prior years.

131

Yet

the regulations also incorporate aspects of the “on notice” element of

constructive knowledge that developed under § 6013(e) in the context of

erroneous deduction cases. On this front, relevant factors include the

amount of the erroneous item in relation to other items and whether the

requesting spouse failed to inquire, at or before signing the return, about

items on the return or omitted from the return that a reasonable person

would question.

132

Knowledge or reason to know of a substantial understatement under

former § 6013(e) constituted an all-or-nothing proposition. Actual or

constructive knowledge of any portion of the understatement presumably

was sufficient to deny relief to the requesting spouse. Section 6015(b)

provides an avenue of limited relief in this setting. If the requesting spouse

would have qualified for relief but for the requirement that he not know or

have reason to know of the understatement, the spouse may be entitled to

partial relief from joint and several liability if he established that he did not

know or have reason to know of the full extent of the understatement.

133

that case, the spouse will be relieved of joint and several liability for the tax

attributable to the portion of the understatement of which he lacked actual

130

Treas. Reg. §§ 1.6015-2(c), 1.6015-3(c)(2)(i)(B)(1). If the claimed deduction

was fictitious or inflated, innocent spouse relief is prohibited if the spouse actually

knew that the expenditure was not incurred or not incurred to the inflated extent.

Treas. Reg. § 1.6015-3(c)(2)(i)(B)(2).

131

Treas. Reg. § 1.6015-2(c).

132

Id.

133

I.R.C. § 6015(b)(2).

464 The United States Tax Court – An Historical Analysis

or constructive knowledge, together with interest and penalties attributable

to that portion of the understatement.

134

3. Section 6015(c) Relief

Congress broadened the availability of innocent spouse relief when the

Service sought to collect from one spouse a deficiency in tax attributable to

an erroneous item of the other spouse at a point when the marriage had

dissolved. If the requesting spouse is no longer married to or is legally

separated from the spouse with whom he filed a joint return, or if two

spouses were not members of the same household at any point during the

prior 12 months, the requesting spouse could elect to limit his liability to

the portion of the deficiency properly allocable to him. In short, the

requesting spouse could elect separate reporting for the item giving rise to

the deficiency.

135

Considerations of equity in holding the requesting spouse

jointly and severally liable for the deficiency are not relevant under

§ 6015(c); rather, they are presumed satisfied in the context of dissolved

marriages.

The statute phrases the relief afforded by § 6015(c) as a matter of right.

However, the requesting spouse is not entitled to make the apportionment

election if the Service demonstrates that the requesting spouse had actual

knowledge, at the time the requesting spouse signed the joint return, “of

any item giving rise to a deficiency” not allocable to the requesting

spouse.

136

This standard reflects two significant deviations from the

knowledge standard of § 6015(b). First, whereas § 6015(b) requires the

requesting spouse to establish the absence of actual or constructive notice,

§ 6015(c) places the burden on the Commissioner to demonstrate that the

requesting spouse possessed actual knowledge of the erroneous item.

Constructive knowledge is not relevant under § 6015(c). Second, the

subject of the prohibited knowledge under § 6015(c) differs from that under

§ 6015(b), at least linguistically. Under § 6015(b), the requesting spouse

may not possess actual or constructive knowledge of the “understatement”

of tax. However, the subject of the actual knowledge inquiry of § 6015(c) is

the “item that gives rise to the deficiency.” Before regulatory guidance was

issued under § 6015(c), the Tax Court wrestled with whether Congress

intended the linguistic distinction to be substantive.

In the court-reviewed opinion in Cheshire v. Commissioner,

137

the majority

effectively equated the knowledge standards of § 6015(b) and (c) by

134

Id.

135

Section 6015(d) sets forth the mechanism for determining the portion of

the deficiency allocable to the requesting spouse for this purpose.

136

I.R.C. § 6015(c)(3)(C).

137

115 T.C. 183 (2000).

Prominence in Judicial Review of Taxpayer Rights 465

interpreting knowledge of an “item giving rise to a deficiency” under the

latter as requiring “an actual and clear awareness . . . of the existence of an

item which gives rise to the deficiency.”

138

The primary dissenting opinion

contended that actual knowledge of an “item giving rise to a deficiency”

necessitated knowledge that the treatment of the item on the return was

incorrect, an interpretation that found support in statements contained in the

legislative record.

139

For example, the report of the Senate Finance

Committee accompanying the enactment of § 6015(c) provided that “if the

IRS proves that the electing spouse had actual knowledge that an item on a

return is incorrect, the election will not apply to the extent any deficiency is

attributable to such item.”

140

The majority opinion of the Tax Court

viewed this legislative explanation as merely providing an example of when

§ 6015(c) relief was not appropriate, rather than establishing a heightened

knowledge requirement to be satisfied in this context. The majority’s

interpretation of § 6015(c) was affirmed by the Fifth Circuit,

141

and later

regulatory guidance adopted the same approach of equating the standards

for actual knowledge under § 6015(b) and (c).

4. Section 6015(f) Relief

Congress intended to make innocent spouse relief more widely available

through the enactment of § 6015, and perhaps the most significant relief-

expanding provision is provided by § 6015(f). This provision represents a

relief mechanism of last resort. To the extent relief is not available to a

requesting spouse under § 6015(b) or (c), Congress empowered the

Secretary to grant discretionary relief from joint and several liability

resulting from the filing of a joint return if, taking into account all the facts

and circumstances, the Secretary determined that it was inequitable to hold

the requesting spouse liable for “any unpaid tax or any deficiency (or any

portion of either).” Hence, the discretionary innocent spouse relief

authorized by § 6015(f) applies not only to deficiencies in tax, but also to

taxes on self-reported income that remain unpaid.

The Service has articulated standards to guide the exercise of its

discretion in Rev. Proc. 2013-34,

142

a revenue procedure providing guidance

for a requesting spouse seeking relief under § 6015(f). Among other things,

the Service announced that it will make streamlined determinations

concerning the grant of discretionary relief under § 6015(f) if the following

conditions are satisfied: (1) the requesting spouse is divorced, legally

138

Id. at 195.

139

Id. at 203 (Colvin, J., dissenting).

140

S. REP. NO. 105-174, at 59 (1998).

141

282 F.3d 326 (5th Cir. 2002).

142

2013-43 I.R.B. 397 (Sept. 16, 2013) (superseding guidance formerly

contained in Rev. Proc. 2003-61, 2003-2 C.B. 296).

466 The United States Tax Court – An Historical Analysis

separated, or has not shared the same household with the other spouse for

12 months on the date relief is sought; (2) the requesting spouse will suffer

economic hardship if relief is not granted; and (3) the requesting spouse had

no knowledge or reason to know that there was an understatement or

deficiency on the joint return, or that the other spouse would not or could

not pay the underpayment of tax shown on the joint return.

143

The Service

also articulated a non-exhaustive list of factors relevant to the exercise of

administrative discretion under § 6015(f) in situations where streamlined

relief was not available. In addition to the three factors mentioned above,

the list of considerations also includes: (1) if relief is sought for a deficiency

in tax, whether the spouse knew or had reason to know of the deficiency

(clarifying that actual knowledge of the deficiency will no longer be

weighted more heavily than any other factor); (2) whether the

nonrequesting spouse has a legal obligation to pay the outstanding liability

under a divorce decree or agreement; (3) whether the requesting spouse

received significant benefit beyond normal support from the unpaid tax or

item giving rise to the deficiency; and (4) whether the requesting spouse

made a good faith effort to comply with the tax laws in later years.

Additional factors that weigh only in favor of relief include: (1) whether the

nonrequesting spouse abused the spouse requesting relief, and (2) whether

the requesting spouse was in poor mental or physical health at the point of

signing the return or requesting relief.

5. Procedure for Requesting Innocent Spouse Relief

To seek relief from joint and several liability, a requesting spouse must

file a Form 8857, Request for Innocent Spouse Relief (And Separation of

Liability and Equitable Relief). To the extent the Service requires additional

information to evaluate the claim, the Service will request that the spouse

complete Form 12510, Questionnaire for Requesting Spouse. To speed

resolution of the claim, a requesting spouse may file both forms together.

If a spouse who has made a claim for § 6015 relief dies prior to its

resolution, the estate of such spouse may step into the decedent’s shoes and

pursue the request for relief. In addition, the executor of a spouse’s estate

may file the initial claim for innocent spouse relief on the spouse’s behalf,

provided the decedent had satisfied all of the conditions for eligibility at the

time of his death.

144

If the requesting spouse seeks relief under § 6015(b) or (c), the Service

will evaluate the claim under the other avenues of relief provided by § 6015.

However, if the requesting spouse seeks innocent spouse relief under

§ 6015(f) alone, the Service will not expand its evaluation of the claim

143

Id. § 4.02.

144

See Rev. Rul. 2003-36, 2003-1 C.B. 849.

Prominence in Judicial Review of Taxpayer Rights 467

beyond the consideration of the merits of discretionary relief on equitable

grounds.

145

For that reason, the requesting spouse is well advised to

advance all potential bases for § 6015 relief in a single claim.

A spouse’s claim for relief under § 6015 can be disregarded as premature

and disallowed as untimely. A spouse must wait until the spouse receives a

notification of an audit or a letter or notice from the Service indicating the

potential existence of an outstanding liability for that year.

146

Hence, a

requesting spouse need not wait until the issuance of a statutory notice of

deficiency to pursue his § 6015 remedies. Yet, the spouse cannot wait

indefinitely to pursue innocent spouse relief either. The statute expressly

limits claims for relief under § 6015(b) and (c) to those made within two

years after the date on which the Secretary begins collection activities.

147

Although the Service originally incorporated the same two-year statute of

limitations to claims for equitable relief under § 6015(f) by regulation,

148

the

Service ultimately relented following extensive litigation concerning the

validity of this regulatory approach.

149

Through publication of Notice

2011-70,

150

the Service expanded the period within which individuals could

request equitable relief pursuant to § 6015(f) to encompass any period for

145

Treas. Reg. § 1.6015-1(a)(2).

146

Treas. Reg. § 1.6015-5(b)(5); see also I.R.C. § 6015(c)(3)(B) (spouse may make

election under § 6015(c) “at any time after a deficiency for such year is asserted

. . .”).

147

I.R.C. § 6015(b)(1)(E), (c)(3)(B).

148

Treas. Reg. § 1.6015-5(b)(1).

149

The Commissioner’s administrative incorporation of the two-year statute of

limitations for perfecting a claim for relief under § 6015(b) and (c) to claims for

equitable relief under § 6015(f) was not well received by the Tax Court. In Lantz v.

Commissioner, 132 T.C. 131 (2009), a divided court determined that the requirement

of Regulation § 1.6015-5(b)(1) that a requesting spouse file a claim for relief under

§ 6015(f) no later than two years after the date of the first collection activity

represented an invalid interpretation of the statute. The Court interpreted the

failure of Congress to a limitations period under § 6015(f) as intentional, which in

turn foreclosed the imposition of a limitations period by regulation. Lantz, 132

T.C. at 138–41. Additionally, the court determined that the adoption of a statute of

limitations for claims under § 6015(f) that was no more lenient than the limitations

period applicable to claims under § 6015(b) and (c) ran counter to the express

intention of Congress to more liberal relief through the former. Id. at 144.

The Tax Court’s critical view of the regulatory two-year statute of limitations on

commencing claims for equitable relief under § 6015(f) was not shared by a number

of circuit courts of appeals. The Seventh Circuit reversed the Tax Court in Lantz,

see Lantz v. Commissioner, 607 F.3d 479 (7th Cir. 2010), and others circuits followed

suit. See Jones v. Commissioner, 642 F.3d 459 (4th Cir. 2011); Mannella v.

Commissioner, 631 F.3d 115 (3d Cir. 2011), rev’g 132 T.C. 196 (2009).

150

2011-32 I.R.B. 135.

468 The United States Tax Court – An Historical Analysis

which the statute of limitations on collection remained open.

151

Accordingly, if the Service can collect the disputed tax, a spouse can request

§ 6015(f) equitable relief.

The Commissioner’s failure to uphold its statutory obligation to provide

a taxpayer with notice of his rights under § 6015 may serve to toll equitably

the statute of limitations for requesting relief under that section. Through a

non-codified provision of the IRS Restructuring and Reform Act of

1998,

152

Congress required the Service to include a notice of an individual’s

rights under § 6015 as part of any collection-related notices. In McGee v.

Commissioner,

153

the Tax Court addressed the ramifications of the Service’s

failure to do so. The Service in McGee had offset a refund owed to the

taxpayer against taxes that remained unpaid under a joint return filed by the

taxpayer with her husband. The Service sent the taxpayer two notices of

the offset, neither of which informed the taxpayer of her right to seek relief

under § 6015. The taxpayer ultimately filed a claim for discretionary relief

under § 6015(f) in response to a notice of a federal tax lien, but the claim

was filed more than two years after the taxpayer received the notices of

offset. Finding that the refund offset constituted a collection action that

commenced the filing period, the Tax Court nonetheless determined that

the Service was estopped from treating the taxpayer’s claim for relief under

§ 6015(f) as untimely on account of its own failure to timely inform the

taxpayer of her rights.

154

6. Tax Court Jurisdiction

The Tax Court possesses jurisdiction to determine whether a requesting

spouse is entitled to relief from joint and several liability under § 6015

through a number of avenues. Consistent with historic practice, a spouse

may raise § 6015 relief as an affirmative defense in a petition for

redetermination of a deficiency.

155

A taxpayer also may raise “appropriate

151

If the requesting spouse seeks a refund of tax, a claim for relief under

§ 6015(f) can be brought at any time within the period of limitations on refunds

provided by § 6511. Id.

152

See Pub. L. No. 105-206, § 3501(b), 112 Stat. 734, 770 (1998).

153

123 T.C. 314 (2004).

154

See id. at 319–20.

155

Butler v. Commissioner, 114 T.C. 276, 287–88 (2000); see also TAX CT. R. 39

(July 6, 2012 ed.) (requiring taxpayers to specifically plead any matter constituting

an avoidance or affirmative defense to the Commissioner’s determination of a

deficiency). The availability of statutory relief under § 6015 also may be raised as

an affirmative defense in a petition filed under § 6404(h)(1) to review the

Commissioner’s failure to abate interest. See Estate of Wenner v. Commissioner,

116 T.C. 284, 287–88 (2001).

Prominence in Judicial Review of Taxpayer Rights 469

spousal defenses” as part of a collection due process hearing.

156

In addition

to these standard vehicles for Tax Court review and consistent with the

purpose of making innocent spouse relief more accessible, Congress created

a procedure by which the Tax Court could address § 6015 relief in a stand-

alone proceeding. Pursuant to § 6015(e)(1), a spouse may petition the Tax

Court for a determination of the “appropriate relief available” under § 6015

in either of the following two instances: (1) a deficiency has been asserted

against the spouse and the spouse elects relief under § 6015(b) or (c), or (2)

the spouse requests equitable relief under § 6015(f).

157

To invoke the Tax Court’s jurisdiction to determine the availability of

statutory relief under § 6015 in a stand-alone proceeding, a spouse generally

must wait until the Commissioner mails the spouse a notice of final

determination of relief.

158

However, if the spouse has elected relief under

§ 6015(b) or (c) or has requested equitable relief under § 6015(f) and the

Commissioner fails to act within six months, the spouse may petition the

Tax Court after the expiration of the six-month period.

159

Once either of

these conditions to Tax Court jurisdiction has been satisfied, the requesting

spouse has until 90 days following the mailing of the notice of final

determination to invoke the court’s jurisdiction under § 6015(e) through the

filing of a petition.

160

The Tax Court’s jurisdiction to review agency denials of relief under

§ 6015(f) has a storied history of its own. In its original form,

§ 6015(e)(1)(A) provided that “[i]n the case of an individual who elects to

have subsection (b) or (c) apply . . .[t]he individual may petition the Tax

Court (and the Tax Court shall have jurisdiction) to determine the

156

See I.R.C. §§ 6320(c) (incorporating terms of hearing set forth in § 6330(c)),

6330(c)(2)(A)(i) (permitting the taxpayer to raise “appropriate spousal defenses” in

collection due process hearing). The collection due process protections are

discussed below in Section D of this Part.

157

I.R.C. § 6015(e)(1)(A). The terms of the grant of jurisdiction indicate that

the Tax Court is not limited to reviewing the Commissioner’s determination

regarding relief from joint and several liability. Rather, once invoked, the Tax

Court’s jurisdiction under § 6015 allows the court to render a decision regarding the

requesting spouse’s rights under § 6015. As discussed in detail below, this suggests

that the Tax Court’s standard of review in this context is de novo. Consistent with

this approach, remand of an innocent spouse determination under § 6015 to the

Commissioner for further consideration or development is not permissible. See

Friday v. Commissioner, 124 T.C. 220, 222 (2005).

158

I.R.C. § 6015(e)(1)(A)(i)(I).

159

I.R.C. § 6015(e)(1)(A)(i)(II).

160

I.R.C. § 6015(e)(1)(A)(ii). Tax Court Rules 320 through 325 provide the

procedural framework that governs stand-alone proceedings under § 6015(e).

470 The United States Tax Court – An Historical Analysis

appropriate relief available to the individual under this section . . . .”

161

Fernandez v. Commissioner,

162

the taxpayer requested relief under § 6015(b),

(c), and (f), all of which the Commissioner denied. The taxpayer petitioned

the Tax Court for a determination of her joint and several liability through a

stand-alone proceeding commenced under § 6015(e). The Commissioner

contended that the court lacked jurisdiction to review the agency’s denial of

relief under § 6015(f) on the basis that the predicate for filing the petition

(that is, the taxpayer elects the benefits of § 6015(b) or (c)) limited the

court’s jurisdiction to these potential grounds for relief. The court rejected

this interpretation, reasoning that the statutory directive to determine relief

available to the petitioning spouse “under this section” encompassed all

avenues of relief provided by § 6015.

163

In this regard, Fernandez reaffirmed

the holding of Butler v. Commissioner,

164

a decision issued by the court earlier

in the same year in which the court declared, “We find nothing in section

6015(e) that precludes our review of respondent’s denial of equitable relief

to petitioner.”

165

Not long after the issuance of the Fernandez and Butler decisions,

Congress amended the predicate of § 6015(e)(1) to read “[i]n the case of an

individual against whom a deficiency has been asserted and who elects to have

subsection (b) and (c) apply . . . .”

166

The Tax Court confronted the

amended statute in Ewing v. Commissioner,

167

a case in which the requesting

spouse invoked the Tax Court’s jurisdiction under § 6015(e) to review the

Commissioner’s denial of equitable relief under § 6015(f) for a self-reported

but unpaid tax. The majority of a divided court in Ewing noted that

Congress intended the statutory amendment merely to clarify the proper

timing of a request for relief for an under-reported tax–specifically, that the

taxpayer need not wait until an assessment or a formal notice of deficiency

but instead could pursue relief at any time after which a deficiency in tax

was asserted (which could occur as early as the examination process).

168

Finding that Congress did not intend to limit the court’s jurisdiction over

claims for equitable relief under § 6015(f), the majority in Ewing determined

that it possessed jurisdiction to review the Commissioner’s denial of

161

I.R.C. § 6015(e)(1)(A) (prior to amendment by the Consolidated

Appropriations Act of 2001, Pub. L. No. 106-554, app. G, § 313, 114 Stat. 2763,

2763A-641 to 643.)

162

114 T.C. 324 (2000).

163

See id. at 331.

164

114 T.C. 276 (2000).

165

Id. at 289.

166

Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, app. G,

§ 313, 114 Stat. 2763, 2763A-641 to 643 (2001) (emphasis added).

167

118 T.C. 494 (2002).

168

See id. at 504–05 (analyzing H.R. REP. NO. 106-1033, at 1023 (2000)).

Prominence in Judicial Review of Taxpayer Rights 471

§ 6015(f) relief even in the absence of an asserted deficiency.

169

The Ninth

Circuit Court of Appeals, however, rejected this reading of the statute. In

fairly short order, the appellate court reasoned that the Tax Court’s

interpretation of § 6015(e)(1) could not be reconciled with the “plain

language” of the statute requiring both the assertion of a deficiency against

the taxpayer and the taxpayer’s filing of an election under § 6015(b) or

(c).

170

Following the Ninth Circuit’s reversal of the Tax Court in Ewing, the

status of the Tax Court’s jurisdiction to review denials of equitable relief

under § 6015(f) was uncertain at best. The Eighth Circuit Court of Appeals

adopted the Ninth Circuit’s position in Bartman v. Commissioner,

171

and the

Second Circuit Court of Appeals in Maier v. Commissioner

172

openly

questioned the Tax Court’s position even before the Ninth Circuit reversal.

Recognizing the adverse appellate landscape and stressing the desirability

for geographic-neutral interpretation of the law, the Tax Court abandoned

its position in Ewing through the 2006 decision in Billings v. Commissioner.

173

In the process, the Tax Court noted the anomaly resulting from the

apparently unintentional limitation on the court’s jurisdiction to hear

§ 6015(f) cases in stand-alone proceedings brought under § 6015(e).

Fortunately, this point was not lost on Congress. Shortly after the Billings

decision was issued, Congress amended § 6015(e)(1) to provide

unequivocally that the Tax Court possesses jurisdiction in stand-alone

proceedings where the requesting spouse seeks relief under § 6015(f)

alone.

174

If either spouse filing the joint return commences a suit for a refund, the

Tax Court is immediately divested of jurisdiction to determine the scope of

available innocent spouse relief under § 6015(e) to the extent the district

court or the Court of Federal Claims acquires jurisdiction over the taxable

years that serve as the subject of the refund action.

175

In that case,

169

Id. at 505. Interestingly, the Tax Court’s interpretation of § 6015(e)(1) was

supported both by the taxpayer and by the Commissioner at this stage of the

litigation.

170

Ewing v. Commissioner, 439 F.3d 1009, 1013 (9th Cir. 2006). The

Commissioner abandoned its prior interpretation of the statute, arguing against the

Tax Court’s jurisdiction for the first time on appeal.

171

446 F.3d 785 (8th Cir. 2006).

172

360 F.3d 361 (2d Cir. 2004).

173

127 T.C. 7 (2006).

174

Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, div. C, § 408,

120 Stat. 2922, 3061 (2006) (amending § 6015(e)(1) to provide jurisdiction “[i]n a

case of an individual against whom a deficiency has been asserted and who elects to

have subsection (b) or (c) apply, or in the case of an individual who requests

equitable relief under subsection (f)”).

175

I.R.C. § 6015(e)(3).

472 The United States Tax Court – An Historical Analysis

jurisdiction over the § 6015(e) petition would transfer to the refund court,

consolidating the litigation in one proceeding.

7. Standard and Scope of Review

With respect to a requesting spouse’s election to obtain relief from joint

and several liability under § 6015(b) or (c), the Tax Court reviews the

Commissioner’s determination under a de novo standard—a standard of

review consistent with the determination of the existence and extent of a

deficiency.

176

The court originally concluded that the Commissioner’s

exercise of discretion under § 6015(f) was entitled to greater deference

owing to the discretionary nature of § 6015(f) itself. Accordingly, the court

reviewed denials of § 6015(f) relief for abuse of discretion,

177

which

obligated the requesting spouse to establish that the denial was arbitrary,

capricious, or without sound basis in law or fact.

178

However, the Tax

Court revisited the issue of the appropriate standard of review to be applied

in reviewing denials of § 6015(f) equitable relief in light of Congress’ 2006

amendments to § 6015(e) through the case of Porter v. Commissioner.

179

Noting that Congress expressly provided the Tax Court with jurisdiction

“to determine the appropriate relief available” under § 6015 when the

taxpayer had sought and been denied equitable relief under § 6015(f),

180

the

court reasoned that a de novo standard of review was consistent with the de

novo standard of review exercised by the court to “determine” the

existence of any overpayment under § 6512(b) or to “redetermine” a

deficiency under §§ 6213(a) and 6214(a).

181

The court further stressed that

nothing in § 6015(e) limits the standard of review to one of an abuse of

discretion, a limitation that Congress expressly imposed in other contexts.

182

176

See Nihiser v. Commissioner, T.C. Memo. 2008-135, 95 T.C.M. (CCH) 1531

(2008).

177

See Cheshire v. Commissioner, 115 T.C. 183, 198 (2000).

178

Jonson v. Commissioner, 118 T.C. 106, 125 (2002); see also Alt v.

Commissioner, 119 T.C. 306, 311 (2002) (requesting spouse bears burden of

proof). But see Wiener v. Commissioner, T.C. Memo. 2008-230, 96 T.C.M. (CCH)

227 (abuse of discretion standard not warranted where notice of determination

failed to provide analysis or cite factual determinations capable of review).

179

132 T.C. 203 (2009). Concurring opinions issued in a prior decision in the

Porter case devoted to the scope of the Tax Court’s review under § 6015(f) raised

the prospect that § 6015(f) determinations should not be reviewed under an abuse-

of-discretion standard. See Porter v. Commissioner, 130 T.C. 115, 142–44 (Goeke,

J., concurring) & 144–46 (Wherry, J., concurring) (2008).

180

See I.R.C. § 6015(e)(1)(A) (emphasis added).

181

Porter, 132 T.C. at 208.

182

Id. (noting statutory amendment to § 6404(e) granting Tax Court

jurisdiction to determine whether the Commissioner’s failure to abate interest

constituted “an abuse of discretion”).

Prominence in Judicial Review of Taxpayer Rights 473

Accordingly, the Tax Court concluded that it would apply the same de novo

standard of review in determining the rights of a requesting spouse to relief

under § 6015, regardless of the specific form of § 6015 relief at issue.

Apart from determining the level of deference to be afforded to the

Commissioner’s determination (standard of review), the appropriate scope

of review—that is, what evidence the Tax Court could consider in making

its determination in a § 6015(e) proceeding—also warranted judicial

attention. The Tax Court at all times applied a de novo scope of review

that permitted consideration of evidence beyond the administrative record

in determining the availability of relief under § 6015(b) or (c).

183

However,

with respect to determinations considering the availability of equitable relief

under § 6015(f), the Commissioner contended that the Administrative

Procedure Act (APA)

184

operated to limit the scope of Tax Court review to

evidence contained in the administrative record. The Tax Court rejected

this restriction in its second divided opinion in Ewing v. Commissioner,

185

and

the court later reaffirmed this position in the first divided opinion in Porter

v. Commissioner.

186

The court first highlighted that the APA did not govern

the Tax Court in its jurisdiction to redetermine a deficiency under §§ 6213

and 6214(a) or to determine an overpayment of tax under § 6512. In each

of these contexts, the Tax Court conducts trials on a de novo basis at which

the court may consider all relevant evidence—not just that developed in the

administrative record. Citing the similarity of the grant of jurisdiction under

§ 6015(e)(1)(A) to “determine” the scope of relief available to the

requesting spouse under § 6015, the court concluded that Congress

intended the court to provide the same trial de novo in making its

determinations under § 6015(e).

187

In this manner, the Tax Court adopted a

uniform scope of review with respect to all forms of relief under § 6015.

This approach was subsequently endorsed by the Eleventh Circuit Court of

Appeals.

188

In 2013, the Service conceded both the standard of review and the

scope of review issues. A notice issued by the Office of Chief Counsel

provided that attorneys representing the Service no longer would contend

that (1) the Tax Court should review administrative denials of requests for

innocent spouse relief under § 6015(f) only for an abuse of discretion, or (2)

the Tax Court should limit the scope of its review to evidence contained in

183

See Porter, 132 T.C. at 210 (noting this practice).

184

5 U.S.C. §§ 551–559, 701–706.

185

122 T.C. 32 (2004).

186

130 T.C. 115 (2008).

187

See Ewing, 122 T.C. at 37–39; Porter, 130 T.C. at 117–19.

188

Commissioner v. Neal, 557 F.3d 1262, 1276 (11th Cir. 2009).

474 The United States Tax Court – An Historical Analysis

the administrative record.

189

Hence, both aspects of the Tax Court’s

decision in Porter have prevailed.

190

8. Rights of the Nonrequesting Spouse

If a claim for relief from joint and several liability is made under § 6015,

the Service must provide notice of the claim to the other spouse to the joint

return to allow that spouse to provide information bearing on the merits of

the requesting spouse’s claim.

191

As the nonrequesting spouse will remain

jointly and severally liable for the entire tax liability attributable to the joint

return, this notice provides the nonrequesting spouse with the opportunity

to oppose the effective increase in his individual exposure for the liability

attributable to the joint return. In addition to notifying the nonrequesting

spouse of the existence of a § 6015 claim on behalf of the other spouse, the

Service also must notify the nonrequesting spouse of any determination

rendered with respect to the claim.

192

If a spouse makes an election for relief under § 6015(b) or (c) or

requests equitable relief under § 6015(f), the Tax Court is obligated to

provide the nonrequesting spouse with adequate notice of the action and an

opportunity to intervene in the matter.

193

With respect to stand-alone

proceedings commenced by the requesting spouse under § 6015(e), Tax

Court Rule 325 implements this directive. The rule obligates the

Commissioner to provide notice of the filing of the petition under § 6015(e)

within 60 days of the service of the petition and to file with the court a copy

of the notice with an attached certificate of service.

194

The Commissioner’s

notice must advise the nonrequesting spouse of his intervention rights and

the period within which they must be exercised, which is 60 days from the

date the notice is served on the nonrequesting spouse.

195

In Corson v. Commissioner,

196

the Tax Court concluded that the rights

afforded to the nonrequesting spouse under § 6015(e)(4) were not limited

to stand-alone proceedings commenced by the requesting spouse under

§ 6015(e). Reasoning that the rights of the nonrequesting spouse should

not differ based on the procedural route by which the requesting spouse

189

Chief Counsel Notice 2013-011, at 1 (June 7, 2013).

190

Consistent with the Tax Court’s holding that denials of requests for

innocent spouse relief under § 66015(f) are subject to a de novo standard and scope

of review, the court has declined to remand such cases to the Service for further

administrative development. See Friday v. Commissioner, 124 T.C. 220, 222 (2005).

191

I.R.C. § 6015(h)(2); Treas. Reg. § 1.6015-6(a)(1).

192

Treas. Reg. § 1.6015-6(a)(2).

193

I.R.C. § 6015(e)(4).

194

TAX CT. R. 325(a) (July 6, 2012 ed.).

195

TAX CT. R. 325(b) (July 6, 2012 ed.).

196

114 T.C. 354 (2000).

Prominence in Judicial Review of Taxpayer Rights 475

pursued innocent spouse relief, the court permitted the nonrequesting

spouse to contest the grant of § 6015(c) relief that the requesting spouse

raised as an affirmative defense in a deficiency proceeding against both

spouses. The Tax Court followed this approach in a slightly different

context in King v. Commissioner,

197

where the requesting spouse raised § 6015

relief as an affirmative defense in a deficiency proceeding against her

individually. The court in King clarified that the nonrequesting spouse is

entitled to notice and an opportunity to intervene to challenge the grant of

innocent spouse relief in any case where a spouse requests relief under

§ 6015, regardless of its procedural origin.

198

The Tax Court in Van Arsdalen v. Commissioner

199

faced an interesting

question not likely contemplated by Congress in enacting § 6015(e)(4):

What if the nonrequesting spouse desired to intervene to support the grant of

innocent spouse relief? Noting the absence of any posture-related

limitation in § 6015 and the neutrality of the terms of Tax Court Rule 325,

the court allowed the nonrequesting spouse to be heard in support of his

former wife.

200

C. Jurisdiction to Review Denials of Interest Abatement

Interest on an underpayment of tax accrues from the last date

prescribed for payment at statutorily defined rates, compounded daily.

201

Given the length of time necessary to resolve tax disputes, the interest owed

on the disputed tax liability can pose a considerable financial burden. Prior

to 1986, the Service lacked the authority to abate the assessment of interest

in situations where an error on its part caused the taxpayer to incur

additional interest charges. Instead, a reduction in the interest charge could

be accomplished only through a compromise of the underlying tax liability.

Recognizing the need to provide the Service with a measure of discretion in

this area, Congress enacted § 6404(e) as part of the Tax Reform Act of

1986.

202

In its original form, § 6404(e)(1) granted the Service discretion to

abate the assessment of interest on any deficiency “attributable in whole or

in part to any error or delay by an officer or employee of the Internal

Revenue Service . . . in performing a ministerial act.”

203

Congress did not

envision that the provision would be used “routinely” to avoid the payment

197

115 T.C. 118 (2000).

198

Id. at 124.

199

123 T.C. 135 (2004).

200

Id. at 141.

201

I.R.C. § 6601(a); see also I.R.C. §§ 6621(a)(2) (interest rate on

underpayments), 6622(a) (interest compounded on a daily basis).

202

See Pub. L. No. 99-514, § 1563(a), 100 Stat. 2762 (1986).

203

I.R.C. § 6404(e)(1), as originally enacted by the Tax Reform Act of 1986,

Pub. L. No. 99-514, § 1563(a), 100 Stat. 2762 (1986).

476 The United States Tax Court – An Historical Analysis

of interest; rather, Congress intended the remedy to be employed “in

instances where failure to abate interest would be widely perceived as

grossly unfair.”

204

Taxpayers who saw their requests for interest abatement under § 6404(e)

denied by the Service understandably sought judicial recourse, but originally

to no avail. Courts consistently held that § 6404(e)(1) vested the Secretary

with complete discretion to abate the assessment of interest and that the

exercise of this discretion was not subject to judicial review.

205

Against this

backdrop, Congress in 1996 supplied the Tax Court with jurisdiction to

determine whether the Secretary’s failure to abate interest under § 6404

constituted an abuse of discretion through what is now designated

§ 6404(h).

206

If the Tax Court finds the requisite abuse of discretion, it is

authorized to order an abatement; to the extent the taxpayer has previously

paid the abated interest, the Tax Court possesses jurisdiction to determine

an overpayment.

207

The jurisdictional grant extends to all requests for

abatement made after the July 30, 1996 effective date of the legislation,

which the Tax Court interpreted as including any requests for interest

abatement pending with the Service that had not been denied by such

date.

208

Consistent with the terms of § 6404(h), the Supreme Court has

determined that the Tax Court constitutes the exclusive judicial forum for

review of adverse interest abatement determinations.

209

204

H.R. REP. NO. 99-426, at 844 (1985); S. REP. NO. 99-313, at 208 (1986).

205

In Selman v. United States, 941 F.2d 1060 (10th Cir. 1991), the Tenth Circuit

Court of Appeals concluded “that the language, structure and legislative history of

I.R.C. § 6404(e)(1) indicate that Congress meant to commit the abatement of

interest to Secretary’s discretion.” Id. at 1064. Accordingly, the court determined

that the Administrative Procedure Act precluded judicial review. Id.; see also

Argabright v. United States, 35 F.3d 472, 476 (9th Cir. 1994); Bax v. Commissioner,

13 F.3d 54, 58 (2d Cir. 1993); Horton Homes, Inc. v. United States, 936 F.2d 548,

554 (11th Cir. 1991); 508 Clinton Street Corp. v. Commissioner, 89 T.C. 352, 356

(1987).

206

Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 302(a), 100 Stat. 1457–58

(1996) (enacting I.R.C. § 6404(g)). Section 6404(g) was redesignated first as

§ 6404(i) by the Internal Revenue Service Restructuring and Reform Act of 1998,

Pub. L. No. 105-206, §§ 3305(a), 3309(a), 112 Stat. 743, 745, and subsequently as

§ 6404(h) by the Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-34,

§ 112(d)(1)(B), 115 Stat. 2435 (2002).

207

I.R.C. § 6404(h)(1), (h)(2)(B) (incorporating rules similar to those of

§ 6512(b)).

208

See Banat v. Commissioner, 109 T.C. 92, 94–95 (1997). The interpretation

of the effective date provision in Banat sensibly protected taxpayers who did not

file a subsequent and apparently superfluous request with the Service.

209

See Hinck v. United States, 550 U.S. 501 (2007). The Court rejected the

argument that the articulation of a standard for reviewing the Service’s denial of

interest abatement in § 6404(h) (the absence of which prior courts had cited as a

Prominence in Judicial Review of Taxpayer Rights 477

Section 6404(h) imposes a host of conditions to the jurisdiction of the

Tax Court. From a procedural standpoint, Tax Court jurisdiction is

predicated upon (1) the issuance of a final notice of determination not to

abate interest, and (2) the taxpayer’s filing of a petition for review within

180 days of the mailing of such notice.

210

Similar to the statutory notice of

deficiency, the notice of determination under § 6404(h) has been described

as the taxpayer’s “ticket” to the Tax Court.

211

Note that the taxpayer’s

access to Tax Court review in this setting could be denied if the

Commissioner simply fails to issue the notice of determination. Whereas

Congress anticipated this possibility in the innocent spouse context by

permitting the requesting spouse to file a petition with the Tax Court once

six months had passed from the filing of the administrative request for

relief,

212

no such stop-gap means in invoking Tax Court review is provided

under § 6404(h).

Given the central role the determination letter occupies in the Tax

Court’s jurisdiction to review denials of interest abatement requests, the

scope of written communications from the Service that constitute a final

determination for § 6404 purposes has been a source of dispute. In Bourekis

v. Commissioner,

213

the Tax Court declined to treat a notice of deficiency

issued under § 6213(a) as a final notice of determination for § 6404

purposes where the taxpayer had not made a formal request for interest

abatement and where the Commissioner did not intend for the statutory

notice to address interest abatement matters.

214

In Wright v. Commissioner,

215

the Tax Court similarly determined that a petition to review a final notice of

determination issued in the context of a collection due process proceeding

under § 6330 did not provide the court with jurisdiction to review the

Commissioner’s denial of interest abatement. However, the Second Circuit

Court of Appeals reversed.

216

Because the taxpayer in Wright had raised the

basis for concluding that interest abatement determinations under § 6404(e) were

immune from judicial review) operated to supply other federal courts with

jurisdiction to review § 6404 interest abatement determinations.

210

I.R.C. § 6404(h)(1); see also TAX CT. R. 280(b) (July 6, 2012 ed.).

211

See Bourekis v. Commissioner, 110 T.C. 20, 26 (1998). By statutory

directive, rules similar to those of § 6213 apply for purposes of determining the

date of mailing of the final notice of determination. I.R.C. § 6404(h)(2)(A). Hence,

the final notice of determination is valid if mailed to the taxpayer’s last known

address; actual receipt of the notice by the taxpayer is immaterial. See Gati v.

Commissioner, 113 T.C. 132, 134 (1999)

212

See I.R.C. § 6015(e)(1)(A)(i)(II).

213

110 T.C. 20 (1998).

214

The Bourekis decision effectively serves as a confirmation that the Tax

Court’s deficiency jurisdiction generally does not extend to the determination of

interest under § 6601.

215

T.C. Memo. 2006-273, 92 T.C.M. (CCH) 525.

216

571 F.3d 215 (2d Cir. 2009).

478 The United States Tax Court – An Historical Analysis

prospect of interest abatement under § 6404(e) in the course of the

collection due process hearing, the Second Circuit reasoned that the notice

of determination under § 6330—which did not grant the requested interest

abatement—necessarily constituted a final notice of determination not to

abate interest. And because the taxpayer had filed his petition for review of

the collection due process determination within the 180-day period

specified in § 6404(h)(1), the Second Circuit concluded that the procedural

prerequisites to the Tax Court’s jurisdiction to review § 6404

determinations had been satisfied.

Beyond these procedural requirements, the Tax Court’s jurisdiction to

review denials of interest abatement under § 6404 is available only to those

taxpayers who satisfy the net worth requirements of § 7430(c)(4)(A)(ii) as of

the date of the filing of the Tax Court petition.

217

Generally speaking, this

provision limits Tax Court review under § 6404 to individuals whose net

worth does not exceed $2 million and to business entities having a net

worth not exceeding $7 million.

218

Responding to the taxpayer’s argument

that the net worth limitation on the Tax Court’s jurisdiction under § 6404

violated the equal protection standard of the Fifth Amendment, the

Seventh Circuit Court of Appeals reasoned that Congress may have

imposed the limitation because it determined that taxpayers with a greater

net worth would be better positioned to avoid the accrual of interest

charges by making an advance payment or posting a cash bond during the

course of the controversy.

219

Once the Tax Court’s jurisdiction under § 6404(h) has been properly

invoked, the court is authorized to determine whether the Service’s failure

to abate interest under § 6404 constitutes an abuse of discretion.

220

Yet

before reviewing the exercise of the Commissioner’s discretion under

§ 6404(e), the Tax Court first must determine if the prerequisites to interest

abatement under that provision are satisfied. Specifically, the taxpayer must

217

I.R.C. § 6404(h)(1).

218

I.R.C. § 7430(c)(4)(A)(ii) (incorporating the net worth requirements of

§ 2412(d)(2)(B)).

219

Estate of Kuntze v. Commissioner, 233 F.3d 948, 954–55 (7th Cir. 2000).

220

Although the Tax Court’s jurisdiction to review interest abatement denials

typically is associated with requests made under § 6404(e), the grant of Tax Court

jurisdiction permits it to review the Secretary’s failure to abate interest “under this

section.” I.R.C. § 6404(h)(1). The Tax Court in Woodral v. Commissioner, 112 T.C.

19, 22–23 (1999), therefore held that its jurisdiction under § 6404(h) is not limited

to reviewing cases arising under § 6404(e) but instead extends to reviewing the

Commissioner’s failure to abate interest under all subsections of § 6404. As a

result, the court in Woodral determined that it possessed jurisdiction to determine

whether the Commissioner’s failure to abate interest under § 6404(a) constituted an

abuse of discretion.

Prominence in Judicial Review of Taxpayer Rights 479

demonstrate the existence of an unreasonable error or delay by an employee

of the Service in performing a ministerial or managerial act.

A “ministerial” act for this purpose constitutes a procedural or

mechanical act that does not involve the exercise of judgment or discretion

and that occurs during the processing of a taxpayer’s case after all

prerequisites to the act, such as conferences and review by supervisors,

have taken place.

221

A ministerial act does not include a decision

concerning the proper application of federal tax law or other federal or state

law.

222

Additionally, the mere passage of time alone does not establish

error or delay in performing a ministerial act.

223

As part of The Taxpayer Bill of Rights 2, Congress expanded the ranges

of unreasonable errors or delays potentially giving rise to § 6404(e) interest

abatement to include “managerial” as well as “ministerial” acts.

224

“managerial act” means an administrative act that involves a temporary or

permanent loss of records or the exercise of judgment or discretion relating

to personnel management during the processing of a taxpayer’s case.

225

Additionally, a managerial act for this purpose does not extend to a general

administrative decision, such as the Service’s decision on how to organize

the processing of tax returns or its delay in implementing an improved

computer system.

226

Legislative history suggests that an unreasonable error

or delay from a managerial act would include the loss of records by the

Service, personnel transfers, extended illnesses, extended personnel training,

or extended leave.

227

Assuming the existence of an unreasonable error or delay in the

performance of a ministerial or managerial act, interest abatement is

available only if no significant aspect of such error or delay is attributable to

the taxpayer.

228

Even then, the error or delay will not be taken into account

until after the Service contacted the taxpayer in writing with respect to the

deficiency or payment.

229

If the taxpayer is successful in establishing the

221

Hull v. Commissioner, T.C. Memo. 2014-36, 107 T.C.M. (CCH) 1203

(citing Treas. Reg. § 301.6404-2(b)(2)).

222

See Corson v. Commissioner, 123 T.C. 202, 207 (2004).

223

See Cosgriff v. Commissioner, T.C. Memo. 2000-241, 80 T.C.M. (CCH) 156,

158.

224

See Pub. L. No. 104-168, § 301(a) (1996), 110 Stat. 1457.

225

Paneque v. Commissioner, T.C. Memo. 2013-48, 105 T.C.M. (CCH) 1301

(citing Treas. Reg. § 301.6404-2(b)(1)).

226

Id.

227

See H.R. REP. NO. 104-506, at 27 (1996).

228

I.R.C. § 6404(e)(1) (flush language).

229

Id. The limitation has been applied to deny interest abatement for any

period preceding the receipt of notification from the Service. See, e.g., Krugman v.

Commissioner, 112 T.C. 230, 239 (1999); Matthews v. Commissioner, T.C. Memo.

2008-126, 95 T.C.M. (CCH) 1486, 1490; see also H.R.

REP. NO. 99-426, at 844

480 The United States Tax Court – An Historical Analysis

requisite error or delay, the taxpayer also must establish a correlation

between the error or delay and a specific period for which interest

abatement is sought.

230

Only if the Tax Court finds that the various conditions to the abatement

of interest under § 6404(e)(1) are satisfied will the court proceed to examine

whether the Commissioner’s failure to abate interest constitutes an abuse of

discretion. To prevail under this standard of review, the taxpayer must

establish that the Commissioner exercised his discretion “arbitrarily,

capriciously, or without sound basis in fact or law.”

231

While the

Commissioner’s determination is afforded considerable deference, the

Commissioner is not entitled to complete latitude in this context. In Jacobs

v. Commissioner,

232

the Tax Court explained that the Commissioner must

explain the basis for the exercise of his discretion:

If we were to uphold the Commissioner’s determination not to abate

interest where the Commissioner has not clearly explained the basis

for the exercise of that discretion, we would be condoning a review

framework that would encourage the Commissioner to provide as

little information as possible about the handling of cases during the

period of the abatement request and about the inquiry in response to

that request. We do not believe that Congress had that kind of

review process in mind when it enacted section 6404 and provided

this Court jurisdiction . . . to review, for abuse of discretion, the

Commissioner’s determination not to abate interest.

233

Accordingly, the Commissioner’s failure to provide support for his

determination alone may constitute the requisite abuse of discretion that

permits the Tax Court to reverse the denial of interest abatement.

(1985) (“The provision applies only to failures to perform ministerial acts that

occur after the taxpayer has been contacted by the IRS.”). Note that, through the

enactment of § 6404(g), Congress now requires the Secretary to suspend the

imposition of interest if (1) the taxpayer files a timely return and (2) the Secretary

fails to provide notice to the taxpayer specifically stating the taxpayer’s liability and

the basis therefor within 36 months of the later of the date on which the return is

filed or the due date for filing the return (determined without regard to extensions).

230

See Mekulsia v. Commissioner, T.C. Memo. 2003-138, 85 T.C.M. 1303,

1309.

231

See Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v.

Commissioner, 112 T.C. 19, 23 (1999). The burden of proof rests on the taxpayer.

AX CT. R. 142(a) (July 6, 2012 ed.).

232

Jacobs v. Commissioner, T.C. Memo. 2000-123, 79 T.C.M. (CCH) 1835,

1840.

233

Id. at 1841; see also Bucaro v. Commissioner, T.C. Memo. 2009-247, 98

T.C.M. (CCH) 388, 393.

Prominence in Judicial Review of Taxpayer Rights 481

D. Review of Determinations in Collection Due Process Proceedings

The grant of jurisdiction to review administrative determinations made

in the course of collection due process proceedings constitutes one of the

most significant modern developments in the operation of the Tax Court.

Since the creation of the collection due process regime as part of the

Internal Revenue Service Restructuring and Reform Act of 1998,

234

the Tax

Court has seen the volume of cases arising in the collection due process

context increase to roughly five percent of its overall docket.

235

Given the

number of division opinions concerning the court’s jurisdiction in the

collection due process setting and, in particular, the number of these cases

yielding court-reviewed divided opinions, the perceived portion of the

court’s resources allocated to these cases perhaps exceeded this statistical

evidence. As discussed below, the wealth of division opinions in this

context was predictable in light of the scant statutory framework. The

court’s exploration of its collection due process jurisdiction reveals the

difficulties the court faced in reconciling this new role with its tradition of

conducting de novo proceedings in the deficiency setting.

1. The Government’s Summary Collection Powers

Prior to the enactment of the seminal 1998 legislation, the Service could

exercise its administrative collection remedies without the prospect of

judicial oversight or intervention. The Service’s administrative collection

procedures are summarized as follows: Within 60 days of assessing a tax,

the Service must provide the taxpayer with written notice stating the

amount of the unpaid liability and demanding payment of same.

236

If the

taxpayer fails to make payment following demand, a lien on all of the

taxpayer’s property—real and personal—arises in favor of the Service.

237

The lien is effective retroactively from the date of assessment,

238

and no

further action is required on the part of the Service to establish its interest

in the taxpayer’s property. However, if the Service intends for its lien to be

effective against a wide range of creditors, including third-party purchasers

for value and judgment lien creditors, the Service must record a formal

Notice of Federal Tax Lien.

239

If the taxpayer fails to make payment of the

234

Pub. L. No. 105-206, § 3401, 112 Stat. 685, 747–50 (1998).

235

This estimate is based on statistical information provided by the Tax Court

for years 2006 to 2012.

236

I.R.C. § 6303(a).

237

I.R.C. § 6321.

238

I.R.C. § 6322.

239

I.R.C. § 6323(a), (f). Given the potential economic hardship imposed on

the taxpayer resulting from the recording of a Notice of Federal Tax Lien, the

482 The United States Tax Court – An Historical Analysis

tax within ten days of the notice and demand for payment, the Service may

proceed to levy against the property subject to the tax lien.

240

However,

prior to levying on the taxpayer’s property, the Service must provide the

taxpayer with 30 days advance notice of its intent to do so.

241

The notice of

intent to levy must convey a litany of statutorily enumerated information,

including the procedures relating to the proposed levy and alternatives the

taxpayer may pursue to avoid it.

242

Compliance with these procedures

would allow the Service to seize the taxpayer’s property and to sell it

through a public sale for the purpose of satisfying the taxpayer’s

outstanding obligation.

243

The Service’s administrative collection procedures outlined above were

not subject to judicial review. In the 1931 case of Phillips v. Commissioner,

244

the Supreme Court explained that “summary proceedings to secure prompt

performance of pecuniary obligations to the government have been

consistently sustained,” so long as opportunity for a later judicial

determination of the taxpayer’s rights is afforded.

245

Hence, once the

Service exercised its broad collection powers, the taxpayer was relegated to

prosecuting a suit for a refund of the collected tax.

246

After conducting public hearings in 1997 and 1998 at which witnesses

recounted sensational tales of governmental abuse in the exercise of its

administrative collection powers,

247

Congress was determined to recalibrate

Service does not do this automatically. Rather, the Service will endeavor to work

out a payment arrangement with the taxpayer, and the Service will inform the

taxpayer of the negative consequences that the notice will have on the taxpayer’s

business operations and credit rating. See L

EANDRA LEDERMAN & STEPHEN W.

MAZZA, TAX CONTROVERSIES: PRACTICE AND PROCEDURE 561 (3d ed. 2009).

240

I.R.C. § 6331(b).

241

I.R.C. § 6331(d)(2).

242

I.R.C. § 6331(d)(4).

243

I.R.C. § 6331(b); see also I.R.C. § 6335 (providing procedures for

administrative sale of seized property).

244

283 U.S. 589 (1931).

245

Id. at 595 (cited in Robinette v. Commissioner, 439 F.3d 455, 458 (8th Cir.

2006)); see also Bull v. United States, 295 U.S. 247, 261 (1935) (noting that a

taxpayer’s recourse for unjust administrative action is a suit for restitution).

246

See Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial

Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 F

LA. L. REV. 1, 26–31

(2004) (detailing the breadth of the Government’s collection powers and noting the

limited remedy available to taxpayers prior to enactment of the 1998 legislation).

247

See IRS Oversight: Hearings Before the Senate Comm. on Finance, 105th Cong.

(1998); Practices and Procedures of the Internal Revenue Service: Hearings Before the Senate

Comm. on Finance, 105th Cong. (1997). Professor Bryan Camp recounts the

sensational nature of these hearings, which included witnesses testifying behind

screens and with the aid of voice disguising technology. See Camp, supra note 246,

at 81. Much of the testimony offered at these hearings concerning governmental

Prominence in Judicial Review of Taxpayer Rights 483

the balance of power in the tax collection setting. In particular, Congress

sought to provide taxpayers with rights against the Service similar to those

one would possess in dealing with a private creditor.

248

Congress did so by

introducing the collection due process procedures as part of the IRS

Restructuring and Reform Act.

249

As described below, the procedures

provide taxpayers the opportunity for a pre-deprivation administrative

hearing (commonly referred to as a “collection due process hearing”) to

contest the proposed collection action,

250

with the resulting administrative

determination being subject to judicial review.

2. The Pre-Deprivation Administrative Hearing

Two avenues exist to a collection due process hearing. If the Service

files a Notice of Federal Tax Lien with respect to the taxpayer’s property,

the Service is required under § 6320 to notify the taxpayer within five days

of doing so of the taxpayer’s right to request a collection due process

hearing. Whereas the notice of collection due process rights required by

§ 6320 follows the filing of the tax lien, § 6330 requires the Service to

provide the taxpayer with advance notice of the right to a collection due

process hearing prior to proceeding with a levy. The Service is prohibited

from levying on the taxpayer’s property during the period in which the

taxpayer may request the collection due process hearing.

251

If the taxpayer

requests a hearing in a timely manner, the prohibition on the proposed levy

generally extends until the hearing is conducted, and the period for judicial

review expires.

252

The window for requesting a collection due process hearing is fairly

narrow—generally, 30 days from the issuance of the collection due process

notice.

253

If the taxpayer makes a timely request for a hearing,

254

the

abuse of its administrative collection powers was later discredited. Id. (citing

General Accounting Office, Report to the Chairman, Comm. on Finance, U.S.

Senate, Tax Administration: Investigation of Allegations of Taxpayer Abuse and

Employee Misconduct ¶ 2 (1999)).

248

See S. REP. NO. 105-174, at 67 (1998).

249

Pub. L. No. 105-206, § 3401, 112 Stat. 685, 747–50 (1998).

250

For a thorough discussion of the nature of the collection due process

hearing, see Danshera Cords, How Much Process is Due? I.R.C. Sections 6230 and 6330

Collection Due Process Hearings, 29 V

T. L. REV. 51 (2004).

251

I.R.C. § 6330(a)(2).

252

I.R.C. § 6330(e)(1). If the underlying tax liability is not in dispute and if the

court determines that the Service has shown good cause not to suspend levy, the

prohibition will be lifted during the appeal of the determination in the collection

due process hearing. I.R.C. § 6330(e)(2).

253

I.R.C. § 6330(a)(3)(B). If the taxpayer’s collection due process notice is

issued in response to the filing of lien notice under § 6320, the 30-day period for

requesting a hearing does not start until the expiration of the five-day period in

484 The United States Tax Court – An Historical Analysis

taxpayer is entitled to a hearing at the IRS Office of Appeals before an

impartial officer who has had no prior involvement with respect to the

uncollected tax.

255

Section 6330(c) outlines the parameters of a collection due process

hearing. The taxpayer may raise “any relevant issue” relating to the unpaid

tax or the proposed levy at the hearing, and the statute specifically

references appropriate spousal defenses, challenges to the appropriateness

of the collection actions, and possible collection alternatives (including,

among other things, installment agreements and offers in compromise) as

possible considerations.

256

As a general rule, the taxpayer may not use the

collection due process hearing as an opportunity to contest the underlying

tax liability.

257

However, this general rule does not apply if the taxpayer did

not receive a notice of deficiency or if the taxpayer did not “otherwise have

an opportunity to dispute” the underlying tax liability.

258

The Tax Court

had the occasion to interpret this latter exception in Montgomery v.

Commissioner.

259

The taxpayers in Montgomery reported considerable income resulting

from the exercise of stock options on their joint return. However, the

taxpayers failed to remit payment of this liability in full, due in part to the

drastic decline in the value of the stock that gave rise to the option-exercise

which the Service is required to provide the taxpayer with notice of the lien. I.R.C.

§ 6320(a)(3)(B).

254

If the taxpayer fails to request a hearing in a timely manner, the Service

nonetheless will conduct an “equivalent hearing.” See Treas. Reg. §§ 301.6320-

1(i)(1), 301.6330-1(i)(1). However, the granting of an equivalent hearing does not

operate as waiver of the 30-day filing requirement. See Kennedy v. Commissioner,

116 T.C. 255, 262 (2001). Accordingly, collection action is not required to be

suspended during the pendency of the equivalent hearing. Treas. Reg. §§ 301.6320-

1(i)(2), Q&A I4, 301.6330-1(i)(2), Q&A I4.

255

I.R.C. §§ 6320(b)(3), 6330(b)(3).

256

I.R.C. § 6330(c)(2).

257

An offer in compromise based on doubt as to the taxpayer’s liability for the

underlying tax constitutes a challenge to the underlying tax liability itself. See Baltic

v. Commissioner, 129 T.C. 178 (2007). Hence, the failure of an Appeals officer to

consider such an offer does not constitute an abuse of discretion when the

underlying tax liability is not properly at issue in the collection due process hearing.

258

I.R.C. § 6330(c)(2)(B); see also Treas. Reg. § 301.6330-1(e)(2) Q&A E2

(providing guidance on the meaning of “opportunity to dispute”). If a taxpayer

receives a notice of deficiency and fails to petition for Tax Court review, the

taxpayer is precluded from contesting the underlying deficiency in the collection

due process hearing pursuant to § 6330(c)(2)(B). See Goza v. Commissioner, 114

T.C. 176, 183–84 (2000). The willingness of an Appeals officer to receive evidence

concerning the underlying tax liability does not operate as a waiver of the

jurisdictional bar. See Behling v. Commissioner, 118 T.C. 572, 579 (2002).

259

122 T.C. 1 (2004).

Prominence in Judicial Review of Taxpayer Rights 485

income. The Service summarily assessed the self-reported tax pursuant to

§ 6201(a)(1) and eventually pursued collection by means of levy. In

advance of the taxpayers’ pre-levy collection due process hearing, the

taxpayers indicated that they intended to file an amended return

recalculating the stock option income and reflecting the taxpayers’

entitlement to a refund for the year at issue. Interestingly, the Appeals

officer responded that the taxpayers would be able to contest the

underlying tax liability at the hearing, given that the taxpayers had not

received a notice of deficiency and did not otherwise have the opportunity

to dispute the tax.

260

However, after the taxpayers failed to file the

amended return within a reasonable time, the Appeals officer issued a

notice of determination permitting the levy to proceed. Prior to appealing

to the Tax Court, the taxpayers filed the amended return claiming

entitlement to a refund. The Tax Court in Montgomery therefore had to

determine if the ability to contest the underlying tax liability in the course of

a collection due process proceeding under § 6330(c)(2)(B) extended to self-

reported obligations.

The Commissioner viewed the taxpayers’ argument that they should be

permitted to contest self-reported obligations in the collection due process

setting as “nonsensical.”

261

In the Commissioner’s view, § 6330(c)(2)(B)

was intended to permit a taxpayer to challenge a tax liability asserted by the

Government that the taxpayer had not had the ability to contest—not

amounts the taxpayers originally conceded were owed. The majority of the

Tax Court, however, was not persuaded. Interpreting the statute according

to its plain language, the court determined that the taxpayers in Montgomery

had not been afforded “a prior administrative or judicial opportunity” to

challenge the amounts assessed by the Service.

262

Hence, the second

alternative condition to the application of § 6330(c)(2)(B) was satisfied.

From a policy perspective, the majority found nothing wrong with

providing taxpayers the opportunity to correct self-inflicted reporting errors

at the collection due process stage.

263

The Service came around to this

view, first acquiescing in the Montgomery decision

264

and later adopting its

holding by regulation.

265

As a narrow matter of statutory interpretation, the holding of Montgomery

may not appear remarkable. However, the larger effect of the decision was

significant. Traditionally, taxpayers who over-reported their income tax

liability were forced to pay the self-reported tax and then pursue a refund

before the federal district court or the Court of Federal Claims. Although

260

Id. at 3.

261

Id. at 6–7.

262

Id. at 8–9.

263

Id. at 9–10.

264

A.O.D. 2005-03 (Dec. 19, 2005).

265

See Treas. Reg. § 301.6330-1(e)(1).

486 The United States Tax Court – An Historical Analysis

the Tax Court possessed jurisdiction to determine an overpayment, that

jurisdiction was ancillary to and predicated upon the court’s deficiency

jurisdiction. The court’s interpretation of § 6330(c)(2)(B) in Montgomery

fundamentally altered these prevailing norms by permitting the taxpayer to

contest a self-reported liability on a pre-payment basis before the Tax

Court.

266

Of course, a taxpayer seeking this procedural advantage must

wade into the Government’s administrative collection process to obtain it.

Turning to the mechanics of the collection due process hearing itself,

the statutory guidance is best described as sparse. Section 6330(c)(1)

provides the lone statutory charge to the Appeals officer, which is to verify

that the Service has satisfied the requirements “of any applicable law or

administrative procedure.”

267

The statute does not elaborate on the

verification that must be obtained, but the legislative history provides that

the Appeals officer is expected to verify that:

(1) the revenue officer has verified the taxpayer’s liability;

(2) the estimated expenses of the levy and sale will not exceed the

value of the property to be seized;

(3) the revenue officer has determined that there is sufficient

equity in the property to be seized to yield net proceeds from sale to

apply to the unpaid tax liabilities; and

(4) with respect to the seizure of assets of a going business, the

revenue officer recommending the collection action has thoroughly

considered the facts of the case, including the availability of

alternative collection methods, before recommending the collection

action.

268

The list of verifications supplied by the legislative history was not

intended to be exhaustive. Additional items to be verified include the

issuance of the notice of deficiency (if appropriate), an internal record of

the tax assessment, the timely issuance of the notice and demand for

payment, and the provision of Notice of Intent to Levy.

269

The Appeals

officer is not required to rely on a particular document to satisfy the

§ 6330(c)(1) verification obligation.

270

On that note, the Tax Court has held

266

The Tax Court addressed its ability to order a refund in the collection due

process setting in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006). See infra notes

345–352 and accompanying text.

267

I.R.C. § 6330(c)(1).

268

S. REP. NO. 105-174, at 68 (1998).

269

See Trout v. Commissioner, 131 T.C. 239, 257–62 (2008) (Marvel, J.,

concurring) (quoting Chief Counsel Notice CC-2006-019 for the proposition that

the appeals officer must verify “those things that the Code, Treasury Regulations,

and the IRM require the Service to do before collection can take place”).

270

See Craig v. Commissioner, 119 T.C. 252, 262 (2002).

Prominence in Judicial Review of Taxpayer Rights 487

that reliance on Form 4340, Certificate of Assessments, Payments, and

Other Specified Matters, to verify that a valid assessment occurred does not

constitute an abuse of discretion where there exists no evidence of

irregularity in the assessment process.

271

The verification obligation of

§ 6330(c)(1) does not create a right to discovery in the taxpayer, as the Tax

Court has held that the Appeals officer is not obligated to provide a copy of

the verification to the taxpayer.

272

Congress expected that the Appeals officer would issue a written

determination at the conclusion of the hearing.

273

Section 6330(c)(3)

outlines the grounds on which the determination must be based. The first

two relate to matters to be addressed at the hearing: (1) the verification of

compliance with applicable law and administrative procedures that the

Appeals officer is required to obtain under § 6330(c)(1);

274

and (2) any

relevant issue relating to the proposed collection action (such as spousal

defenses, appropriateness of collection actions, and alternatives to

collection) or, if appropriate, the underlying tax liability pursuant to

§ 6330(c)(2).

275

The third ground, however, is the most intriguing, as it

introduces a subjective balancing test that necessitates consideration of the

effect of collection on the taxpayer. Specifically, the Appeals officer must

consider whether the proposed collection activity “balances the need for

efficient collection of taxes with the legitimate concern of the person that

any collection action be no more intrusive than necessary.”

276

Prior to the promulgation of administrative guidance, the Tax Court was

tasked with resolving practical questions concerning the nature of the

collection due process hearing that the statute fails to address. In Davis v.

Commissioner,

277

the court determined that the collection due process hearing

constituted an informal proceeding, one consistent with historical practice

of the IRS Office of Appeals prior to the enactment of the collection due

process procedures.

278

Accordingly, the court held that a collection due

271

See Nicklaus v. Commissioner, 117 T.C. 117, 121 (2001) (reliance on Form

4340 by Appeals officer did not constitute an abuse of discretion).

272

See Nestor v. Commissioner, 118 T.C. 162, 166 (2002).

273

H.R. REP. NO. 105-599, at 266 (1998) (“The conferees expect the appeals

officer will prepare a written determination addressing the issues presented by the

taxpayer and considered at the hearing.”).

274

I.R.C. § 6330(c)(3)(A).

275

I.R.C. § 6330(c)(3)(B).

276

I.R.C. § 6330(c)(3)(C); see also Living Care Alternatives of Utica, Inc. v.

United States, 411 F.3d 621, 625 (6th Cir. 2005) (“This final balancing factor is

novel in American tax law and injects into the calculus an equitable consideration

for the taxpayer and his concerns.”).

277

115 T.C. 35 (2000).

278

Id. at 41.

488 The United States Tax Court – An Historical Analysis

process hearing does not entitle the taxpayer to subpoena witnesses to

provide testimony under oath.

279

Consistent with its informal nature, the collection due process “hearing”

does not necessarily relate to a single proceeding before the IRS Office of

Appeals. Rather, the hearing may consist of several meetings or other

communications between the Appeals officer and the taxpayer, whether

oral or in writing.

280

Indeed, a face-to-face meeting is not required in all

cases. In Katz v. Commissioner,

281

the taxpayer was offered the opportunity

for a face-to-face collection due process hearing at the nearest location of

the IRS Appeals Office. The taxpayer declined to make the approximately

one-hour commute, contending that he was entitled to have the hearing

held in the city where he resided and where his witnesses were located.

Citing the informal nature of the collection due process hearing and the

taxpayer’s failure to establish that the necessary travel would engender

hardship, the court concluded that the telephonic communications between

the taxpayer and the Appeals officer satisfied the hearing requirement.

282

Shortly thereafter, the Tax Court in Lundsford v. Commissioner

283

extended the

holding of Katz by providing that a taxpayer who raises only frivolous

arguments is not entitled to a face-to-face hearing.

284

3. Judicial Review

Given that the collection due process protections of the IRS Reform

and Restructuring Act were aimed at precluding perceived abuses in the

Government’s exercise of its administrative collection powers, Congress

was not content in supplying an additional administrative hearing alone.

Rather, Congress subjected the administrative hearing to judicial review. As

originally proposed by the Senate Finance Committee, the Tax Court was to

serve as the exclusive forum for appeals from collection due process

hearings.

285

However, this provision was modified by the Conference

279

Id. at 41–42.

280

See Ginsberg v. Commissioner, 130 T.C. 88, 92 (2008).

281

115 T.C. 329 (2000).

282

Id. at 336–37.

283

117 T.C. 183 (2001).

284

Id. at 189 (refusing to remand case back to IRS Office of Appeals for a

hearing when the taxpayer intended to raise only frivolous arguments that the Tax

Court had previously rejected). For a critique of the Tax Court’s willingness to

excuse the Service’s failure to provide or conduct a collection due process hearing,

see Danshera Cords, How Much Process Is Due? I.R.C. § 6320 and 6330 Collection Due

Process Hearings, 29 V

T. L. REV. 51 (2004).

285

See S. REP. NO. 105-174, at 68 (1998) (“The taxpayer may contest the

determination of the appellate officer in the Tax Court by filing a petition within 30

days of the date of the determination.”).

Prominence in Judicial Review of Taxpayer Rights 489

Committee, which provided that judicial review would lie with the federal

district court “where appropriate.”

286

In its original form, § 6330(d) split

judicial review of collection due process determinations between the two

courts based on whether the Tax Court normally possessed jurisdiction

over the underlying tax liability.

287

In the event the taxpayer petitioned the

incorrect court for review, Congress authorized the taxpayer to re-file with

the proper court within 30 days after the original court determined that it

lacked jurisdiction. This provision, intended to protect taxpayers who may

not have been well versed in the traditional jurisdiction of the Tax Court,

quickly became the subject of abuse. Taxpayers seeking to delay collection

activity would intentionally file in the improper court, gaining the time it

took for that court to conclude that it lacked jurisdiction plus the 30-day

grace period for re-filing.

288

To avoid confusion relating to the mutually

exclusive appellate fora and to avoid the intentional exploitation of this

regime, Congress revised § 6330 in 2006 to vest the Tax Court with

exclusive jurisdiction over all appeals of collection due process

determinations—regardless of the underlying tax liability at issue.

289

To invoke the jurisdiction of the Tax Court in the collection due process

setting, the taxpayer must file a timely petition for review of the notice of

286

H.R. REP. NO. 105-599, at 266 (1998).

287

While this was the effect of the original provision, the language Congress

employed to accomplish the demarcation of these jurisdictional boundaries was not

quite so clear. Section 6330(d)(1) in its original form is reproduced below:

The person may, within 30 days of a determination under this section,

appeal such determination—

(A) to the Tax Court (and the Tax Court shall have jurisdiction with

respect to such matter); or

(B) if the Tax Court does not have jurisdiction of the underlying tax

liability, to a district court of the United States.

If a court determines that the appeal was to an incorrect court, a person

shall have 30 days after the court determination to file such appeal with the

correct court.

I.R.C. § 6330(d)(1) (1998); see also Moore v. Commissioner, 114 T.C. 171, 175

(2000) (“[W]e interpret section 6330(d)(1)(A) and (B) together to mean that

Congress did not intend to expand the Court’s jurisdiction beyond the types of

taxes that the Court may normally consider.”).

288

See STAFF OF THE JOINT COMM. ON TAX’N, REPORT OF THE JOINT

COMMITTEE ON TAXATION RELATING TO THE INTERNAL REVENUE SERVICE AS

REQUIRED BY THE IRS REFORM AND RESTRUCTURING ACT OF 1998, JCX-53-03,

at 88 (2003) (“Some taxpayers intentionally file in the wrong court, which creates a

further delay.”).

289

See Pension Protection Act of 2006, Pub. L. No. 109-208, § 855(a), 120 Stat.

780, 1019 (amending I.R.C. § 6330(d)(1)). The statute as amended eliminated the

grace period following a filing in an improper court. Id.

490 The United States Tax Court – An Historical Analysis

determination issued as a result of the collection due process hearing.

290

be timely, the petition generally must be filed by the taxpayer within 30 days

of the determination. However, if the taxpayer appeals the determination

based on the claimed availability of innocent spouse relief under § 6015, the

taxpayer has 90 days from the determination to pursue Tax Court review.

291

Turning to the notice of determination, the Tax Court explained in

Offiler v. Commissioner that “[t]he notice of determination provided for in

section 6330 is, from a jurisdictional perspective, the equivalent of a notice

of deficiency.”

292

While § 6330 refers to a determination to be issued by the

Appeals officer in connection with the due process hearing, Treasury

Regulations clarify that Appeals must issue a “Notice of Determination” to

each person who makes a timely request for a collection due process

hearing.

293

The caption of the document does not control whether its contents

constitute a determination for purposes of § 6330. For instance, in Craig v.

Commissioner,

294

the Appeals officer issued a “Decision Letter” to the

taxpayer in connection with an equivalent hearing provided to the taxpayer

based on the belief that the taxpayer failed to submit a timely request for a

collection due process hearing. However, the Service improperly proceeded

down the equivalent hearing path, because the taxpayer’s request for a

collection due process hearing was in fact timely. Under these facts, the

Tax Court determined that the decision letter constituted a determination

under § 6330 sufficient to invoke its jurisdiction.

295

The Tax Court in

Wilson v. Commissioner

296

addressed the inverse scenario of that raised in

Craig. The Service in Wilson issued a document captioned “Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330” following an equivalent hearing held in response to an

untimely request for a collection due process hearing. The court in Wilson

290

I.R.C. § 6330(d)(1); see also Goza v. Commissioner, 114 T.C. 176, 182 (2000)

(“The Court’s jurisdiction under section 6330 is contingent on the issuance of a

valid notice of determination and a timely petition for review.”).

291

See I.R.C. § 6015(e)(1)(A). However, pursuing an innocent spouse objection

to the notice of determination does not extend the petition period for all claims.

That is, if the taxpayer’s petition is filed after the 30-day period provided by

§ 6330(d)(1), the Tax Court may review only the claims that relate to innocent

spouse relief under § 6015. See Treas. Reg. § 301.6330-1(f)(2), Q&A F2.

292

114 T.C. 492, 498 (2000).

293

See Treas. Reg. § 301.6330-1(f)(1).

294

117 T.C. 252 (2002). Normally, a decision letter issued in response to an

equivalent hearing provided in response to an untimely request for a collection due

process hearing is not sufficient to invoke the Tax Court’s jurisdiction. See

Moorhous v. Commissioner, 116 T.C. 263, 270 (2001).

295

Id. at 259.

296

131 T.C. 47 (2008).

Prominence in Judicial Review of Taxpayer Rights 491

concluded that the taxpayer’s failure to make a timely request for a

collection due process hearing precluded a determination under § 6330,

regardless of the caption of the document.

297

As a result, the Tax Court

lacked jurisdiction in the case.

298

The Tax Court originally vacillated on the degree of deference to be

afforded to a notice of determination issued in the collection due process

context. In Meyer v. Commissioner,

299

the court concluded that the notice of

determination issued to the taxpayer was invalid on the basis that the

taxpayer had not been offered an opportunity for a hearing prior to

issuance of the determination.

300

However, roughly a year later, a divided

Tax Court in Lundsford v. Commissioner

301

determined that it was improper to

“look behind” the notice of determination in this manner.

302

Instead, the

court imported into the collection due process arena the well-settled rule of

not looking behind the notice of deficiency necessary to invoke the Court’s

deficiency jurisdiction.

303

The court’s decision to overrule its prior decision

in Meyer also was based on the “unjustified delay” that approach had

engendered in the resolution of collection due process cases.

304

Rather than

considering evidence bearing on the quality of the collection due process

hearing provided to the taxpayer for the purpose of determining whether

the predicate to its jurisdiction (a notice of determination) was satisfied, the

court reasoned that such evidence was best considered in reviewing the

determination on the merits. The court in Lundsford therefore held that a

notice of determination would be respected as a jurisdictional prerequisite

provided that nothing on the face of the notice raised a question

concerning its validity.

305

a. Standard of Review

The statute does not articulate a standard of review to be applied by the

Tax Court in reviewing collection due process determinations. However,

legislative materials accompanying the 1998 enacting legislation addressed

this issue. As originally proposed in the Senate Finance Committee, the

297

Id. at 52.

298

Note that the holding of Wilson constitutes a mere application of the well-

settled principle that the Tax Court’s lack of subject matter jurisdiction cannot be

waived by the parties.

299

115 T.C. 417 (2000).

300

Id. at 422–23.

301

117 T.C. 159 (2001).

302

Id. at 163 (“Our analysis in Meyer improperly required us to look behind the

notice of determination.”).

303

Id. at 163–64.

304

Id. at 164.

305

Id. at 164–65.

492 The United States Tax Court – An Historical Analysis

Tax Court was expected to review the determination of the Appeals officer

for abuse of discretion.

306

However, the Conference Committee addressed

the appropriate standard of review in § 6330(d) cases at greater length,

articulating a two-tier approach based on the subject of the officer’s

determination:

Where the validity of the tax liability was properly at issue in the

hearing, and where the determination with regard to the tax liability

is part of the appeal, no levy may take place during the pendency of

the appeal. The amount of the tax liability will in such cases be

reviewed by the appropriate court on a de novo basis. Where the

validity of the tax liability is not properly part of the appeal, the

taxpayer may challenge the determination of the appeals officer for

abuse of discretion. In such cases, the appeals officer’s

determination as to the appropriateness of collection activity will be

reviewed using an abuse of discretion standard of review.

307

The Tax Court quickly adopted the approach outlined in the conference

agreement, essentially treating it as a statutory directive.

308

When the

underlying tax liability is properly at issue in a lien and levy proceeding, the

court applies its traditional de novo standard of review that prevails in the

court’s deficiency jurisdiction. For matters not relating to the underlying

tax liability, the court reviews the Appeals officer’s determination for an

abuse of discretion, which the court has explained occurs when the officer

acts “arbitrarily, capriciously, or without sound basis in fact or law.”

309

b. Scope of Inquiry

As a general rule, the Tax Court’s jurisdiction under §§ 6230 and 6330 is

limited to determining if the filing of the lien or the proposed levy action is

proper.

310

Accordingly, a taxpayer’s failure to raise an issue during a

306

S. REP. NO. 105-174, at 68 (1998).

307

H.R. REP. NO. 105-599, at 266 (1998).

308

See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.

Commissioner, 114 T.C. 176, 181 (2000). For a discussion of how the Tax Court’s

abuse of discretion review in collection due process proceedings is unique when

compared to traditional judicial review of agency action, see Leslie Book, The

Collection Due Process Rights: A Misstep or a Step in the Right Direction?, 41 H

OUS. L.

REV. 1145, 1194–1202 (2004).

309

Woodral v. Commissioner, 112 T.C. 19, 23, (1999).

310

See Chocallo v. Commissioner, T.C. Memo. 2004-152, 87 T.C.M. (CCH)

1432 (declining to entertain taxpayer’s request that sanctions be imposed against

the Service for attempting to collect a deficiency for which the Service failed to

issue a notice of deficiency).

Prominence in Judicial Review of Taxpayer Rights 493

collection due process hearing generally will bar consideration of that issue

by the Tax Court.

311

The Tax Court addressed the ability of the taxpayer to raise additional

challenges to the proposed collection action post hearing in Giamelli v.

Commissioner.

312

At the collection due process hearing, the taxpayer

informed the Appeals officer that he desired to enter into an installment

agreement to satisfy his tax liability. The Appeals officer concluded that the

installment agreement could not be consummated due to the taxpayer’s

failure to remain compliant with the estimated tax obligations for later

years. The officer therefore issued a notice of determination to proceed

with the proposed collection action. After filing a timely petition for review

that raised the prospect of paying the tax liability on an installment basis,

the taxpayer and the Service reached a settlement under which the Service

agreed to accept the taxpayer’s installment obligation and the taxpayer

agreed to execute the appropriate decision document to submit to the

court. However, before doing so, the taxpayer died in a car accident. The

taxpayer’s estate stepped into his shoes and sought to introduce evidence

contesting the validity of the underlying tax liability.

In a reviewed opinion, the Tax Court rejected the taxpayer’s claim as

falling outside of its § 6330 jurisdiction. The court based its holding in

Giamelli primarily on the text of the statute. Because the court is charged

with reviewing the determination rendered by the Appeals officer as a result

of the hearing, any claim or argument not raised at the hearing level could

not be part of the determination being reviewed.

313

The court noted that

this interpretation of the statute advanced valid policy objectives as well.

An approach of not constraining Tax Court review to those issues raised at

the hearing would permit taxpayers to divest the Appeals officer of any

meaningful influence in the collection review process; in effect, the

administrative hearing would amount to a procedural formality en route to

a more encompassing proceeding before the Tax Court.

314

Accordingly,

whereas the court had previously hinted that it could not reverse a

collection due process determination based on arguments or issues not

raised at the hearing level,

315

the court in Giamelli eliminated any such

equivocation.

311

See Treas. Reg. § 301.6330-1(f)(2), Q&A F3; see also Magana v.

Commissioner, 118 T.C. 488, 493 (2002) (“[G]enerally we consider only arguments,

issues, and other matter that were raised at the collection hearing or otherwise

brought to the attention of the Appeals Office.”).

312

129 T.C. 107 (2007).

313

Id. at 112–13.

314

Id. at 115.

315

See Magana v. Commissioner, 118 T.C. 488, 493 (2002) (“[G]enerally it

would be anomalous and improper for us to conclude that respondent’s Appeals

Office abused its discretion under section 6330(c)(3) in failing to grant relief, or in

494 The United States Tax Court – An Historical Analysis

Not long after the Giamelli decision, the court clarified its holding in

Giamelli through Hoyle v. Commissioner.

316

The taxpayer in Hoyle sought to

challenge the Appeals officer’s determination on the basis that the Service

failed to comply with applicable law by not issuing the taxpayer a notice of

deficiency. Even though the taxpayer did not raise this matter before the

Appeals officer, the Tax Court determined that it nonetheless could review

whether the Appeals officer verified compliance with applicable law and

administrative procedures under § 6330(c) as part of its judicial review. The

court’s basis for distinguishing Giamelli rested in the statute governing the

collection due process hearing. Pursuant to § 6330(c)(2), the Appeals

officer is required to consider only those challenges to the proposed

collection action (or, where appropriate, the underlying tax liability), that are

raised by the taxpayer. Hence, the issues raised by the taxpayer at the

hearing level serve to define the scope of the Appeals officer’s

determination that is subject to review. In contrast, § 6330(c)(1) requires

the Appeals officer to verify compliance with applicable law and

administrative procedures, regardless of whether the taxpayer presses this

matter at the hearing level. Accordingly, subjecting the verification

requirement to Tax Court review in all cases cannot prejudice the

Government as a procedural matter.

317

c. Scope of Evidentiary Record

A separate but related inquiry to the range of issues the Tax Court may

consider in a collection due process hearing is the range of evidence the

court may entertain. One of the more vexing questions for the Tax Court

in resolving its expanded jurisdiction to review administrative

determinations outside of the deficiency context is whether the court must

limit the evidence it considers to that presented at the administrative level,

and this issue has been particularly acute in the collection due process

context.

The Service contends that, with limited exceptions, the Tax Court is

limited to the administrative record in exercising its § 6330(d) jurisdiction.

318

On that note, the Service has described the scope of the administrative

failing to consider arguments, issues, or other matter not raised by taxpayers or not

otherwise brought to the attention of respondent’s Appeals Office.”).

316

131 T.C. 197 (2008).

317

See id. at 201–02.

318

See Chief Counsel Notice CC-2006-019, at 46 (Aug. 18, 2006) (“Generally,

review of the procedural aspects of a CDP hearing is limited to the administrative

record.”). However, the Chief Counsel Notice recognizes the need to supplement

the administrative record in cases where the record does not adequately describe

the hearing process or where factual disputes exist concerning what occurred at the

hearing level. Id.

Prominence in Judicial Review of Taxpayer Rights 495

record the Tax Court may consider in reviewing a collection due process

determination as including the following:

any oral communications with the taxpayer or the taxpayer’s

authorized representative submitted in connection with the CDP

hearing, notes made by an Appeals officer or employee of any oral

communications with the taxpayer or the taxpayer’s authorized

representative, memoranda created by the Appeals officer or

employee in connection with the CDP hearing, and any other

documents or materials relied upon by the Appeals officer or

employee in making the determination under section 6330(c)(3).

319

However, courts have noted problems of limiting review of collection due

process determinations to the administrative record, as often there is little

record to speak of. The Sixth Circuit Court of Appeals has explained the

predicament as follows:

Judicial review of collection due process hearings presents a real

problem for reviewing courts. Congress overlaid the Restructuring

and Reform Act on a previous system that involved very little judicial

oversight. The result is a surprisingly scant record, comprised almost

exclusively of the parties’ appellate briefs and the Notice of

Determination letter. No transcript or official record of the hearing

is required and, accordingly, one rarely exists.

320

Whereas federal district courts sitting in review of collection due process

determinations considered themselves bound under principles of

administrative law to limit the evidence they considered to the

administrative record,

321

the Tax Court in Robinette v. Commissioner

322

concluded that it was not subject to any such limitation.

The taxpayer in Robinette presented an offer-in-compromise to the

Service that considerably reduced his outstanding tax liabilities on the basis

of doubt as to collectability. The Service accepted the offer in 1995 after

including a host of conditions to the compromised liability, one of which

obligated the taxpayer to comply with all provisions of the tax laws

(including submitting returns on a timely basis) for five years from

acceptance of the offer. The Service failed to receive a timely filed return

from the taxpayer for the 1998 year. After contacting the taxpayer about

319

Treas. Reg. § 301.6330-1(f)(2), A-F4.

320

Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621, 625

(6th Cir. 2005).

321

See Olsen v. United States, 414 F.3d 144 (1st Cir. 2005); Living Care

Alternatives of Utica, Inc. v. United States, 411 F.3d 621 (6th Cir. 2005).

322

123 T.C. 85 (2004).

496 The United States Tax Court – An Historical Analysis

the missing return, the Service declared the offer-in-compromise in default

and reinstated the taxpayer’s tax liability in full. Thereafter, the Service sent

the taxpayer a Notice of Intent to Levy, from which the taxpayer requested

a due process hearing. As part of the telephonic collection due process

hearing, the taxpayer’s accountant explained that he had prepared the

taxpayer’s return, caused the taxpayer to sign it, and placed the return in the

mail with appropriate postage on the filing deadline (a practice purportedly

followed by the taxpayer and his accountant in prior years). The Appeals

officer, however, would consider only a certified or registered mail receipt.

Accordingly, the officer determined that he could not reinstate the offer-in-

compromise and that the proposed collection activity should proceed.

323

On appeal of the collection due process determination to the Tax Court,

the taxpayer in Robinette sought to introduce evidence relating to the timely

filing of his 1998 tax return, including among other things his testimony to

that effect, evidence concerning the filing of prior years’ returns, and his

accountant’s records on the date of alleged mailing. The Commissioner

sought to exclude all such evidence that was not presented to the Appeals

officer. A divided Tax Court sided with the taxpayer, holding that it was

not bound by the Administrative Procedure Act (APA) in conducting its

review of the Appeals officer’s determination and, specifically, that the

court’s review was not limited to that evidence contained in the

administrative record.

324

The Court justified its conclusion that the APA

did not govern nor inform its review of collection due process

determinations on a number of grounds, including but not limited to the

following: (1) because the Tax Court’s de novo procedures for reviewing

actions taken by the Service were well established when the APA was

enacted, these procedures constituted an “additional requirement . . .

otherwise recognized by law” that the APA expressly declined to

override;

325

(2) the APA constitutes a statute of general application that

does not supersede statutory provisions for judicial review, and the Court’s

jurisdiction is based on a specific statutory framework;

326

(3) the legislative

history accompanying the enactment of the collection due process regime

failed to suggest that the APA applied to the Tax Court in this context or

that the court’s review was to be limited to the administrative record; and

(4) the determination by the Tax Court in other contexts (e.g., innocent

spouse relief, interest abatement) that its jurisdiction to review IRS

determinations for abuse of discretion was not governed by the APA.

Accordingly, the majority of the Tax Court in Robinette permitted

323

Id. at 86–93.

324

Id. at 95.

325

Id. at 97 (citing 5 U.S.C. § 559 (2000)).

326

Id. at 97–98.

Prominence in Judicial Review of Taxpayer Rights 497

consideration of testimony and other evidence that was not presented to

the Appeals officer in resolving the taxpayer’s appeal.

327

The Tax Court’s assertion of administrative review exceptionalism in

Robinette did not withstand appeal. The Eighth Circuit Court of Appeals

determined that judicial review of collection due process determinations by

the Tax Court should be limited to consideration of the evidence contained

in the administrative record.

328

While recognizing that the statute and

legislative history failed to address the scope of evidence to be considered

in a § 6330(d) proceeding, the appellate court interpreted this silence as

suggesting that the APA and general principles of administrative law should

govern. In particular, the court was not willing to read much into the Tax

Court’s tradition of conducting de novo proceedings in the deficiency

setting:

The Tax Court seemed to believe that because it traditionally has

conducted de novo proceedings in deficiency proceedings, and because

Congress did not change that practice when it passed the APA in

1946, Congress should likewise be presumed to have intended de novo

proceedings in the Tax Court in connection with the review of

decisions by an appeals officer under § 6330. We do not think the

proposed conclusion follows from history. Collection due process

hearings under § 6330 were newly-created administrative proceedings

in 1998, and the statute provided for a corresponding new form of

limited judicial review. The nature and purpose of these proceedings

are different from deficiency determinations, and it is just as likely

that Congress believed judicial review of decisions by appeals

officers in this context should be conducted in accordance with

traditional principles of administrative law. Indeed, that Congress

provided for judicial review in either the Tax Court or a United

States District Court, depending on the type of underlying tax

liability involved, indicates that traditional principles of

administrative law should apply.

329

327

For commentary on the Tax Court’s decision in Robinette, see Leslie M.

Book, CDP and Collections, Perceptions and Misperceptions, 107 T

AX NOTES 487 (Apr.

25, 2005); Danshera Cords, Administrative Law and Judicial Review of Tax Collection

Decisions, 52 S

T. LOUIS UNIV. L.J. 429 (2008); Diane L. Fahey, Is the United States Tax

Court Exempt From Administrative Law Jurisprudence When Acting as a Reviewing Court?,

58 C

LEV. ST. L. REV. 603 (2010); Christine K. Lane, On-the-Record Review of CDP

Determinations: An Examination of Policy Reasons Encouraging Judges to Stick to the

Administrative Record, 6 F

LA. ST. U. BUS. L. REV. 149 (2007); Nick A. Zotos, Service

Collection Abuse of Discretion: What is the Appropriate Standard of Review and Scope of the

Record in Collection Due Process Appeals?, 62 T

AX LAW. 223 (2008).

328

Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006).

329

Id. at 461.

498 The United States Tax Court – An Historical Analysis

The First Circuit in Murphy v. Commissioner

330

followed the lead of the

Eighth Circuit in Robinette, holding that the administrative record rule

applies to the Tax Court’s consideration of a collection due process appeal.

Although the Tax Court has not had occasion to revisit the matter in light

of these appellate reversals, indications suggest that the Tax Court may not

be willing to abandon its position in cases appealable to other circuits. In

2008, the Tax Court held in Porter v. Commissioner

331

that it is not limited to

the administrative record when it determines if a taxpayer is entitled to

innocent spouse relief under § 6015. In explaining its holding, the court

distinguished the Eighth Circuit’s decision in Robinette on the basis that the

Tax Court’s jurisdiction to determine a taxpayer’s entitlement to innocent

spouse relief differed qualitatively from its jurisdiction to review collection

due process determinations. However, in the process of distinguishing the

Robinette reversal, the Tax Court was careful to note that “no inference

should be drawn that . . . we are changing our position in lien and levy cases

as expressed in [the original Robinette decision].”

332

Hence, for the time

being, taxpayers may have success in augmenting the administrative record

when pursuing a collection due process appeal before the Tax Court.

The Tax Court addressed a much less controversial aspect of the

evidentiary record it may consider in collection due process appeals in Freije

v. Commissioner.

333

There, the Tax Court was forced to consider when, if

ever, it could entertain evidence arising in a year other than the year that

served as the subject of the notice of determination under review. The

taxpayer in Freije remitted a payment to the Service that he intended to be

applied to his 1997 tax liability, but the Service instead applied the payment

to the taxpayer’s outstanding liability for 1995. The taxpayer therefore

appealed the Service’s determination to proceed with levies to collect his

unpaid 1997 liability, challenging the determination on the basis there

remained no unpaid liability for the 1997 year.

The Service argued that its application of the taxpayer’s remittance to his

1995 tax liability fell outside the jurisdiction of the Tax Court to review, as

the taxpayer’s 1995 liability was not the subject of the notice of

determination. The court rejected this argument, noting that its jurisdiction

to review the adverse collection due process determination necessarily

included the jurisdiction to determine if the tax to be collected had in fact

330

469 F.3d 27 (1st Cir. 2006).

331

130 T.C. 115 (2008); see also Wadleigh v. Commissioner, 134 T.C. 280, 289

(2010) (declining the Commissioner’s invitation to overrule its prior decision in

Robinette because resolution of that issue not necessary to disposition of case).

332

Id. at 120 n.6. Indeed, the Tax Court has reaffirmed its position in Robinette

in cases appealable to other circuit courts of appeals. See Trainor v. Commissioner,

T.C. Memo. 2013-14, 105 T.C.M. (CCH) 1108.

333

125 T.C. 14 (2005).

Prominence in Judicial Review of Taxpayer Rights 499

already been paid—an inquiry that could encompass facts beyond the year

subject to the notice. Accordingly, the court held that its jurisdiction under

§ 6330(d) encompassed consideration of such facts and circumstances in

nondetermination years as are necessary to determine the correct amount of

unpaid tax for the determination year at issue.

334

The court went on to

explain that this approach is consistent with the authorization under

§ 6214(b) to consider facts relating to other years to the extent necessary to

determine the amount of a deficiency for a tax year before the court.

335

d. Possible Outcomes

The Tax Court may sustain the determination of the Appeals officer on

the basis that the determination as it relates to collection-related matters did

not constitute an abuse of discretion or because the taxpayer’s challenge to

the underlying tax liability lacked merit. However, § 6330 fails to specify

what action the Tax Court is to take if it finds the collection due process

determination deficient.

336

For instance, the Appeals officer may have

failed to perform the verification required by § 6330(c)(1), the officer may

have not given sufficient consideration to collection-related matters raised

by the taxpayer pursuant to § 6330(c)(2), or the officer may have failed to

weigh sufficiently the concern that the proposed collection activity be no

more intrusive than necessary as required under § 6330(c)(3)(C).

Furthermore, the record before the Tax Court may not be sufficiently

developed to permit the court to make these determinations.

If the court determines that the proposed levy action is improper, such

as where the court finds that the verification requirements of applicable law

have been satisfied was incorrect, the court may simply stay the proposed

collection action.

337

On the other hand, if the court finds that the Appeals

officer’s determination to proceed with collection constituted an abuse of

discretion, the court may remand the case to the Office of Appeals for

334

Id. at 27.

335

Id. at 27–28.

336

See Diane L. Fahey, The Tax Court’s Jurisdiction Over Due Process Collection

Appeals: Is it Constitutional?, 55 B

AYLOR L. REV. 453, 479 (2003) (“Because I.R.C.

section 6330(d)(1) does not provide for the Tax Court to remand or modify the

Internal Revenue Service’s determination, the Tax Court may be limited merely to

stating that the Internal Revenue Service’s proposed collection action is improper,

with the result that the collection action remains in limbo until the Internal

Revenue Service itself decides either to correct its procedural error or desist from

collection altogether.”).

337

See, e.g., Freije v. Commissioner, 125 T.C. 14, 37 (2005) (directing that the

levy to collect the portion of an assessment for which no notice of deficiency had

been issued “may not proceed”).

500 The United States Tax Court – An Historical Analysis

reconsideration.

338

Presumably the Office of Appeals would heed the Tax

Court’s guidance and rectify the identified defects in the initial

determination. Remand also serves as the appropriate remedy in cases

where the court finds the record insufficient to enable meaningful review of

the collection due process determination.

339

Although nothing in § 6330 expressly contemplates the Tax Court’s

authority to remand a collection due process proceeding to the Office of

Appeals, courts have operated under the assumption that the right exists.

340

Given the failure of the statute to address the prospect of remand, it is not

clear if the remanding court retains jurisdiction over the proceeding to

ensure compliance with its directive.

341

However, the Tax Court operates

on the assumption that it retains jurisdiction over remanded proceedings.

The Court explained this practice in Wadleigh v. Commissioner

342

as follows:

We may under certain circumstances remand a case to the

Commissioner’s Appeals Office while retaining jurisdiction. The

resulting section 6330 hearing on remand provides the parties with

338

See id. at 33, 37 (finding that the Appeals officer’s failure to credit the

taxpayer’s account with withholding credits and remittances that were improperly

applied to other years constituted an abuse of discretion and therefore remanding

determination for reconsideration); Harrell v. Commissioner, T.C. Memo. 2003-

271, 86 T.C.M. (CCH) 378, 379 (remanding case to Appeals officer to enable

taxpayer to consider installment agreement offered by the officer or to propose

collection alternatives but prohibiting taxpayers from raising other issues).

339

See, e.g., Wadleigh v. Commissioner, 134 T.C. 280 (remanding case to Office

of Appeals because administrative record insufficient to properly evaluate whether

the Appeals officer abused discretion in determining that levy on taxpayer’s

pension could proceed). One of the first examples of a court remanding for this

purpose was Mesa Oil, Inc. v. United States, 86 A.F.T.R.2d 2000-7312 (D. Colo.

2000), wherein the district court remanded the case for development of the

administrative record and, in particular, clarification of the reasoning behind the

Appeals officer’s determination that the § 6330(c)(3)(C) balancing test was satisfied.

However, the Sixth Circuit in Living Care Alternatives of Utica, Inc. v. United States, 411

F.3d 621, 625 (6th Cir. 2005), described the remand in Mesa Oil as “an exception to

the general practice of reviewing courts showing deference to Appeals Officers’

conclusions regarding the [§ 6330(c)(3)(C)] balancing analysis.”

340

See, e.g., Lunsford v. Commissioner, 117 T.C. 183, 189 (2001) (“We do not

believe that it is either necessary or productive to remand the case to IRS Appeals

to consider petitioners’ arguments.”); see also Danshera Cords, Collection Due Process:

The Scope and Nature of Judicial Review, 73 U.

CIN. L. REV. 1021, 1040 (2005) (noting

practice of courts remanding collection due process cases for further consideration

by the Appeals officer or further development of record).

341

See id. (noting the confused state of the Tax Court’s retained jurisdiction

over remanded collection due process determinations and suggesting legislative

clarity).

342

134 T.C. 280 (2010).

Prominence in Judicial Review of Taxpayer Rights 501

an opportunity to complete the initial section 6330 hearing while

preserving the taxpayer’s right to receive judicial review of the

ultimate administrative determination.

343

When the Tax Court reviews the underlying tax liability as part of the

§ 6330(d) proceeding, the proceeding very much resembles the de novo

proceedings the court regularly conducts as part of its deficiency

jurisdiction. However, the court’s remedial powers are not the same in the

two settings. If a case arrives before the court through a petition for

redetermination of a deficiency, the court possesses the jurisdiction to

determine an overpayment for the year at issue and to order the

overpayment to be refunded.

344

The Tax Court considered whether it

possessed similar powers when sitting in review of collection due process

determinations in Greene-Thapedi v. Commissioner.

345

Greene-Thapedi concerned the Service’s attempt to collect a taxpayer’s

outstanding income tax liability for 1992. Subsequent to the taxpayer’s

filing of her petition for review of the Appeals officer’s adverse collection

due process determination, the Service applied an overpayment from the

taxpayer’s 1999 year to the outstanding 1992 liability pursuant to § 6402(a),

fully satisfying the 1992 liability. The Service therefore moved to dismiss

the § 6330(d) proceeding as moot due to the absence of an unpaid tax

liability, which the court granted. The court reasoned that it could not

review the Service’s application of its offset authority, because the § 6402

offset does not constitute a levy action that is subject to collection due

process review.

346

To continue pursuing her challenge to the 1992 deficiency (which served

as the basis of her initial petition), the taxpayer amended her petition in the

collection due process proceeding to assert a claim for a refund of amounts

offset against the 1992 liability. The court dismissed her claim for lack of

jurisdiction on grounds that the proposed levy that had given rise to the

court’s § 6330(d) jurisdiction had been abandoned by the Service. In a

divided opinion, the court held that no basis existed for the taxpayer to

challenge her 1992 income tax liability before the court.

347

Accordingly, the

court dismissed the case as moot.

348

However, before doing so, the majority in Greene-Thapedi explained that

even if its § 6330 jurisdiction remained open to the taxpayer, the court

343

Id. at 299 (citations omitted); see also Dalton v. Commissioner, 135 T.C. 393

(2010) (reviewing supplemental notice of determination issued as a result of a

remand of the initial determination).

344

I.R.C. § 6512(b)(1), (2).

345

126 T.C. 1 (2006).

346

Id. at 7–8.

347

Id. at 8.

348

Id. at 14.

502 The United States Tax Court – An Historical Analysis

lacked the authority to determine an overpayment or to order a refund in

the § 6330 context.

349

The court recounted the history of its overpayment

jurisdiction in the deficiency setting, noting that Congress had narrowly

proscribed its jurisdiction by statute. Additionally, the court noted that its

overpayment jurisdiction in the deficiency setting did not carry an ancillary

power to order the Service to refund the determined overpayment. Rather,

this refund power was acquired by legislative grant only decades later, and

even then the court’s refund power was narrowly defined.

350

In light of the

historical development of the court’s circumscribed overpayment and

refund jurisdiction in the deficiency setting, the court refused to interpret

§ 6330 as implicitly conferring upon the Tax Court the authority to

determine an overpayment for the determination year at issue or the power

to order the refund of such amount.

351

The taxpayer therefore was left to

pursue refund litigation with respect to the 1992 tax liability in traditional

refund fora.

352

E. Reimbursement of Taxpayer Litigation and Administrative Costs

Section 7430 provides the prospect of a taxpayer obtaining

reimbursement of reasonable litigation costs and administrative costs

incurred in tax proceedings. The section provides the Tax Court with

jurisdiction to order an award of such costs in docketed cases and,

furthermore, to review a determination concerning an award at the

administrative level. After providing a brief history of the fee-shifting

landscape prior to the enactment of § 7430, this Section will detail the

operation of the statutory remedy as well as the Tax Court’s jurisdiction in

this area.

349

Id. at 8–9.

350

Additionally, the court noted that Congress amended its jurisdiction to

review the Service’s failure to abate interest under § 6404 by incorporating the

court’s overpayment jurisdiction through a cross-reference to § 6512(b) under

§ 6404(h)—further evidence that the court’s overpayment jurisdiction and refund

powers must be expressly authorized. See id. at 13.

351

Id. at 11.

352

Judge Colvin, agreeing with the result in Greene-Thapedi, wrote separately to

note the judicial inefficiency of initially providing the court with jurisdiction to

review the underlying tax liability for the determination only to allow that

jurisdiction to be undercut through the fortuitous application of an overpayment

offset. Id. at 14–15 (Colvin, J., concurring).

Prominence in Judicial Review of Taxpayer Rights 503

1. Pre-TEFRA Rules

Under the common law “American rule,” each litigant is ordinarily

responsible for paying his own costs of counsel.

353

This rule is rooted in

the belief that losing parties should not be penalized for exercising the right

to litigate, nor should the possibility of paying another party’s attorney’s

fees hang guillotine-like over the heads of potential litigants so as to

discourage resort to the courts.

354

The rule, however, is not without its

exceptions.

Two narrow common law exceptions to the American rule

355

allow the

federal courts to reallocate responsibility for paying the attorneys’ fees of

prevailing parties. First, if the losing party “acted in bad faith, vexatiously,

wantonly, or for oppressive reasons,” the federal courts can assess the

attorney’s fees of the winning party against the loser.

356

Second, if the legal

action of a successful litigant has conferred a benefit upon a group of

persons, the attorney’s fees of the prevailing litigant may be recovered from

the other beneficiaries of the action or from a “common fund” created by a

successful suit.

357

Traditionally, however, absent specific statutory or

contractual authority, the doctrine of sovereign immunity and the

distinctive language of section 2412 of title 28 of the United States Code,

358

barred the recovery of attorney’s fees from the Government, even in cases

353

Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 247 (1975).

Under the “English rule,” England and many other countries generally award

attorney’s fees to the prevailing party. Id. at 247 n.18; Spencer v. N.L.R.B., 712

F.2d 539, 543 n.12 (D.C. Cir. 1983); Comment, Court Awarded Attorney’s Fees and

Equal Access to the Courts, 122 U. P

A L. REV. 636, 637 n.3, 639–40 (1974).

354

See Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U.S. 714, 718

(1967); H.R. R

EP. NO. 96-1418, at 9 (1980); Comment, supra note 353, at 644.

355

There are also numerous specific statutory exceptions to the American rule,

authorizing awards of attorney’s fees in cases commenced under statutes granting

or protecting various federal rights. See, e.g., 5 U.S.C. § 552(a)(4)(E) (Freedom of

Information Act); 15 U.S.C. § 15a (Clayton Act); 15 U.S.C. § 77k(e) (Securities Act

of 1933 (as amended)); 15 U.S.C. § 78i(e), 78r(a) (Securities Exchange Act of 1934

(as amended)); see also H.R. R

EP. NO. 96-1418, at 8 (listing additional statutory

authorizations of attorney’s fees).

356

F.D. Rich Co. v. Industrial Lumber Co., 417 U.S. 116, 129 (1974) (footnote

omitted). Accord Alyeska, 421 U.S. at 258–59; Spencer, 712 F.2d at 543.

357

Mills v. Electric Auto-Lite Co., 396 U.S. 375, 391–93 (1970). Accord Spencer,

712 F.2d at 543 & n.13; H.R. R

EP. NO. 96-1418, at 8 (1980).

358

Prior to its amendment in 1980, 28 U.S.C. § 2412 provided as follows:

“Except as otherwise specifically provided by statute, a judgment for costs, as

enumerated in section 1920 of this title, but not including the fees and expenses of

attorneys, may be awarded to the prevailing party in any civil action brought by or

against the United States . . . .” 28 U.S.C. § 2412 (1966) (emphasis added), prior to

amendment by Pub. L. No. 96-481, § 204(a), 94 Stat. 2321, 2327–29 (1980).

504 The United States Tax Court – An Historical Analysis

falling within the well-recognized “bad faith” and “common benefit”

exceptions to the American rule.

359

The American rule became the subject of increasing criticism in the early

twentieth century.

360

Although a primary purpose of the American rule was

to prevent excessive costs from discouraging litigation, the rule was “having

the opposite effect.”

361

Often the expected costs of a judicial contest

exceeded the amount at stake, an anomaly that could preclude the

commencement of well-founded suits.

362

Consequently, the federal courts

began exercising their equity powers to fashion further exceptions to the

American rule.

363

The most important of these exceptions was the “private

attorney general” theory, under which successful litigants who aided in the

enforcement of “important societal rights” could recover their costs of

counsel.

364

Still, the doctrine of sovereign immunity and section 2412 of

title 28 precluded recovery of attorney’s fees from the Federal

Government.

365

In 1975, the Supreme Court ordered cessation in the federal courts of

judicially innovated exceptions to the American rule.

366

In Alyeska Pipeline

Service Co. v. Wilderness Society,

367

the Court held that “the circumstances

under which attorneys’ fees are to be awarded and the range of discretion of

the courts in making those awards are matters for Congress to

determine.”

368

Absent specific statutory authority or unless the case fell

within the “common benefit” or “bad faith” exceptions, the Supreme Court

held that federal courts could not shift the costs of counsel away from the

prevailing party.

369

Congress soon responded.

359

Spencer, 712 F.2d at 543–44.

360

Id. at 544 n.14. The court listed a number of articles criticizing the

American rule, including: William B. Stoebuck, Counsel Fees Included in Costs: A

Logical Development, 38 U. C

OLO L. REV. 202 (1966); Ewing O. Cossaboom,

Attorney’s Fees as an Element of Damages, 15 U. C

IN. L. REV. 313 (1941); Comment,

supra note 353, at 648–55; Note, Distribution of Legal Expense Among Litigants, 49

ALE L.J. 699 (1940).

361

See H.R. REP. NO. 96-1418, at 9 (1980).

362

Id.

363

See Spencer, 712 F.2d at 544; Comment, supra note 353, at 657, 666–70.

364

Spencer, 712 F.2d at 544; Barry S. Rutcofsky, The Award of Attorney’s Fees

Under the Equal Access to Justice Act, 11 H

OFSTRA L. REV. 307, 309–10 (1982);

Comment, supra note 353, at 657, 666–70.

365

See Spencer, 712 F.2d at 543–44; Comment, supra note 353, at 679 n.255.

366

See Spencer, 712 F.2d at 544.

367

421 U.S. 240 (1975).

368

Id. at 262 (footnote omitted).

369

Spencer, 712 F.2d at 544 (citing Alyeska Pipeline Service Co., 421 U.S. at 247,

257–60, 271).

Prominence in Judicial Review of Taxpayer Rights 505

In 1976, in direct response to the Supreme Court’s decision in

Alyeska,

370

Congress enacted the Civil Rights Attorney’s Fee Awards Act,

371

providing for the award of attorney’s fees to prevailing parties other than

the United States in civil actions, including tax cases.

372

The application of

this act to tax litigation was limited, however, because it applied only to

suits brought by or on behalf of the Federal Government. Because the

petitioner in the Tax Court is always the taxpayer seeking the

redetermination of a deficiency asserted by the Service or some other form

of relief, the 1976 legislation had no effect on Tax Court litigation.

373

Following the American rule, the Tax Court refused to award attorney’s

fees or costs against the Government in the absence of a specific statutory

provision conferring such authority.

374

Four years later, Congress again expanded the circumstances in which

attorney’s fees could be recovered in litigation with the Government. The

Equal Access to Justice Act (EAJA),

375

enacted in 1980, provided for the

370

S. REP. NO. 94-1011, at 4 (1976).

371

Pub. L. No. 94-559, 90 Stat. 2641 (1976) (amending 42 U.S.C. § 1988).

372

The legislation provided in pertinent part as follows:

That the Revised Statutes section 722 (42 U.S.C. § 1988) is amended by

adding the following: “In any action or proceeding to enforce a provision

of sections 1977, 1978, 1979, 1980, and 1981 of the Revised Statutes, title

IX of Public Law 92-318, or in any civil action or proceeding, by or on

behalf of the United States of America, to enforce, or charging a violation

of, a provision of the United States Internal Revenue Code, or title VI of

the Civil Rights Act of 1964, the court, in its discretion, may allow the

prevailing party, other than the United States, a reasonable attorney’s fee as

part of the costs.”

Pub. L. No. 94-559, § 2, 90 Stat. 2641.

373

See H.R. REP. NO. 97-404, at 10 (1981); Key Buick Co. v. Commissioner, 68

T.C. 178 (1977) (concluding that not only did the plain language of the 1976 Act

exclude its application to the Tax Court, the legislative history of the Act was

insufficient to support its application to Tax Court litigation), aff’d, 613 F.2d 1306

(5th Cir. 1980); see also Sharon v. Commissioner, 66 T.C. 515, 533–34 (1976)

(holding that the Tax Court was without authority under 28 U.S.C. § 2412 to award

costs to prevailing petitioner), aff’d, 591 F.2d 1273 (9th Cir. 1979).

374

See Don Casey Co. v. Commissioner, 87 T.C. 847, 857 (1986); Key Buick Co.,

68 T.C. at 178 n.2; Sharon, 66 T.C. at 533–34.

375

Pub. L. No. 96-481, § 204(a), 94 Stat. 2321, 2327–29 (1980) (amending 28

U.S.C. § 2412). Both the Civil Rights Attorney’s Fees Awards Act and EAJA were

intended to supplement numerous more specific provisions authorizing awards of

attorney’s fees in cases commenced under statutes granting or protecting various

federal rights. For a list of statutes authorizing awards of attorney’s fees, see supra

note 355.

506 The United States Tax Court – An Historical Analysis

award of litigation costs in any civil action (except tort cases

376

) brought by

or against the United States, unless the position of the Government was

“substantially justified” or special circumstances made such an award

unjust.

377

Under EAJA,

378

which expressly superseded the Civil Rights

Attorney’s Fees Awards Act as to tax litigation,

379

a party prevailing against

the United States could recover attorney’s fees and other reasonable costs,

including “the reasonable cost of any study, analysis, engineering report,

test, or project which is found by the court to be necessary for the

preparation of the party’s case.”

380

No ceiling was placed on the total cost

awards recoverable under EAJA, although individual items were limited:

attorney’s fees could not exceed a statutory hourly rate without the court

finding a special justification, and the rate of expert witness fees could not

be higher than those paid by the Government.

381

Additionally, parties had

to meet certain economic requirements to be eligible for a litigation award

under EAJA.

382

376

28 U.S.C. § 2412(d)(1)(A). However, the legislative history of the EAJA

makes clear that it is to apply to cases involving constitutional torts. H.R. R

EP. NO.

96-1418, at 9 (1980); Rutcofsky, supra note 364, at 313.

377

28 U.S.C. § 2412(b), (d)(1)(A). Section 2412(b) authorizes the courts, unless

prohibited by statute, to award attorney’s fees and other expenses against the

United States “to the same extent that any other party would be liable under the

common law or under the terms of any statute which specifically provides for such

an award.” 28 U.S.C. § 2412(b). Thus, the “bad faith” and “common benefit”

exceptions are made applicable to the Federal Government. However,

§ 2412(d)(1)(A) is even more sweeping because of the allowance of fees and

expenses unless the position of the United States is “substantially justified.” 28

U.S.C. § 2412(d)(1)(A).

378

Pub. L. No. 96-481, §§ 201–208, 94 Stat. 2321, 2325–30 (1980).

379

Pub. L. No. 94-559, 90 Stat. 2641 (1976), amended by Pub. L. No. 96-481,

§ 205(c), 94 Stat. 2321, 2330 (1980).

380

28 U.S.C. § 2412(d)(2)(A).

381

Id. (setting the original reimbursable rate at $75 per hour, prior to

amendment in 1996). In 1996, Congress increased the reimbursable hourly rate to

$125. See Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L.

No. 104-121, § 232(b)(1), 101 Stat. 847, 863 (1996).

382

28 U.S.C. § 2412(d)(2)(B). As enacted, § 204 of EAJA limited the

availability of litigation awards by defining a “party” as an individual whose net

worth did not exceed $1 million at the time the action was filed; the sole owner of

an unincorporated business, or a partnership, corporation, association, or

organization (excluding § 501(c)(3) organizations) whose net worth did not exceed

$5 million or who did not have more than 500 employees at the time the action was

filed. Pub. L. No. 96-481, § 204, 94 Stat. 2321, 2329 (1980) (enacting 28 U.S.C. §

2412). The dollar amounts of the net worth ceilings for individuals and

organizations have been raised to $2 million and $7 million respectively. I.R.C.

§ 2412(d)(2)(B) (as amended by Pub. L. No. 99-80, § 2(c)(1), 99 Stat. 183, 185

(1985)).

Prominence in Judicial Review of Taxpayer Rights 507

EAJA also was interpreted as being inapplicable to Tax Court litigation.

The primary justification was that the legislation, enacted as part of title 28

of the United States Code concerning Article III courts, had no application

to a legislative court established under Article I.

383

Thus, no matter how

unreasonable the position of the Service, taxpayers prevailing in Tax Court

proceedings continued to be unable to recover cost and fee awards, despite

legislation providing access to litigation awards to taxpayers prevailing in

cases brought in other federal forums.

2. Taxpayer Rights as Expanded by TEFRA

Believing that taxpayers should be entitled to litigation costs in tax cases

in which the position of the Service is unreasonable, regardless of the

forum involved,

384

Congress increased the availability of fee and cost

awards in tax cases in the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA).

385

Section 7430 expressly applies to Tax Court litigation,

386

and,

as originally enacted, provided that a prevailing party

387

(not including the

Government) may recover reasonable litigation costs in any action under

the Internal Revenue Code brought by or against the United States.

388

383

See, e.g., Bowen v. Commissioner, 706 F.2d 1087 (11th Cir. 1983) (holding

EAJA inapplicable to Tax Court litigation); McQuiston v. Commissioner, 78 T.C.

807 (1982) (holding the attorney’s fee provisions of EAJA and section 1988 of the

Civil Rights Act inapplicable to Tax Court litigation), aff’d, 711 F.2d 1064 (9th Cir.

1983).

384

See H.R. REP. NO. 97-404, at 11 (1981).

385

Pub. L. NO. 97-248, § 292, 96 Stat. 324, 572–74 (1982) (amending I.R.C.

§ 7430). The EAJA is superseded by TEFRA in actions to which § 7430 applies.

See id. § 292(c), 96 Stat. at 573 (amending 28 U.S.C. § 2412(e)).

386

I.R.C. § 7430(a)(2) (as originally enacted by TEFRA, Pub. L. No. 97-248,

§ 292(a), 96 Stat. 572). The express reference to litigation before the Tax Court is

now contained in § 7430(c)(6).

387

Section 7430 excludes creditors of the taxpayer from the definition of

“prevailing party.” I.R.C. § 7430(c)(4)(A); H.R. R

EP. NO. 97-404, at 12 (1981)

(stating that creditors of a taxpayer would be ineligible for a litigation award under

§ 7430 in interpleaders, wrongful levy actions, and lien priority cases); see also Miller

v. United States, 831 F. Supp. 1347 (M.D. Tenn. 1993) (explaining scope of

creditor exception).

388

I.R.C. § 7430(a)(1) (as originally enacted by TEFRA, Pub. L. No. 97-248,

§ 292(a), 96 Stat. 572). Prior to 1996, declaratory judgment proceedings generally

were excluded from § 7430. I.R.C. § 7430(b)(3) (prior to amendment in 1996). As

part of the Taxpayer Bill of Rights 2, this prohibition was removed, effective for

proceedings after July 30, 1996. Pub. L. No. 104-168, § 704(a), (b), 110 Stat. 1452,

1464 (1996). Congress attributed the change to recognition that it was appropriate

to treat declaratory judgment proceedings similar to other tax proceedings with

508 The United States Tax Court – An Historical Analysis

A variety of justifications animated the decision of Congress to enable

prevailing taxpayers to recover attorney’s fees in the Tax Court. First,

because the majority of tax litigation occurs in the Tax Court, few taxpayers

were able to obtain litigation awards under the earlier statutes.

389

Second,

Congress hoped that § 7430 would deter abusive actions by the Service, as

well as enable taxpayers to resist unjustified tax assertions regardless of their

economic situation.

390

Finally, having different rules apply in the Tax

Court, the district courts, and the Claims Court was thought to promote

forum shopping, and Congress intended that one set of rules be applicable

to litigation awards in all tax cases.

391

In its concern with the then increasing case load of the Tax Court and

the impact the TEFRA attorney’s fees provisions might have in

encouraging additional cases to be brought,

392

Congress originally limited

the availability of litigation cost awards to cases in which the position of the

Government was unreasonable.

393

Congress intended that this limitation

reduce any incentive that might otherwise exist for a party to avoid

settlement and the informal stipulation process in the hope of winning an

award of litigation costs.

394

Following the enactment of § 7430 in 1982, Congress made significant

modifications to the statute through the Tax Reform Act of 1986

395

and

respect to eligibility for reimbursement of costs and fees. H.R. REP. NO. 104-506,

at 38 (1996).

389

H.R. REP. NO. 97-404, at 11 (1981).

390

Id.

391

Id.

392

Id.

393

Id.; I.R.C. § 7430(c)(2)(A)(i) (as originally enacted by TEFRA, Pub. L. No.

97-248, § 292, 96 Stat. 572). Currently, reimbursement of costs under § 7430 is

foreclosed if the Government’s position is “substantially justified.” I.R.C.

§ 7430(c)(4)(B)(i). As part of the effort to deter frivolous Tax Court litigation,

Congress also increased the maximum damage penalty from $500 to $5,000. I.R.C.

§ 6673 (as amended by TEFRA, Pub. L. No. 97-248, § 292(b), 96 Stat. 574); H.R.

EP. NO. 97-404, at 11 (1981). The current ceiling on the § 6673 penalty stands at

$25,000. I.R.C. § 6673 (as amended by Omnibus Budget Reconciliation Act of

1989, Pub. L. No. 101-239, § 7731(a), 103 Stat. 2106, 2400–02).

394

H.R. REP. NO. 97-404, at 11 (1981).

395

See Pub L. No. 99-514, § 1551, 100 Stat. 2085, 2752–53 (1986). Perhaps

most significantly, the 1986 legislation converted § 7430 from a temporary

provision to a permanent one. Pursuant to a sunset provision contained in the

original legislation, the TEFRA rules applicable to attorney’s fees ceased to apply to

Tax Court proceedings commenced after December 31, 1985. Pub. L. No. 97-248,

§ 292(a), 96 Stat. 324, 572–74 (l982). The relatively short effective period was

intended to give Congress time to review the operation and effect of § 7430 before

deciding under what conditions, if any, it should be extended. See H.R. R

EP. NO.

97-404, at 11 (1981). In connection with their consideration of the Tax Reform

Prominence in Judicial Review of Taxpayer Rights 509

then through the Technical and Miscellaneous Revenue Act of 1988

(TAMRA).

396

Taken together, these amendments extended the application

of § 7430 and liberalized its application to administrative proceedings

before the Service. In particular, Congress extended the scope of

recoverable expenses beyond reasonable litigation costs to include

“reasonable administrative costs,”

397

and it directed that the position of the

United States to be evaluated included the position taken during

administrative proceedings.

398

Perhaps most significantly, Congress

provided the Service with explicit authority to settle taxpayer’s requests for

litigation and administrative costs at the administrative level while providing

for Tax Court review of such administrative determinations.

399

The scope

of relief provided by § 7430 and the various conditions thereto are detailed

below.

a. Exhaustion of Administrative Remedies

To qualify for an award of litigation or administrative costs under

§ 7430, the requesting taxpayers must have exhausted all available

administrative remedies.

400

The term “administrative remedies” is not

defined in the statute; however, the regulations interpreting § 7430 generally

require that a taxpayer attempt to resolve the dispute in an Appeals office

conference prior to filing a petition in the Tax Court.

401

The legislative

history of § 7430 indicates that the requirement to exhaust administrative

remedies “is intended to preserve the role that the administrative appeals

process plays in the resolution of tax disputes.”

402

A taxpayer who actively

participates in, and discloses relevant information during, the administrative

appeals process will be considered to have exhausted available

administrative remedies.

403

The failure to so participate or disclose

information could render the party ineligible for an award under § 7430.

404

Act of 1986, the House and Senate proposed different amendments to extend

§ 7430. These differences were resolved in conference and the Internal Revenue

Code of 1986 extended § 7430 indefinitely. Pub. L. No. 99-514, § 1551(g), 100

Stat. 2085, 2753 (1986).

396

See Pub. L. No. 100-647, § 6239, 102 Stat. 3342, 3743–46 (1988).

397

Id. § 6239(a), 102 Stat. 3743–44 (amending I.R.C. § 7430(a)).

398

Id., 102 Stat. 3745–46 (amending I.R.C. § 7430(c)(7)).

399

Id. (amending I.R.C. § 7430(c)(4)(B), (f)).

400

I.R.C. § 7430(b)(1).

401

See Treas. Reg. § 301.7430-1(a), (b).

402

H.R. REP. NO. 97-404, at 13 (1981).

403

Treas. Reg. § 301.7430-1(b)(1)(i), (2).

404

Id.; see also Popham v. Commissioner, T.C. Memo. 1984-652, 49 T.C.M.

(CCH) 323, 325–26 (assuming for purposes of a motion that taxpayers exhausted

their administrative remedies because they did engage to some extent in

510 The United States Tax Court – An Historical Analysis

Taxpayers are not required to exhaust administrative remedies if “the

court determines that, under the circumstances of the case, such

requirement is unnecessary.”

405

The legislative history accompanying the

enactment of § 7430 provides that it would be inappropriate to require a

taxpayer to pursue an administrative appeal in a case involving an issue that

the Service “has identified as one which it will litigate in all cases.”

406

Moreover, if the Service has informed the taxpayer that administrative

remedies need not be pursued, or if the taxpayer does not receive a

preliminary notice of deficiency (30-day letter) prior to receipt of the

statutory notice of deficiency, the administrative remedies generally will be

considered exhausted for the purposes of § 7430.

407

In Minahan v. Commissioner,

408

the Service contended that the prevailing

petitioners were ineligible for a litigation award under § 7430 on two

conferences with the Appeals office, but did not allow recovery of litigation costs

as taxpayers did not meet the statutory definition of “prevailing party”).

405

Phillips v. Commissioner, 88 T.C. 529, 533 n.6 (1987) (quoting H.R. REP.

NO. 97-404, at 13 (1981)), rev’d, 851 F.2d 1492 (D.C. Cir. 1988). In Phillips, the

petitioner, who had been issued a preliminary notice of deficiency, did not request

an Appeals office conference prior to the issuance of the statutory notice of

deficiency. The Service contended that the petitioner was ineligible for an award of

attorney’s fees because he had failed to exhaust the administrative remedies

available to him. Id. Although the court noted that the Appeals office conference

is a “necessary and important administrative remedy,” the failure to request an

Appeals office conference was not fatal to the petitioner’s request for a litigation

award in this case because the sole issue tried in the case (whether the petitioner

was entitled to file a joint return) was not raised by the Service until after the case

was docketed. Id. at 532. Additionally, the court took into consideration the

Service’s disregard for the petitioner’s many attempts to negotiate prior to trial, and

the disregard by the Service of the procedures it had announced it would follow in

a Revenue Ruling. Id. at 533. See Award of Attorney’s Fees in Tax Cases: Hearings Before

the Subcomm. on Select Revenue Measures of the House Comm. on Ways and Means, 99th

Cong., 1st Sess. 21–22 (1985) (statement of Jim Keightley, Associate Chief Counsel

for Litigation, Internal Revenue Service) [hereinafter House Hearings].

406

H.R. REP. NO. 97-404, at 13 (1981).

407

See Popham v. Commissioner, T.C. Memo. 1984-652, 49 T.C.M. (CCH) 323

(citing Treas. Reg. § 301.7430-1(f)(1), (2)); see also Vasquez v. Commissioner, T.C.

Memo. 2007-6, 93 T.C.M. (CCH) 660 (applying Treas. Reg. § 301.7430-1(f)(2) in

situation where the taxpayer did not receive a 30-day letter). In these

circumstances, the Service’s failure to require exhaustion must not be due to action

of the taxpayer, and the taxpayer must agree to participate in an Appeals office

conference after the case is docketed. See Swanson v. Commissioner, 106 T.C. 76,

98–99 (citing predecessor of Treas. Reg. § 301.7430-1(f)(2)). Once the Tax Court

case has been docketed, the taxpayer does not have to affirmatively request an

Appeals office conference to exhaust administrative remedies; rather, the taxpayer

simply must not refuse to participate in such conference. Id.

408

88 T.C. 492 (1987).

Prominence in Judicial Review of Taxpayer Rights 511

grounds: first, the petitioners failed to participate in an Appeals office

conference; and second, the petitioners refused to extend the time for

assessment of tax.

409

In a reviewed opinion, the court addressed the first

argument by explaining that § 7430 “does not speak in terms of

administrative remedies in the abstract, but rather focuses on ‘the

administrative remedies available to such party [the prevailing party] within

the Internal Revenue Service.’”

410

Because the Service did not make an

Appeals office conference available, the court held that it “was not an

administrative remedy available to these petitioners” and, consequently, was

not a remedy they had failed to exhaust.

411

The second argument of the Service was submitted in reliance on

regulations interpreting § 7430, which at the time provided that the

administrative remedies of a taxpayer would not be considered exhausted in

cases in which a taxpayer refused to extend the time in which to assess the

tax.

412

The court rejected this argument as well, noting that “an extension

of time for assessment is not an administrative remedy at all.”

413

Noting

that the Service could not use the regulations to add a restriction to § 7430

that was unsupported by the statute or its legislative history,

414

the court

determined the regulations to be invalid to the extent they imposed consent

to an extension of the statute of limitations as a condition to eligibility for

an award of litigation costs.

415

Almost a decade after Minahan, Congress believed a clarification of the

court’s decision in that case was necessary.

416

In 1996, Congress added the

final sentence of § 7430(b)(1),

417

directing that any failure to agree to an

extension of time for the assessment of tax not be taken into account in

determining whether a taxpayer has exhausted administrative remedies

available to him.

418

b. Prevailing Party

A recovery of costs and fees under § 7430 is available only if the

taxpayer qualifies as a “prevailing party” in the proceeding.

419

To be

409

Id. at 503.

410

Id. (quoting I.R.C. § 7430(b)(1) (1986)) (emphasis added by court).

411

Id. (emphasis in original).

412

Id. at 501–02; see Treas. Reg. § 301.7430-1(b)(1)(i)(B), (f)(2)(i) (1985).

413

Minahan, 88 T.C. at 503.

414

Id. at 503, 505–08.

415

Id. at 508.

416

H.R. REP. NO.104-506, at 37–38 (1996).

417

Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 703(a), 110 Stat. 1452,

1464 (1996).

418

I.R.C. § 7430(b)(1); Treas. Reg. § 301.7430-1(b)(4).

419

I.R.C. § 7430(c)(4)(A).

512 The United States Tax Court – An Historical Analysis

considered a prevailing party, the taxpayer must substantially prevail with

respect to the amount in controversy or must substantially prevail with

respect to the most significant issue or set of issues presented.

420

In 1998,

Congress supplied an alternate route for a taxpayer to be considered a

prevailing party—generally, if the taxpayer’s liability turns out to be equal to

or less than the amount provided in a “qualified offer” presented to and

rejected by the Government.

421

Under either approach, the taxpayer must

file a timely motion for the award of costs and must satisfy certain financial

eligibility requirements designed to limit the remedy to those lacking

sufficient financial resources.

422

While these conditions relate to the

taxpayer, the Government, through the manner in which it prosecutes the

proceeding, can prevent the taxpayer from being considered a prevailing

party for purposes of the statute. If the Government establishes that its

position in the proceeding was “substantially justified,” the taxpayer will not

be considered a prevailing party for purposes of the statute.

423

If the taxpayer requests reimbursement of costs under § 7430 in

connection with the trial of the underlying tax issue, the court determines

whether the taxpayer constitutes a prevailing party under the statute.

424

However, this determination will be made by the Service if the final

determination with respect to the underlying liability for tax, interest, or

penalty is made at the administrative level.

425

The determination made by

the Service in the latter scenario is subject to Tax Court review.

426

(1) Taxpayer Substantially Prevails

Generally, Congress intended that the decision on the amount in

controversy be determinative as to whether a party has substantially

prevailed in the proceeding.

427

To substantially prevail as to the amount in

controversy, the taxpayer must establish that the deficiency is substantially

less than the amount originally proposed, with no precise percentage

420

I.R.C. § 7430(c)(4)(A)(i); Treas. Reg. § 301.7430-5(a); see also H.R. REP. NO.

97-404, at 15 (1981).

421

I.R.C. § 7430(c)(4)(E). This provision was enacted as part of the Internal

Revenue Service Restructuring and Reform Act of 1998. See Pub. L. No. 105-206,

§ 3101(e)(1), 112 Stat. 685, 728–29 (1998).

422

I.R.C. § 7430(c)(4)(A)(ii) (incorporating filing requirements and net worth

requirements of 28 U.S.C. § 2412(d)(1)(B) and (d)(2)(B), respectively).

423

I.R.C. § 7430(c)(4)(B).

424

I.R.C. § 7430(c)(4)(C)(ii).

425

I.R.C. § 7430(c)(4)(C)(i).

426

I.R.C. § 7430(f)(2).

427

H.R. REP. NO. 97-404, at 15 (1981).

Prominence in Judicial Review of Taxpayer Rights 513

governing this determination.

428

In Andrews v. Commissioner,

429

the court

addressed an apparent close case based on the reduction in asserted

deficiency alone—the Service had determined a deficiency of $13,214.49

and the parties entered into a stipulated decision in the amount of

$7,737.42. The court’s resolution of the case demonstrates that the

underlying dollar amounts cannot be divorced from the issues presented in

the proceeding. The court in Andrews held that the petitioners were clearly

not the prevailing party with respect to the amount in controversy because

even though the petitioners had succeeded in reducing the amount of

income for employer-provided housing, the Service prevailed on the more

important issue of whether those amounts constituted additional income.

430

Congress recognized that a single case often involves several unrelated

issues and that the most significant issue may involve a lesser dollar

amount.

431

Thus, § 7430 provides that a party can also qualify as a

prevailing party if he prevails on the most significant issue or set of issues

presented.

432

An issue or set of issues that concerns a lesser dollar amount

in the proceeding nonetheless may represent the most significant issue or

set of issues if it objectively is viewed as such by the taxpayer or the Service.

This could be the case when the issue or set of issues has significant

implications for the taxpayer in other tax years or on other transactions, or

if the issue or set of issues has a significant effect on related parties.

433

(2) Government’s Position Not Substantially Justified

As originally enacted, § 7430 permitted reimbursement of the taxpayer’s

litigation expenses only if the Government’s position in the civil proceeding

428

See Dixson Int’l Serv. Corp. v. Commissioner, 94 T.C. 708 (1990) (taxpayer

substantially prevailed when asserted deficiencies reduced from $850,000 to

$15,000); Cassuto v. Commissioner, 93 T.C. 256 (1989) (taxpayers substantially

prevailed when asserted deficiencies of $49,000 were settled for $4,600); Hall v.

Commissioner, T.C. Memo. 1989-187, 57 T.C.M. (CCH) 232 (taxpayers

substantially prevailed when final settlement represented 17 percent of asserted

deficiency). But see Bragg v. Commissioner, 102 T.C. 715 (1994) (taxpayers did not

substantially prevail when court upheld more than 70 percent of asserted

deficiency).

429

T.C. Memo. 1985-559, 50 T.C.M. (CCH) 1404.

430

Id. at 1405–06.

431

H.R. REP. NO. 97-404, at 15 (1981).

432

I.R.C. § 7430(c)(4)(A)(i)(II) (added by TEFRA, Pub. L. No. 97-248,

§ 292(a), 96 Stat. 324, 572–74 (1982), and amended by Tax Reform Act of 1986,

Pub. L. No. 99-514, § 1551(d)(1), 100 Stat. 2085, 2752).

433

See McCauley v. Commissioner, T.C. Memo. 2014-44 (citing Treas. Reg.

§ 301.7430-5(e)).

514 The United States Tax Court – An Historical Analysis

was “unreasonable.”

434

Whether the Government’s position violated this

standard of reasonableness was to be made “based upon all the facts and

circumstances surrounding the proceeding,”

435

and the taxpayer carried the

burden of proof on this issue.

436

If the taxpayer failed to carry this burden,

he was not considered a prevailing party for purposes of the statute.

In connection with the Tax Reform Act of 1986,

437

Congress amended

§ 7430 by changing the requisite standard concerning the Government’s

position in the proceeding. Instead of the Government’s position being

“unreasonable,” Congress adopted the standard of “not substantially

justified.”

438

The amendment resulted in conforming § 7430 more closely

to the standard for recovery in other civil actions involving the

Government. This change in phrasing, however, did not effect a

considerable change in substance.

In determining whether the position of the Service was unreasonable

under TEFRA, the Tax Court looked to cases under EAJA, which requires

that the Government’s position be “substantially justified” if it is to avoid

the payment of attorney’s fees and other litigation costs in cases in which it

does not prevail.

439

Some courts in EAJA litigation have considered the

tests of “reasonableness” and “substantial justification” to be the same.

440

Others, however, have held that the language “substantially justified”

434

I.R.C. § 7430(c)(2)(A)(i), as enacted by TEFRA, Pub. L. No. 97-248,

§ 292(a), 96 Stat. 324, 572–74 (1982); see also H.R. R

EP. NO. 97-404, at 12 (1981)

(describing the “unreasonable” standard as adopted by TEFRA). For a thorough

discussion of the “unreasonable” standard under § 7430 as originally enacted and

the interpretation of this standard by courts, see Harold Dubroff & Charles M.

Greene, Recent Developments in the Business and Procedures of the United States Tax Court;

Part Three: Reimbursement of Taxpayer Litigation Costs, 52 A

LB. L. REV. 87, 98–101

(1987).

435

Baker v. Commissioner, 83 T.C. 822, 828 (1984).

436

I.R.C. § 7430(c)(2)(A)(i), as enacted by TEFRA, Pub. L. No. 97-248,

§ 292(a), 96 Stat. 324, 572–74 (1982); see also Frisch v. Commissioner, 87 T.C. 838,

840 (1986); DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

437

Pub. L. No. 99-514, 100 Stat. 2085 (1986).

438

Id. § 1551(d)(1), 100 Stat. 2752. However, as discussed in Section E.2.b.(3)

below, the burden of proof remained on the taxpayer to establish that the

Government’s position was not substantially justified.

439

See Rutana v. Commissioner, 88 T.C. 1329, 1333 (1987); Don Casey Co. v.

Commissioner, 87 T.C. 847, 858–60 (1986); Baker v. Commissioner, 83 T.C. 822,

828 (1984), vacated on other grounds, 787 F.2d 637 (D.C. Cir. 1986).

440

See Ashburn v. United States, 740 F.2d 843, 850 (11th Cir. 1984); Foster v.

Tourtellotte, 704 F.2d 1109, 1111–12 (9th Cir. 1983); S & H Riggers & Erectors,

Inc. v. O.S.H.R.C., 672 F.2d 426, 430 (5th Cir. 1982).

Prominence in Judicial Review of Taxpayer Rights 515

provides for a somewhat more liberal standard of recovery than would be

required by an ordinary reasonableness standard.

441

Although, recognizing “possible differences” between the “substantially

justified” and “reasonableness” standards, the Tax Court has approved a

formulation barring recovery of costs under either standard if the

Government’s “case had a reasonable basis both in law and fact.”

442

The

“substantially justified” standard does not require that the Government’s

case be based on a “substantial probability of prevailing.”

443

Moreover, the

Tax Court has stated that “[b]ecause the ‘substantially justified’ standard is

not a departure from the ‘reasonableness standard,’” the TEFRA legislative

history remains an important source “for guidelines in evaluating

respondent’s position.”

444

Reflecting the relevance of reasonableness to the inquiry concerning

whether the Government’s position is substantially justified, the Tax Court

has recently articulated the following standard for evaluating the Service’s

position: “The Commissioner’s position is substantially justified if it has a

reasonable basis in both fact and law and is justified to a degree that could

441

See Spencer v. N.L.R.B., 712 F.2d 539, 558–59 (D.C. Cir. 1983); American

Academy of Pediatrics v. Heckler, 580 F. Supp. 436, 438 (D.D.C.), vacated in part,

594 F. Supp. 69 (D.D.C. 1984). The Spencer court considered the test under a

“substantially justified” standard to be more liberal for recovery, in part, because

under the Equal Access to Justice Act the language “reasonably justified” was

rejected in favor of “substantially justified.” See Spencer, 712 F.2d at 558.

442

Don Casey Co. v. Commissioner, 87 T.C. 847, 859–60 (1986) (quoting H.R.

REP. NO. 96-1418, at 11 (1980)); see also Cox v. Commissioner, 121 F.3d 390, 393

(8th Cir. 1997) (adopting the same standard); Barton v. United States, 988 F.3d 58,

59 (8th Cir. 1993) (same).

443

Don Casey Co., 87 T.C. at 859–60 (quoting H.R. REP. NO. 96-1418, at 11

(1980)).

444

Sher v. Commissioner, 89 T.C. 79, 84 (1987), aff’d, 861 F.2d 131 (5th Cir.

1988); Hubbard v. Commissioner, 89 T.C. 792, 798 (1987). The House report on

§ 7430, as originally enacted, provided as follows:

The Committee intends that the determination by the court on this issue is

to be made on the basis of the facts and legal precedents relating to the case

as revealed in the record. Other factors the committee believes might be

taken into account in making this determination include, (1) whether the

government used the costs and expenses of litigation against its position to

extract concessions from the taxpayer that were not justified under the

circumstances of the case, (2) whether the government pursued the

litigation against the taxpayer for purposes of harassment or

embarrassment, or out of political motivation, and (3) such other factors as

the court finds relevant.

H.R. R

EP. NO. 97-404, at 12 (1981) (quoted in Sher, 89 T.C. at 84–85).

516 The United States Tax Court – An Historical Analysis

satisfy a reasonable person.”

445

This determination is made in light of the

available facts and controlling law that formed the basis of the

Government’s position. Hence, the Government’s position, although

reasonable when established, may become unreasonable when additional

facts and changed circumstances arise.

446

Additionally, where the

determination of the Service concerns an exercise of discretion (such as

whether the taxpayer’s method of accounting clearly reflects income), a

finding that the Service abused its discretion does not necessarily mean that

the Service’s position was not substantially justified.

447

Lastly, the Service

generally is not subject to an award of costs under § 7430 where the

underlying issue represents one of first impression.

448

Prior to 1998, the Government remained “free by law to relitigate prior

lost issues in other circuits.”

449

Concerned that the freedom to continue

litigating issues previously resolved in favor of the taxpayer by other circuit

courts of appeals placed an undue burden on taxpayers who were required

to continue resisting the Government’s position,

450

Congress acted to

disincentivize this practice in 1998.

451

The statute now requires a reviewing

court to take into account whether the Government has lost in courts of

appeal for other circuits on “substantially similar issues” in evaluating

whether the Government’s position is substantially justified.

452

As originally enacted by TEFRA, § 7430 did not specify the point at

which the “position of the United States” to be evaluated under the statute

took shape. Specifically, did the position of the Government include the

position it took in administrative proceedings before commencement of the

case, or was judicial consideration of the Government’s position under

§ 7430 limited to the posture assumed during the litigation?

453

In Baker v.

Commissioner,

454

the court relied on the specific language of the statute to

support its conclusion that a taxpayer could not base recovery under § 7430

445

Dalton v. Commissioner, T.C. Memo. 2011-136, 101 T.C.M. (CCH) 1653,

1656; see also Hubbard, 89 T.C. at 798 (explaining the “substantially justified” inquiry

to be “essentially a test of reasonableness”).

446

See Lippitz v. Commissioner, T.C. Memo. 2007-293, 94 T.C.M. (CCH) 330.

447

See Mid-Del Therapeutic Center, Inc. v. Commissioner, T.C. Memo. 2000-

383, 80 T.C.M. (CCH) 894.

448

See Estate of Wall v. Commissioner, 102 T.C. 391 (1994).

449

Allbritton v. Commissioner, 37 F.3d 183, 185 (5th Cir. 1994).

450

S. REP. NO. 104-174, at 48 (1998).

451

See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

No. 105-206, § 3101(d), 112 Stat. 685, 728 (1998).

452

I.R.C. § 7430(c)(4)(B)(iii).

453

For a thorough discussion of this former issue, see Dubroff & Greene, supra

note 434, at 106–13.

454

83 T.C. 822 (1984), vacated on other grounds, 787 F.2d 637 (D.C. Cir. 1986).

Prominence in Judicial Review of Taxpayer Rights 517

on an unreasonable administrative position taken by the Service.

455

At the

time, the statute required that the “position of the United States in the civil

proceeding” be unreasonable for the costs and fees of a prevailing taxpayer to

be shifted to the Service.

456

According to Baker, “Congress clearly

distinguished a civil proceeding from an administrative proceeding by

including the requirement of exhaustion of administrative remedies in

section 7430(b)(2) before an award may be made of costs incurred in the

subsequent civil proceeding.”

457

Congress rejected the approach taken by the Tax Court in Baker by

amending § 7430 as part of the Tax Reform Act of 1986 to permit a

taxpayer to recover litigation costs incurred because of an unreasonable

position taken by the Service during certain administrative stages of the

dispute.

458

In its current form, the statute provides that the “position of the

United States” for purposes of § 7430 includes the position taken by the

Government in a judicial proceeding and the position taken by the

Government in any administrative proceeding.

459

However, the position in

the latter context is to be determined as of the earlier of the issuance of a

notice of decision from the IRS Office of Appeals, or the date of the notice

of deficiency.

460

Hence, not all conduct at the administrative level will serve

455

Baker, 83 T.C. at 827; see Wasie v. Commissioner, 86 T.C. 962, 967 (1986)

(holding that costs awarded under section 7430 are . . . measured by looking at the

reasonableness of respondent’s position from the time of the filing of a petition”).

456

Baker, 83 T.C. at 826; (quoting I.R.C. § 7430) (emphasis added by court).

457

Id. at 827 (emphasis added by court).

458

Pub. L. No. 99-514, § 1551(e), 100 Stat. 2085, 2753 (1986). Section

7430(c)(4) as amended in 1986 provided that the term “position of the United

States” includes “any administrative action or inaction by the District Counsel of

the Internal Revenue Service (and all subsequent administrative action or inaction)

upon which [the civil] proceeding is based.” I.R.C. § 7430(c)(4)(B) (1986).

The Tax Court opposed the amendment because of its concern that the already

overcrowded Tax Court docket would be further burdened. Letter from Chief

Judge Sterrett to Ronald Pearlman, Assistant Treasury Secretary for Tax Policy

(Oct. 9, 1985) (filed at U.S. Tax Court in Rules Committee: Litigation Costs). Chief

Judge Sterrett argued that allowing the taxpayer to recover costs traceable to

administrative proceedings would require the court to “go behind the statutory

notice,” and determine whether the Service had acted unreasonably when it first

decided against the taxpayer. Id. The Tax Court had refused to inquire into the

Service’s actions prior to the filing of the petition and, according to Chief Judge

Sterrett, requiring it to do so would “reverse the existing law of our Court which

tries all cases before it as a de novo proceeding. Id.

459

I.R.C. § 7430(c)(7). The court may consider the administrative and litigating

positions of the Government together if the Commissioner maintains the same

position throughout both stages of the proceedings. Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 442 (1997).

460

I.R.C. § 7430(c)(7)(B).

518 The United States Tax Court – An Historical Analysis

as grounds for a § 7430 award of costs. Hence, positions taken by the

Service at the examination phase and when the matter is before the IRS

Office of Appeals (prior to the issuance of a notice of decision) remain

outside of the scope of the statute.

(3) Burden of Proof

As originally enacted, § 7430 placed the burden on the taxpayer to

establish that it was the prevailing party, i.e., that it had substantially

prevailed in regard to the amount in controversy or a significant issue and

that the position of the Government was unreasonable.

461

Some

commentators questioned placing the burden of proof on the taxpayer

since the benefit of the provision would thus tend to be limited to cases in

which the Service exhibited “egregious misconduct or bad faith.”

462

addition, such a standard was more stringent than that applicable in other

civil actions involving the Government. Under EAJA, the burden rests on

the Government to show that its position was substantially justified if it is

to avoid the payment of costs and fees in cases in which it does not

prevail.

463

Arguably, it would not be difficult for the Service to justify a

position it has legitimately taken, because it has readily available the tax

returns, audit reports, and other information on which its position was

based.

464

Taxpayers, however, might be forced to resort to lengthy and

expensive discovery procedures to obtain information demonstrating that

the position of the Service was unjustified. Imposing the burden of proof

would needlessly and inappropriately hinder efforts to obtain justifiable

litigation awards.

461

I.R.C. § 7430(c)(2)(A)(i), as enacted by TEFRA, Pub. L. No. 97-248,

§ 292(a), 96 Stat. 324, 572–74 (1982); see also Frisch v. Commissioner, 87 T.C. 838,

840 (1986); DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

462

I. Paul Mandelken, Recovering Attorney’s Fees in Tax Court Cases after TEFRA,

57 F

LA. B.J. 707, 710 (1983); see Louise L. Hill, Attorneys’ Fees Under the Tax Equity

and Fiscal Responsibility Act of 1982

A Reevaluation, 29 TAX NOTES 203, 204–05

(1985).

463

H.R. REP. NO. 96-1418, at 10. However, EAJA also makes the “bad faith”

exception to the “American rule” statutory, see Pub. L. No. 96-481, § 204(a), 94

Stat. 2321, 2328 (1982) (now codified at 28 U.S.C. § 2412(c)(2)), and the party

seeking recovery of litigation costs bears the burden of proof on the issue of bad

faith. See Mary Ann Link, Award of Attorney Fees in Tax Litigation, 19 V

AL. U. L.

REV. 153, 172 (1985). Thus, parties seeking attorneys’ fees under EAJA usually

allege that the position of the Government was not substantially justified, rather

than alleging bad faith. Id. at 172–73.

464

The Government has taken the opposite position arguing that important tax

records are often in the hands of the taxpayer. See House Hearings, supra note 405,

at 29 (statement of Glen L. Archer, Jr., Asst. Attorney General, Tax Division, Dep’t

of Justice).

Prominence in Judicial Review of Taxpayer Rights 519

The Service and the Tax Court, however, were concerned that

transferring the burden of proof from the taxpayer would interfere with the

orderly operation of tax litigation.

465

First, because the matter at issue is

usually a taxpayer’s private financial transaction, the taxpayer has ready

access to the facts that can illuminate and lead to the resolution of the

questions surrounding the transaction.

466

Second, the Service and Tax

Court expressed concern that placing the burden of justifying its position

on the Service would tend to reduce taxpayer willingness to stipulate and

settle cases; the greater likelihood of recovery that would result from a

shifting of the burden of proof to the Service could prove to be a lure to

taxpayers that might discourage pre-trial settlements and increase the

burden on the court.

467

Despite Senate proposals to allocate the burden of

proof to the Service,

468

Congress retained pre-existing law imposing the

burden on the taxpayer through the Tax Reform Act of 1986.

Congress revisited the matter in 1996. Believing that it was appropriate

for the Service to demonstrate that it was substantially justified in

maintaining its position when the taxpayer substantially prevails,

469

Congress shifted the burden of proof on this issue to the Government.

470

Congress further believed that the Service should be required to follow

published guidance and private guidance provided to taxpayers.

471

Accordingly, in addition to shifting to the Government the burden of

proving that its position was substantially justified, Congress created a

rebuttable presumption that the Government’s position lacked substantial

justification if it did not adhere to published guidance provided to the

public (including regulations, revenue rulings, revenue procedures,

information releases, notices, and announcements) or private guidance

465

See House Hearings, supra note 405, at 14–15 (statement of Roscoe L.

Egger, Jr., Commissioner, Internal Revenue Service); see also Letter from Chief

Judge Sterrett to Ronald Pearlman, Assistant Treasury Secretary for Tax Policy

(Oct. 9, 1985) (filed at U.S. Tax Court in “Rules Committee: Litigation Costs”).

466

See supra note 464.

467

See id. If the taxpayer establishes facts supporting allegations that the

Government has acted arbitrarily and capriciously, the burden will shift to the

Government to prove its case. See House Hearings, supra note 405, at 10

(statement of Chief Judge Sterrett).

468

H.R. 3838, 99th Cong., 2d Sess., § 541(b), 132 CONG. REC. S8817, S8850

(daily ed. June 26, 1986) (subsequently deleted in conference); S. R

EP. NO. 313,

99th Cong., 2d Sess. 198–99 (1986) (reporting on Senate Finance Committee

proposed amendments to section 541 of H.R. 3838, subsequently enacted as the

Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085).

469

H.R. REP. NO. 104-506, at 37–38 (1996).

470

Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 701(b), 110 Stat. 1463–64

(1996) (enacting I.R.C. § 7430(c)(4)(B)(i)).

471

H.R. REP. NO. 104-506, at 37–38 (1996).

520 The United States Tax Court – An Historical Analysis

(including private letter rulings, technical advice memoranda, and

determination letters) issued to the taxpayer seeking § 7430 relief.

472

(4) Qualification as Prevailing Party Through Qualified Offer

Believing that settlement of tax cases should be encouraged whenever

possible, Congress looked to Rule 68 of the Federal Rules of Civil

Procedure to craft an incentive for the Service to settle cases for

appropriate amounts.

473

This exercise led Congress to enact the qualified

offer provisions of § 7430 as part of the Internal Revenue Service

Restructuring and Reform Act of 1998.

474

These provisions supply an

alternate, less precarious route by which taxpayers may qualify as a

prevailing party entitled to relief under the statute. In this context, whether

the taxpayer substantially prevailed in the proceeding and whether the

Service’s position was substantially justified are immaterial.

Pursuant to § 7430(c)(4)(E), if a taxpayer makes a “qualified offer” to

the Service to settle the tax dispute which the Service rejects, the taxpayer

will be treated as a prevailing party if the Service later obtains a judgment

equal to or less than the tax liability specified in the offer (disregarding

interest).

475

A “qualified offer” is defined in § 7430(g) as a written offer to

the United States made during a defined period beginning on the date the

Service issues the first letter of proposed deficiency that permits the

taxpayer to seek a conference before the IRS Office of Appeals and ending

on the date 30 days in advance of the date the taxpayer’s case is first set for

trial.

476

The offer must specify the amount of the taxpayer’s liability

(determined without regard to interest). To put the Service on notice of the

potential implications, the offer must be designated as a “qualified offer”

under § 7430 at the time the offer is made. Finally, in order to give the

Service sufficient time to evaluate the offer, the offer must remain

outstanding for 90 days after the offer was made or until the date the trial in

the case commences, whichever occurs first.

477

472

Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 701(b), 110 Stat. 1463–64

(1996) (enacting I.R.C. § 7430(c)(4)(B)(ii)).

473

See S. REP. NO. 105-174, at 48 (1998).

474

Pub. L. No. 105-206, § 3101(e), 112 Stat. 685, 728–29 (1998).

475

A judgment for this purpose does not any judgment issued pursuant to a

settlement, or a judgment issued in any proceeding in which the amount of tax

liability is not at issue (such as a declaratory judgment action). I.R.C.

§ 7430(c)(4)(E)(ii). A taxpayer’s subsequent settlement of the case therefor

precludes recovery of administrative or litigation costs pursuant to the qualified

offer provisions of § 7430.

476

I.R.C. § 7430(g)(2).

477

I.R.C. § 7430(g)(1)(D). The Service’s rejection of the offer operates to close

the period the qualified offer must remain open. Id. Accordingly, nothing in the

Prominence in Judicial Review of Taxpayer Rights 521

To the extent the qualified offer provisions of § 7430 offer taxpayers a

streamlined means of recovering administrative and litigation costs, the

streamlined procedure comes at a cost. In this context, recoverable

administrative and litigation expenses are limited to those incurred on or

after the date of the qualified offer.

478

This limitation encourages taxpayers

to make qualified offers as early as possible in the proceeding, in keeping

with the legislative goal of encouraging settlement of these cases.

c. Protraction of Proceedings

An award of reasonable administrative or litigation costs under § 7430

to which the taxpayer otherwise would be entitled is precluded to the extent

attributable to any period during which the taxpayer “unreasonably

protracted” the proceeding.

479

The taxpayer bears the burden of proving

the absence of unreasonable protraction.

480

As a practical matter, this

means that the taxpayer must include a statement in the motion for costs

that the taxpayer did not unreasonably protract the proceedings,

481

and then

defend against any such contention by the Service.

d. Financial Requirements

In contrast to EAJA,

482

§ 7430 as enacted by TEFRA did not base a

party’s eligibility for an attorney’s fee award on net worth. Rather, TEFRA

qualified offer provisions entitles to Service to later accept a qualified offer that it

previously rejected.

478

I.R.C. § 7430(c)(4)(E)(iii)(II).

479

I.R.C. § 7430(b)(3); see also Mearkle v. Commissioner, 90 T.C. 1256 (1988)

(finding that taxpayer unreasonably protracted proceedings by refusing to accept

full concession by the Service four months before trial); Nordvick v.

Commissioner, 67 F.3d 1489, 1494 (9th Cir. 1995) (upholding determination that

taxpayers unreasonably protracted proceedings by failing to promptly review the

Service’s calculations of their tax liability upon receipt after judgment). But see

Mason v. Commissioner, T.C. Memo. 1998-400, 76 T.C.M. (CCH) 805 (holding

that failure to sign proposed settlement document due to failure to reach agreement

over litigation costs did not constitute unreasonable protraction of proceedings).

480

See Swanson v. Commissioner, 106 T.C. 76, 85 (1996); TAX CT. R. 232(e)

(July 6, 2012 ed.).

481

See TAX CT. R. 231(b)(6) (July 6, 2012 ed.).

482

As enacted, EAJA provided:

(B) “party” means (i) an individual whose net worth did not exceed

$1,000,000 at the time the civil action was filed, (ii) a sole owner of an

unincorporated business, or a partnership, corporation, association, or

organization whose net worth did not exceed $5,000,000 at the time the

civil action was filed, except that an organization described in section

501(c)(3) of the Internal Revenue Code of 1954 exempt from taxation

522 The United States Tax Court – An Historical Analysis

limited the amount recoverable under § 7430 to $25,000,

483

presumably

providing a disincentive for wealthy persons to pursue litigation with the

Government in the hopes of winning a litigation award. Apparently,

Congress declined to include the economic eligibility requirements of EAJA

in the TEFRA provisions because of the apprehension that such a

requirement might create factual disputes which would further burden the

courts.

484

As part of the Tax Reform Act of 1986, Congress revised § 7430 by

eliminating the cap on reimbursable costs; in its place, Congress based the

eligibility of parties for an award of costs under § 7430 on their net

worth.

485

This amendment sought to further congressional policy of

conforming the standards for recovery of attorney’s fees in tax and non-tax

cases.

486

Under current levels, an award of costs under § 7430 generally is

not available to individuals whose net worth exceeds $2 million or to

businesses or organizations whose net worth exceeds $7 million and which

have more than 500 employees at the time the action was commenced.

487

taxpayer must supply proof of net worth when making a request for

reimbursement of costs under § 7430,

488

and the failure to do so can cause

the request to be denied.

489

The net worth limitations under § 7430 created confusion concerning

their application to estates of deceased taxpayers

490

and to individuals who

filed joint returns.

491

Seeking to clarify the application of the net worth

under section 501(a) of the Code and a cooperative association as defined in

section 15(a) of the Agricultural Marketing Act, may be a party regardless of

the net worth of such organization or cooperative association, or (iii) a sole

owner of an unincorporated business, or a partnership, corporation,

association, or organization, having not more than 500 employees at the

time the civil action was filed . . . .

Pub. L. No. 96-481, § 204, 94 Stat. 2321, 2329 (1980) (amended 1985).

483

I.R.C. § 7430(b)(1) (1982).

484

House Hearings, supra note 405, at 33 (statement of Glen L. Archer, Jr.,

Asst. Attorney General, Tax Division, Dep’t of Justice).

485

Pub L. No. 99-514, § 1551(a), 100 Stat. 2085, 2752 (1986).

486

STAFF OF THE JOINT COMM. ON TAX’N, GENERAL EXPLANATION OF THE

TAX REFORM ACT OF 1986, at 1298–99 (Comm. Print 1987).

487

See I.R.C. § 7430(c)(4)(A)(ii) (incorporating net worth requirements of 28

U.S.C. § 2412(d)(2)(B)). Organizations that are tax exempt pursuant to § 501(c)(3)

are exempted from the net worth limitation. 28 U.S.C. § 2412(d)(2)(B).

488

See TAX CT. R. 231(b)(4).

489

See Dixson Int’l Serv. Corp. v. Commissioner, 94 T.C. 708 (1990).

490

See, e.g., Boatman’s First Nat’l Bank v United States, 723 F. Supp. 163, 169

(W.D. Mo. 1989) (finding the $7 million limit applicable to organizations governed

the estate’s qualification for a § 7430 award).

491

See, e.g., Hong v. Commissioner, 100 T.C. 88 (1993) (applying the $2 million

limitation separately to each spouse).

Prominence in Judicial Review of Taxpayer Rights 523

requirements of § 7430 so as to avoid “needless litigation over procedural

issues,”

492

Congress enacted § 7430(c)(4)(D) as part of the Taxpayer Relief

Act of 1997.

493

This provision clarifies that an estate of a deceased

individual must satisfy the $2 million net worth limitation as of the date of

the decedent’s death.

494

A trust also must satisfy the $2 million net worth

limitation, as determined on the last day of the taxable year involved in the

proceeding.

495

With respect to spouses filing joint returns, the amending

legislation clarified that the $2 million limitation would be applied separately

to each spouse.

496

Accordingly, if one spouse possesses a net worth in

excess of $2 million but the other does not, an award of costs under § 7430

will be available for the qualifying spouse only. The 1997 legislation did not

address the application of the net worth and size limitations under § 7430 to

partnership actions brought under the TEFRA unified audit and litigation

procedures,

497

and confusion persists as to whether the net worth

limitations should be applied at the entity or partner level.

498

e. Reimbursable Costs

(1) Reasonable Litigation Costs

In its original form, § 7430 limited a taxpayer’s recovery to “reasonable

litigation costs.” Reimbursable litigation costs include the following: court

fees; attorneys’ fees; expenses of expert witnesses; and the costs of any

study, analysis, engineering report, test, or project necessary to preparation

of the taxpayer’s case.

499

Perhaps the most significant of these litigation costs is attorneys’ fees.

This category encompasses not only the rates charged by licensed attorneys

representing the taxpayer, but also expenses attributable to paralegals and

law clerks.

500

The fees charged by non-attorney representatives authorized

to practice before the Tax Court also are recoverable under this category.

501

The statutory rate for recoverable attorney’s fees is set at $125 per hour, as

492

H.R. REP. NO. 105-148, at 638–39 (1993).

493

Pub. L. No. 105-34, § 1453(a), 111 Stat. 788, 1055 (1997).

494

I.R.C. § 7430(c)(4)(D)(i)(I).

495

I.R.C. § 7430(c)(4)(D)(i)(II).

496

I.R.C. § 7430(c)(4)(D)(ii).

497

See I.R.C. §§ 6226, 6228.

498

See Foothill Ranch Co. Partnership v. Commission, 110 T.C. 94 (1998)

(reasoning that the net worth limitations were to be applied at the partner level in

this context).

499

I.R.C. § 7430(c))(1).

500

See O’Bryon v. Commissioner, T.C. Memo. 2000-379, 80 T.C.M. (CCH)

859.

501

I.R.C. § 7430(c)(3)(A).

524 The United States Tax Court – An Historical Analysis

adjusted for increases in the cost of living from 1995.

502

As of 2013, the

inflation-adjusted hourly rate stood at $190.

503

The showing of a special factor by the taxpayer may serve to increase

the rate for fees of a representative.

504

The limit on recoverable fees does

not apply to a representative who qualifies as a “specially qualified

representative” under the regulations.

505

A specially qualified representative

is narrowly defined as a representative possessing distinctive knowledge or a

unique and specialized skill that is necessary for adequate representation of

the taxpayer in the proceeding.

506

The regulations clarify that knowledge of

tax law and experience representing taxpayers before the Service do not

constitute distinctive knowledge or a specialized skill set in this setting,

while citing knowledge of patent law or international law as two examples

of distinctive knowledge or skill sets that do qualify.

507

For costs incurred before January 18, 1999, only one special factor was

included in the statutory language of § 7430: the limited availability of

qualified attorneys for the proceeding.

508

In 1998, Congress added two

considerations that it believed justified the payment of higher hourly rates

when determining reasonable costs: the difficulty of the issues presented in

the case or the limited local availability of tax expertise.

509

To avail the

special factor adjustment, a taxpayer must show that no specially qualified

representative was available at the statutory rate. The taxpayer may do so

by submitting an affidavit by the taxpayer or the taxpayer’s counsel that a

specially qualified representative who practices within a reasonable distance

from the taxpayer’s principal residence or office would normally charge a

client similar to the taxpayer at a rate higher than the statutorily prescribed

amount.

510

Believing that the value of legal services rendered in pro bono

representation of taxpayers should be recognized and that pro bono

representation should be encouraged, and, further, that the Service should

not be relieved of its obligation to bear reasonable administrative and

litigation costs because representation was provided to the taxpayer on a

502

I.R.C. § 7430(c)(1)(B)(iii), (c)(1)(B) (flush language).

503

Rev. Proc. 2012-41, § 3.25, 2012-45 I.R.B. 539.

504

I.R.C. § 7430(c)(1)(B)(iii).

505

See Treas. Reg. § 301.7430-4(b)(2)(ii).

506

Treas. Reg. § 301.7430-4(b)(2)(ii).

507

Id.; see also Estate of Cervin v. Commissioner, 200 F.3d 351 (5th Cir. 2000)

(special factor justifying increased hourly rate requires nonlegal or technical

abilities).

508

See, e.g., Pierce v. Underwood, 487 U.S. 552 (1988).

509

Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

No. 105-206 § 3101(a)(2), 112 Stat. at 727–28 (1998) (amending I.R.C.

§ 7430(c)(1)(B)(iii)); see also H.R.

REP. NO. 105-364, at 58 (1997).

510

Treas. Reg. § 301.7430-4(b)(3)(iii)(C).

Prominence in Judicial Review of Taxpayer Rights 525

pro bono basis,

511

Congress expanded the scope of reimbursable costs

under § 7430 into the pro bono arena.

512

Pursuant to § 7430(c)(3)(B), a

court may award reasonable attorney’s fees in excess of fees paid or

incurred if the fees are less than the reasonable attorney’s fees because an

individual is representing the prevailing party for no fee or a nominal fee.

513

The exception for pro bono representation does not extend to attorneys

who represent themselves in tax proceedings; the opportunity cost of the

taxpayer-attorney’s services remains unrecoverable.

514

(2) Reasonable Administrative Costs

Passage of TAMRA in 1988 expanded the scope of expenses subject to

a § 7430 award to include reasonable administrative costs.

515

In addition to

administrative fees or similar charges imposed by the Service, the scope of

reimbursable administrative expenses encompasses the same scope of

professional fees (attorneys’ fees, expert witness fees, etc.) that are capable

of being reimbursed in the litigation setting, and the reasonableness of such

administrative costs are determined in the same manner as that of litigation

costs.

516

The scope of reimbursable administrative costs is limited to those

incurred on or after the earliest of (1) the date the taxpayer receives the

notice of decision from the IRS Office of Appeals, (2) the date of the

notice of deficiency, or (3) the date the Service sends the first letter of

proposed deficiency that allows the taxpayer an opportunity to seek a

conference with the IRS Office of Appeals (the 30-day letter).

517

For

purposes of determining whether the Service’s position in the

511

H.R. REP. NO. 105-364, at 58 (1997).

512

Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L.

No. 105-206, § 3101(c), 112 Stat. at 728 (1998).

513

Any award pursuant to this exception must be paid to the individual who

rendered the services or such individual’s employer. I.R.C. § 7430(c)(3)(B).

514

Frisch v. Commissioner, 8 T.C. 838 (1986).

515

Pub. L. No. 100-647, § 6239, 102 Stat. 3743–46 (1988) (enacting I.R.C.

§ 7430(c)(2)).

516

I.R.C. § 7430(c)(2)(B); see also H.R. REP. NO. 100-1104, at 225 (1988).

517

I.R.C. § 7430(c)(2). The Internal Revenue Service Restructuring and

Reform Act of 1998 added the third option (30-day letter) for costs incurred more

than 180 days after July 22, 1998. Prior to that amendment, administrative costs

could only be reimbursed from the earlier of the date of the notice of deficiency or

the date the taxpayer received a decision from the IRS Office of Appeals. See Estate

of Gillespie v. Commissioner, 103 T.C. 395, 396–98 (1994). The lack of the third

demarcation point had been criticized by practitioners as not truly affording most

taxpayers the opportunity to receive any administrative costs. See Taxation Section

Los Angeles County Bar Association, Legislative Recommendation to Amend the Internal

Revenue Code Section 7430, 89 T

AX NOTES TODAY 127–24 (May 1, 1989).

526 The United States Tax Court – An Historical Analysis

administrative setting was substantially justified, the Service’s position is

established as of the earlier of either the date the taxpayer receives notice of

decision from the IRS Office of Appeals, or the date of the notice of

deficiency.

518

A taxpayer may seek reimbursement for the costs of resolving the

controversy and the costs to seek such reimbursement.

519

To do so, a

taxpayer must submit an application with the Service for administrative

costs within 90 days of the Service’s final decision as to the tax, interest, or

penalty.

520

As discussed below, the Service’s determination in this setting is

subject to Tax Court review.

521

3. Tax Court Jurisdiction

a. Review of Agency Determinations Concerning Administrative

Costs

A taxpayer who seeks reimbursement from the Service of administrative

costs pursuant to § 7430(b)(4) may seek Tax Court review of the resulting

determination § 7430(f)(2). If the Service sends a notice of decision

concerning the request for administrative expenses to the taxpayer by

registered or certified mail, the taxpayer must file a petition for Tax Court

review within 90 days of such mailing.

522

If the Service does not respond to

a taxpayer’s request for administrative costs within six months of its filing,

the Service’s failure to respond is deemed a decision denying such

request.

523

The taxpayer may then petition the Tax Court for review, but is

not subject to the 90-day limitations period for invoking the court’s

jurisdiction.

The court conducts its review generally in accordance with small tax

case procedures of § 7463, except that the monetary limitations imposed by

§ 7463 do not apply.

524

Any decision of the court disposing of a petition

for review of a determination concerning administrative costs is appealable

in the same manner as a decision of the court.

525

Accordingly, unlike small

518

I.R.C. § 7430(c)(7).

519

Maggie Management Co. v. Commissioner, 108 T.C. 430, 440 (1997) (“A

motion for litigation costs may seek an award for certain expenses connected with

the filing and prosecution of the motion . . . .”).

520

I.R.C. § 7430(b)(4).

521

I.R.C. § 7430(f)(2).

522

Id.

523

See Bent v. Commissioner, T.C. Memo. 2009-146, 97 T.C.M. (CCH) 1825

(citing Treas. Reg. § 301.7430-2(c)(6)).

524

I.R.C. § 7430(f)(2); see also TAX Ct. R. 274 (July 6, 2012 ed.).

525

I.R.C. § 7430(f)(3).

Prominence in Judicial Review of Taxpayer Rights 527

tax cases, the decision in a petition for administrative costs will not be

issued as a summary opinion.

526

Relatively few opinions have addressed taxpayer claims for

administrative costs brought pursuant to § 7430(f)(2). And in those cases,

taxpayers have largely proven unsuccessful at pursuing their claims. One

particularly difficult aspect of these claims is that the “position of the

United States” that must be substantially justified does not include the

Service’s position at every stage of the administrative process. Rather, the

position cannot exist prior to the earlier of the date the IRS Office of

Appeals issues a notice of decision or the date the Service issues a notice of

deficiency.

527

The taxpayers in Rathburn v. Commissioner

528

encountered this

problem. The taxpayers never received a notice of deficiency, and the

communication they received from an Appeals Officer did not rise to the

level of a notice of decision contemplated by § 7430. Accordingly, the

Service never took a position in the taxpayers’ case, which in turn precluded

the taxpayers from qualifying as prevailing parties under the statute.

529

b. Motions to Recover Litigation or Administrative Costs in

Docketed Cases

If the Tax Court’s jurisdiction has been invoked in a proceeding

concerning the underlying tax liability, a taxpayer seeking reimbursement of

litigation and administrative costs under § 7430 does so by filing a written

motion with the court.

530

The motion must be filed within 30 days of

service on the parties of either an opinion resolving the substantive issues,

or a transcript of the oral findings of fact and opinion.

531

If the parties have

settled all other issues in the case, but do not agree on an award for

reasonable administrative costs, then a motion for those costs must

accompany the stipulation of settlement.

532

It is important to emphasize that a claim for litigation or administrative

costs under § 7430 “is to be made only after all of the other issues in the

526

See TAX Ct. R. 274 (July 6, 2012 ed.).

527

See I.R.C. § 7430(c)(7).

528

125 T.C. 7 (2005).

529

Id. at 14; see also Florida Country Clubs, Inc. v. Commissioner, 122 T.C. 73

(2004) (similarly holding that the taxpayer was not a prevailing party due to the

failure of the Service to take a § 7430 position in the administrative proceeding);

Kwestel v. Commissioner, T.C. Memo. 2007-135, 93 T.C.M. 1288 (same).

530

See TAX CT. R. 231(b) (July 6, 2012 ed.).

531

TAX CT. R. 231(a)(2)(A), (B) (July 6, 2012 ed.).

532

TAX CT. R. 231(a)(2)(C) (July 6, 2012 ed.). For fully settled cases, including

where the parties agree to the award of reasonable litigation and administrative

costs, the parties include the amount of administrative costs in their stipulated

decision filed with the court. T

AX CT. R. 231(a)(1) (July 6, 2012 ed.).

528 The United States Tax Court – An Historical Analysis

case have been either settled by the parties or determined by the Court.”

533

A claim for litigation or administrative costs which is included in the

petition, or otherwise made before the decision on the merits of the case,

will not be considered.

534

The Tax Court addressed the ripeness of the taxpayer’s claim for

litigation and administrative expenses in McWilliams v. Commissioner.

535

The

Service in that case had made a jeopardy assessment and levy against the

taxpayer while his case was pending before the court. After finding that the

Service failed to prove that the jeopardy assessment and levy was reasonable

and pursuant to taxpayer’s motion under § 7429, the court ordered the

assessment abated and the levy released.

536

The taxpayer filed his motion

for costs under § 7430 within 30 days of the decision concerning the § 7429

matter. However, several other issues related to the deficiency proceeding

remained, none of which had been decided when the taxpayer filed his

motion. The court reasoned that the jeopardy assessment decision was

separate from the deficiency proceeding, and that its order concerning the

jeopardy assessment and levy did not constitute an interlocutory ruling.

537

Consequently, the taxpayer’s motion for costs attributable to the § 7429

proceeding was not premature.

538

Following service of a motion for litigation or administrative costs, the

Commissioner must file a written response within 60 days.

539

After the date

for filing the Commissioner’s response, the Service and the taxpayer are

required to confer and attempt to reach an agreement regarding each of the

allegations by the parties.

540

Nonetheless, once the Commissioner’s

response is received, the court may take action on the motion.

541

Ordinarily, the court will dispose of the motion without a hearing, unless

there appears to exist a “bona fide factual dispute” that cannot be resolved

533

Rules Comm. Note, TAX CT. R. 231, 79 T.C. 1155 (1982); see also Stevenson

v. Commissioner, T.C. Memo. 1986-207, 51 T.C.M. (CCH) 1050, 1061–62 n.14

(rejecting litigation cost claims included in petition); Roth v. Commissioner, T.C.

Memo. 1986-20, 51 T.C.M. (CCH) 287, 289 n.6 (same).

534

Tax Court Rules provide that “[a] claim for reasonable litigation costs shall

not be included in the petition.” T

AX CT. R. 34(b) (July 6, 2012 ed.); see also Failla v.

Commissioner, T.C. Memo. 1986-39, 51 T.C.M. (CCH) 355, 365 (1986) (“In

general, the time for making such claims is after the substantive issues have been

resolved. Should petitioners desire to pursue this matter, they must comply with

Rules 230 and 231.”)

535

104 T.C. 320 (1995).

536

Id. at 321.

537

Id. at 325–26.

538

Id. at 326.

539

TAX CT. R. 232(b) (July 6, 2012 ed.).

540

TAX CT. R. 232(c) (July 6, 2012 ed.).

541

TAX CT. R. 232(a)(1) (July 6, 2012 ed.).

Prominence in Judicial Review of Taxpayer Rights 529

otherwise.

542

The disposition of the motion for litigation costs will be

included in the court’s decision,

543

and an order which grants or denies a

motion for a litigation award is subject to appeal in the same manner as a

decision or judgment.

544

The Tax Court’s jurisdiction to resolve a party’s motion for reasonable

litigation or administrative expenses under § 7430 following the court’s

dismissal of the underlying proceeding for lack of jurisdiction presents an

interesting issue. In the 1986 case of Fuller v. Commissioner,

545

the Tax Court

refused to entertain a motion for an award of litigation costs after dismissal

of a case for lack of jurisdiction due to an invalid statutory notice.

546

The

Seventh Circuit Court of Appeals subsequently adopted a corresponding

view when affirming an order of the Tax Court, holding that the court had

no jurisdiction to hear a motion for an award of litigation costs when it did

not have jurisdiction to consider the merits of the case.

547

The Fuller decision did not prove long lasting. The Tax Court overruled

it a year later in Weiss v. Commissioner.

548

The Service in Weiss moved to

dismiss because of its failure to comply with the TEFRA partnership

provisions.

549

The motion was granted and the petitioners moved for an

award of litigation costs.

550

Although the Tax Court reserved judgment on

whether the petitioner qualified for a litigation award, the court concluded

that it had the authority to grant a motion for a litigation award if

appropriate.

551

The court, in rejecting its prior position, stated that it had

previously failed to properly consider the language “in any civil proceeding”

that then appeared in the statute.

552

A case commences with the filing of a

petition with the Tax Court and “[i]t is axiomatic that a case properly

commenced is a civil proceeding.”

553

According to Weiss, dismissal of an

action “does not nullify the proceeding or void the petition,” and the

dismissal has binding legal effect to preclude assessing the deficiency

542

TAX CT. R. 232(a)(2) (July 6, 2012 ed.).

543

I.R.C. § 7430(f)(1); TAX CT. R. 232(f) (July 6, 2012 ed.).

544

I.R.C. § 7430(f)(1).

545

T.C. Memo. 1986-33, 51 T.C.M. (CCH) 336. In Fuller, the notice of

deficiency was invalid because it attempted to determine a deficiency for

partnership items outside the procedures prescribed by §§ 6221–6233.

546

Id. at 337–38.

547

Sanders v. Commissioner, 813 F.2d 859, 861–62 (7th Cir. 1987).

548

88 T.C. 1036 (1987).

549

Id. at 1037.

550

Id. at 1037.

551

Id.

552

Id. at 1039–40 (analyzing I.R.C. § 7430(a) (1986)). The statute now refers to

“court proceeding” that means “any civil action” brought in a court of the United

States. I.R.C. § 7430(c)(6).

553

Weiss, 88 T.C. at 1039.

530 The United States Tax Court – An Historical Analysis

previously determined.

554

Having reasoned that a case does not lose its

nature as a civil proceeding following dismissal for lack of jurisdiction, the

court held that it had the authority under § 7430(a)(2) to award reasonable

litigation costs.

555

The Tax Court’s holding in Weiss was examined and

adopted by the Ninth Circuit Court of Appeals in Sponza v. Commissioner.

556

F. Review of Whistleblower Award Determinations

The ability of the Service to pay awards to informants who provide

information concerning violations of the tax laws has a long history, with

the origins of the whistleblower program tracing back to 1867.

557

Prior to

2006, the whistleblower program as reflected in § 7623 essentially amounted

to a legislative grant of agency discretion.

558

The Service decided whether

payment of an award was appropriate and, subject to relatively modest

dollar-denominated statutory caps, the amount of any such award.

559

disappointed informant possessed little if any recourse. Judicial review was

thought to rest with the Court of Federal Claims, yet that court repeatedly

held that it lacked subject matter jurisdiction to review denials of awards on

grounds that the statute and implementing guidance did not create a

554

Id.

555

Id.

556

844 F.2d 689 (9th Cir. 1988).

557

For a historical perspective on the IRS Whistleblower Program, see Internal

Revenue Service, History of the Whistleblower/Informant Program (2008), available at

http://www.irs.gov/uac/History-of-the-Whilstleblower-Informant-Program; see

also Dennis J. Ventry, Jr., Whistleblowers and Qui Tam for Tax, 61 T

AX LAW. 357,

360–68 (2008).

558

Prior to the amendment of the statute in 2006, § 7623 provided as follows:

The Secretary, under regulations prescribed by the Secretary, is authorized

to pay such sums as he deems necessary for—

(1) detecting underpayments of tax, and

(2) detecting and bringing to trial and punishment persons guilty of

violating the internal revenue laws or conniving at the same,

in cases where such expenses are not otherwise provided by law.

Any amount payable under the preceding sentence shall be paid from the

proceeds of amounts collected by reason of the information provided,

and any amount so collected shall be available for such payments.

I.R.C. § 7623 (prior to amendment by Pub. L. No. 109-432, § 406(a)(1) (2006)).

559

See Sarcena v. United States, 508 F.2d 1333, 1336 (Ct. Cl. 1975) (“It is clear .

. . that the District Director has complete discretion in the first instance to

determine whether an award should be made and, in the second, to fix what, in his

judgment, amounts to adequate compensation.”); see also Ventry, supra note 557, at

362 (noting that § 7623 awards were capped at $2 million under prior law, with the

cap standing at $50,000 as late as 1989).

Prominence in Judicial Review of Taxpayer Rights 531

substantive right to monetary damages.

560

If the Government decided to

pay a discretionary award to an informant, the amount of the award would

not be disturbed unless the determination lacked a rational basis.

561

Following the release of a report by the Treasury Inspector General for

Tax Administration detailing shortcomings in the Whistleblower

Program,

562

Congress overhauled § 7623 as part of the Tax Relief and

Health Care Act of 2006.

563

Preserving the prior discretionary program in a

slightly modified form in § 7623(a), the legislation introduced a non-

discretionary award program through § 7623(b). Pursuant to this new

provision, if the Commissioner proceeds with administrative or judicial

action based on information provided by an informant, the informant is

entitled to a minimum award of 15 percent of the collected proceeds—

including penalties, interest, additions to tax, and other additional

amounts—resulting from the action or from any settlement reached in

response to the action.

564

While these awards are subject to a statutory cap

of 30 percent of collected proceeds,

565

whistleblower awards under

§ 7623(b) are not subject to an absolute dollar-figure ceiling.

The non-discretionary whistleblower award program under § 7623(b) is

not available across the board. The amount in dispute between the

Government and the taxpayer to whom the disclosed information relates

must exceed $2 million.

566

Furthermore, if the disclosed information

pertains to an individual, the individual’s gross income for the year at issue

560

In Krug v. United States, 168 F.3d 1307 (Fed. Cir. 1999), the Court of Appeals

for the Federal Circuit explained that the existence of the whistleblower statute and

administrative guidance concerning its application did not operate to create an

implied-in-fact contract obligating the Government to pay an informant. Rather, a

contractual obligation would arise only once the Government agreed to pay the

informant a specific sum for the disclosed information. Id. at 1309; see also

Destefano v. United States, 52 Fed. Cl. 291 (2002); Confidential Informant v.

United States, 46 Fed. Cl. 1 (2000) (both holding that § 7623 did not constitute a

money-mandating statute).

561

See Saracena v. United States, 508 F.2d 1333, 1336 (Ct. Cl. 1975) (placing

burden on plaintiff to establish the absence of a rational basis to support the

Government’s determination of amount of award); see also Krug, 168 F.3d at 1310

(suggesting that the Government’s exercise of discretion to determine an award

may not be subject to review at all based on administrative law norms).

562

See Treasury Inspector General for Tax Administration, The Informants’

Rewards Program Needs More Centralized Management Oversight, 2006-30-092

(June 6, 2006).

563

Pub. L. No. 109-432, § 406, 120 Stat. 2922, 2958–60 (2006).

564

I.R.C. § 7623(b)(1). This provision applies to information provided by the

informant on or after the December 20, 2006 effective date of the amending

legislation. Pub. L. No. 109-432, § 406(a)(1), 120 Stat. at 2960.

565

Id.

566

I.R.C. § 7623(b)(5)(B).

532 The United States Tax Court – An Historical Analysis

must exceed $200,000.

567

For cases that fail to satisfy these thresholds, the

pre-existing discretionary award program of § 7623(a) remains available.

The amount of a non-discretionary award under § 7623(b) is subject to a

host of potential reductions. In cases where the informant’s disclosure

constitutes a “less substantial contribution”

568

due to the Government’s

access to the information through other means, the Service may reduce the

amount of the award (presumably to zero), and the award is subject to a

considerably reduced cap of 10 percent of the collected proceeds.

569

Additionally, the informant’s participation in the disclosed activity may

adversely affect the amount of the award. The Commissioner is authorized

to reduce any non-discretionary award under § 7623(b) upon a

determination that the informant planned or initiated the actions that led to

the underpayment of tax or violation of the tax laws. If the informant is

criminally convicted for this behavior, the Commissioner must deny the

award altogether.

570

In addition to strengthening the rights of informants to monetary

awards for their disclosures, the 2006 amendments to § 7623 addressed the

prevailing absence of judicial review of award determinations. Pursuant to

§ 7623(b)(4), an informant may appeal any determination affecting a non-

discretionary award under § 7623(b) to the Tax Court within 30 days of

such determination.

571

In somewhat redundant fashion, the statute

parenthetically affirms the Tax Court’s jurisdiction to entertain such an

appeal. Although the statute does not limit judicial review to the Tax Court

in literal terms, the Court of Federal Claims has interpreted the Tax Court’s

jurisdiction as exclusive in this context.

572

The court justified this

interpretation by pointing to the statute’s singular provision of an appeal

right to the Tax Court against the prevailing backdrop of the absence of

judicial review of whistleblower award determinations.

573

567

I.R.C. § 7623(b)(5)(A).

568

A “less substantial contribution” concerns a disclosure based on allegations

“resulting from a judicial or administrative hearing, from a government report,

hearing, audit, or investigation, or from the news media.” I.R.C. § 7623(b)(2)(A).

569

Id.

570

I.R.C. § 7623(b)(3).

571

Tax Court review is available only for appeals from determinations that

relate to information provided by the informant after the December 20, 2006

effective date of the amending legislation. Wolf v. Commissioner, T.C. Memo.

2007-133, 93 T.C.M. (CCH) 1273.

572

See Dacosta v. United States, 82 Fed. Cl. 549 (2008).

573

The Court of Federal Claims in Dacosta relied heavily on the Supreme Court

decision in Hinck v. United States, 550 U.S. 501 (2007), in which the Court reasoned

that the grant of jurisdiction to the Tax Court to review the Secretary’s

determinations concerning the abatement of interest under § 6404(e) was exclusive.

Prominence in Judicial Review of Taxpayer Rights 533

The Tax Court’s jurisdiction under § 7623(b)(4) is predicated upon a

determination by the Commissioner “regarding” a non-discretionary award

under § 7623(b), followed by the filing of a petition within 30 days of such

determination.

574

The issue of what constitutes a determination by the

Commissioner in this setting therefore assumes critical importance. The

2006 legislation directed the Secretary to issue guidance concerning the

operation of a Whistleblower Office to be administered by the Service.

575

The Commissioner did so through the issuance of Notice 2008-4

576

which,

among other things, provides that the Whistleblower Office will send

written correspondence to the informant once a final determination

regarding the informant’s claim has been made.

577

In most cases, this item

of correspondence will serve as the predicate to the Tax Court’s jurisdiction

in this setting.

The Commissioner initially took the position that a determination giving

rise to Tax Court jurisdiction under § 7623(b)(4) referred to a determination

by the Service to make an award to the informant after the Whistleblower

Office undertook administrative or judicial action in response to the

disclosed information.

578

Under this interpretation, Tax Court review under

§ 7623(b)(4) would be limited to examining the amount of any award the

Commissioner decided to issue. A decision to deny a § 7623(b) award

altogether, on the other hand, would continue to escape judicial scrutiny.

579

The Tax Court rejected this narrow interpretation of a § 7623(b)

574

The Tax Court Rules of Practice and Procedure governing review of

whistleblower award determinations are contained in Rules 340 to 344. In a press

release accompanying the issuance of these provisions, the Tax Court explained

that, generally applicable statutory provisions, Tax Court Rule 103, and related case

law provide authority for a petitioner seeking review of a whistleblower award

determination to request to proceed anonymously and to seal the record in

appropriate circumstances. See United States Tax Court, Press Release, Oct. 3,

2008, at 5.

575

Pub. L. No. 109-432, § 406(b)(1), 120 Stat. 2959 (2006).

576

2008-1 C.B. 253; see also Internal Revenue Manual (IRM) pt. 25.2.2 (Dec. 30,

2008) (providing procedural guidance on the processing of whistleblower claims).

577

2008-1 C.B. at 256. Note that the determination of an informant’s award

may be made well in advance of payment, as awards are paid only out of collected

proceeds.

578

See Cooper v. Commissioner, 135 T.C. 70, 75 (2010); see also Friedland v.

Commissioner, T.C. Memo. 2011-90, 101 T.C.M. (CCH) 1422, 1423.

579

Pursuant to internal guidance, whistleblower claims will be denied if the

information supplied by the claimant does not (1) identify a federal tax issue upon

which the Service will act; (2) result in the detection of an underpayment of tax; or

25.2.2.12(2) (Dec. 30, 2008).

534 The United States Tax Court – An Historical Analysis

determination in Cooper v. Commissioner,

580

noting that the breadth of the

jurisdictional grant to the Tax Court encompasses appeals of a

determination to deny an award.

Borrowing from other areas of its expanded non-deficiency jurisdiction,

the court in Cooper further explained that the form of the Service’s

determination was not dispositive. A determination with respect to a

§ 7623(b) award sufficient to implicate Tax Court review need only

constitute a final administrative decision concerning the informant’s

whistleblower claim issued pursuant to established administrative

procedures.

581

The Tax Court examined the nature of the 30-day period for filing an

appeal of a § 7623(b) award determination in Friedland v. Commissioner.

582

The petitioner in Friedland received four letters from the IRS Whistleblower

Office in response to his claim. The first letter denied the petitioner’s

claim, providing generic justifications for the denial of whistleblower

awards and asserting the absence of legal authority to provide a more

specific explanation for the denial of the petitioner’s claim. The subsequent

three letters simply reaffirmed the initial denial determination and were

issued in response to later inquiries from the petitioner concerning the

denial or the petitioner’s provision of additional information. One of these

subsequent letters informed the petitioner that he could challenge the

decision of the Whistleblower Office by writing “to the U.S. Court of Claim

(sic)” in Washington, DC. The petitioner thereafter filed a complaint in the

U.S. Court of Federal Claims, which that court subsequently dismissed for

lack of subject matter jurisdiction. Approximately three weeks after this

dismissal but over seven months after the Commissioner’s issuance of the

initial determination to deny a § 7623(b) award, the petitioner filed a

petition to appeal the Commissioner’s determination to the Tax Court.

Recognizing that the petitioner “may have relied on the erroneous advice of

the Whistleblower Office” and expressing its sympathy for the petitioner,

the Tax Court determined that it lacked the authority to provide equitable

relief.

583

The court found compliance with the 30-day filing period to be a

580

135 T.C. at 70, 75 (2010) (citing STAFF OF THE JOINT COMM. ON TAX’N,

TECHNICAL EXPLANATION OF H.R. 6408, THE “TAX RELIEF AND HEALTH CARE

ACT OF 2006,” at 89 (2006), which explained that an individual could appeal both

the amount and the denial of an award to the Tax Court); see also Friedland v.

Commissioner, T.C. Memo. 2011-90, 101 T.C.M. (CCH) 1422, 1423 (standing by

holding in Cooper).

581

135 T.C. at 76. While this approach potentially expands the range of

documents that can serve as the predicate to Tax Court review, this approach also

necessarily expands the range of documents that can operate to commence the 30-

day limitations period for invoking the Tax Court’s jurisdiction.

582

T.C. Memo. 2011-90, 101 T.C.M. (CCH) 1422.

583

Id.

Prominence in Judicial Review of Taxpayer Rights 535

prerequisite to its jurisdiction to hear the appeal. Accordingly, the

petitioner’s failure to file his petition within the 30-day period following the

Government’s determination—however justified that failure may have

been—deprived the court of subject matter jurisdiction.

Apart from establishing the predicate to and limitations period for

pursuing an appeal of a § 7623(b) determination, the statute is silent on

important aspects of the Tax Court’s review in this setting. Specifically, the

statute fails to address the level of deference the Tax Court should afford to

the Commissioner’s determination (standard of review), as well as the

evidence the court may consider in fulfilling its appellate function (scope of

review). One would expect determinations that are not the product of

agency discretion under § 7623(b) (e.g., whether the information provided

by the petitioner led to administrative or judicial action that resulted in the

collection of tax so as to warrant a minimum award under § 7623(b)(1);

whether the information provided constituted a “less substantial

contribution” within the meaning of § 7623(b)(2)(A) warranting a reduced

ceiling on the award percentage; whether the petitioner planned or initiated

the actions that led to the underpayment of tax or violation of tax laws so as

to warrant a reduction in the award under § 7623(b)(3)) will be reviewed by

the Tax Court on a de novo basis. On the other hand, to the extent a

determination under § 7623(b) rests in the discretion of the Commissioner

(e.g., the determination concerning the particular percentage award to be

paid within the 15 percent and 30 percent parameters of § 7623(b)(1); the

appropriate amount of reduction in the amount of the award pursuant to

§ 7623(b)(2) or (b)(3)), a more deferential abuse-of-discretion standard of

review would appear appropriate.

With respect to the proper scope of the Tax Court’s review, the court

announced its expectation that this issue would be resolved through case

law when it issued the procedural rules governing whistleblower award

review cases.

584

While decisions addressing the scope of the court’s review

in other contexts involving the expansion of the court’s non-deficiency

jurisdiction undoubtedly will prove relevant,

585

the breadth of issues

584

See United States Tax Court, Press Release, Oct. 3, 2008, at 5 (noting the

absence of “specific statutory direction” concerning whether whistleblower actions

are to be decided based on the administrative record).

585

See, e.g., Robinette v. Commissioner, 439 F.3d 455 (8th Cir. 2006) (holding

that the Tax Court was limited to the administrative record in considering a

taxpayer’s “appeal” of a collection due process determination under § 6330(d)), rev’g

123 T.C. 85 (2004); Commissioner v. Neal, 557 F.3d 1262 (11th Cir. 2009) (holding

that the Tax Court, in exercising authority to “determine” appropriate innocent

spouse relief pursuant to § 6015(e), may conduct trial de novo); Porter v.

Commissioner, 130 T.C. 115 (2008) (concluding that a determination of whether a

spouse is entitled to equitable relief from joint and several liability is to be made

based on a trial de novo). On this note, the fashioning of the Tax Court’s

536 The United States Tax Court – An Historical Analysis

potentially affecting awards under § 7623(b)—which could include facts

concerning the taxpayer to whom the supplied information relates—will

complicate the scope of review determination in this setting.

In Whistleblower 14106-10W v. Commissioner,

586

the Tax Court addressed a

taxpayer’s request to maintain the confidentiality of his identity as he

prosecuted an appeal of the Commissioner’s denial of a whistleblower

award. The petitioner in that case moved for a protective order requesting

that the record in the case be sealed or, alternatively, that he be granted

anonymity throughout the proceeding, fearing professional ostracism and

harassment if his identity became known to his current employer.

587

noted by the Tax Court in the case, § 7623 does not expressly address the

privacy interests of whistleblowers or the parties to whom the

whistleblower claims relate.

588

Shortly after revamping the whistleblower

program in 2006, the House and the Senate approved legislation that would

permit the Tax Court to seal portions of the record in these cases.

589

This

provision was not enacted, however, as the larger legislative package failed

to survive a presidential veto. Nonetheless, in promulgating the rules of

practice and procedure to govern whistleblower cases, the court noted its

ability to permit a petitioner to proceed anonymously and to seal the record

when appropriate.

590

The Commissioner opposed the petitioner’s request

to preserve the confidentiality of his identity, contending that

relinquishment of confidentiality was a natural consequence of the

petitioner’s decision to pursue judicial review of the adverse

determination.

591

jurisdiction under § 7623(b) to entertain an “appeal” of a whistleblower

determination award as opposed to making its own “determination” of the

appropriate award may prove relevant to the evidence the court may consider in

reviewing whistleblower award determinations.

586

137 T.C. 183 (2011).

587

See id. at 185. The petitioner’s whistleblower claim related to his former

employer.

588

See id. at 191.

589

As passed by the Senate on March 29, 2007, the U.S. Troop Readiness,

Veterans’ Health, and Iraq Accountability Act contained the following provision:

Publicity of Appeals—Notwithstanding sections 7458 and 7461, the Tax

Court may, in order to preserve the anonymity, privacy, or confidentiality of

any person under this subsection [section 7463(b)], provide by rules

adopted under section 7453 that portions of filings, hearings, testimony,

evidence, and reports in connection with proceedings under this subsection

may be closed to the public or inspection by the public.

H.R. 1591, 110th Cong., § 543(c).

590

See Rules Comm. Note, TAX CT. R. 340, 130 T.C. 586 (2008) (citing

authority under “generally applicable statutory provisions, Rule 103, and related

caselaw”).

591

See Whistleblower 14106-10W, 137 T.C. at 205.

Prominence in Judicial Review of Taxpayer Rights 537

In ruling on the petitioner’s motion, the court balanced the petitioner’s

legitimate privacy interest as a confidential informant

592

together with the

nature and severity of the specific harm alleged to result from disclosure of

the petitioner’s identity against the harm to relevant social interests favoring

publicity of the court’s proceedings.

593

In evaluating the potential harm

suffered by the petitioner through disclosure, the court noted that the

absence of anti-retaliatory provisions in § 7623 made the prospect of harm

particularly acute. Even though the petitioner’s information related to a

former employer, the court was persuaded that revealing the petitioner’s

identity could severely damage his standing in the professional community

through which petitioner derived his livelihood.

594

Finding the competing

social interests to be mixed,

595

the court specifically rejected the

Commissioner’s “take-it-or-leave-it” approach to confidentiality as likely

having a chilling effect on claimants seeking judicial review of whistleblower

award determinations as being at odds with the congressional purpose of

promoting public confidence in the whistleblower program through the

availability of judicial oversight.

596

Accordingly, the court ordered that any

information that would tend to reveal the petitioner’s identity be redacted

from the record, as well as any information that would identify the subject

of petitioner’s whistleblower claim.

597

Believing these steps to be sufficient

to address the petitioner’s concerns, the court denied the more drastic

remedy of sealing the entire record.

598

The opinion in Whistleblower 14106-10W was reviewed by the court

without dissent. However, a concurring opinion stated the view that the

court will not automatically grant anonymity merely because the petitioner

raises the prospect of resulting employment discrimination.

599

Accordingly,

claimants seeking judicial review of adverse whistleblower award

determinations must still weigh the imprecise prospect of identity disclosure

in connection with invoking the Tax Court’s jurisdiction in this setting.

592

The court noted that the Service’s policy to treat tax whistleblowers as

confidential informants. See id. at 202 (citing relevant portions of the Internal

Revenue Manual).

593

Id. at 203.

594

Id. at 203–04. The court noted that the Service’s policy to treat tax

whistleblowers as confidential informants. See id. at 202 (citing relevant portions of

the Internal Revenue Manual).

595

Id. at 205.

596

Id. at 206.

597

Id.

598

Id. at 207.

599

Id. at 208 (Halpern, J., concurring).

538 The United States Tax Court – An Historical Analysis

Pretrial Procedure 539

ART IX

PRETRIAL PROCEDURE

On July 17, 1924, one day after the original Board of Tax Appeals

members were sworn in, the Board undertook its first order of business, the

drafting of its procedural rules. In view of its essentially judicial character,

the adversarial nature of the proceedings over which it would preside, and

the clear legislative intent that a court-like procedure be employed, the

Board had little choice but to adopt generally formal procedural rules.

Within this framework, however, Congress had given broad discretion to

the Board to specify the particulars of the rules it would follow.

In formulating its rules regarding pretrial procedure, the Board was

undoubtedly mindful of several important considerations. First, procedures

had to be adopted to provide a documentary basis for the appeal. Both

taxpayer and Government needed to be responsible for stating their

respective positions in writing in a manner that would apprise the adverse

party and the Board of the nature of the controversy. In this connection,

the Board had to balance the interest of simplicity and brevity, which were

important congressional goals in creating the Board procedure, with the

conflicting interest in favor of a comprehensive statement of the case that

would conform to judicial standards of pleading.

Second, the Board had to consider the time limits to be allotted to

complete the various stages of the pretrial procedure. Important in this

regard was the extent to which the Board should limit the time available to

the parties to complete the various preliminary stages of the proceeding to

ensure the expeditious preparation of a case for trial. Additionally, these

rules needed to discourage use of the Board procedure simply for purposes

of delay.

Third, it was essential that the Board’s procedures encourage, to the

extent practicable, pretrial settlements. The anticipation of a heavy caseload

made such settlements critical.

Fourth, public concern with impartiality dictated that the Board quickly

establish a reputation for even-handedness in its procedure, as well as its

decisions. In both form and substance, the burdens and benefits of pretrial

procedure had to be equitably apportioned.

Finally, the Board was required to conform its procedures to its

jurisdictional limitations. Jurisdictional provisions required a timely appeal

from the Commissioner’s assertion of a deficiency.

540 The United States Tax Court – An Historical Analysis

Out of this blend of concerns, the Board’s first rules of practice and

procedure emerged on July 27, 1924, a product of an “almost continuous

session”

since the members took office ten days earlier. Although these

first rules covered the most important areas of pretrial concern, they were

hardly the last word on Board procedure. From the outset, the Board

demonstrated a willingness to consider suggestions for change.

In that

regard, major efforts occasionally have been made to improve and refine

the procedures under which the Board, and later the Tax Court, has

operated. One such effort was initiated in 1937, with the creation of a joint

committee composed of members of the Board and representatives of

Treasury for the purpose of studying the Board’s procedure and

recommending improvements.

The conclusions of the joint committee

were felt in a number of important areas. In 1974, the Tax Court adopted a

comprehensive rules revision which substantially modified many of its rules

of practice and procedure. Since then, the court has undertaken substantial

revisions to its procedural rules, once in 2003,

and, not long thereafter, in

2008.

Hence, the initial willingness of the Board to consider changes to its

procedural rules has proved long lasting.

In broad outline, pretrial procedure before the Tax Court is similar to

that applicable in most trial courts. The opportunity for court review is

initially provided by the Commissioner’s issuance of a deficiency notice,

which asserts that additional tax is due. This, in effect, provides the

gravamen on which the cause of action is based. Within a statutory time

period, the taxpayer has an opportunity to invoke the jurisdiction of the

court by filing a petition. The pleading stage of the proceedings generally

terminates with the Commissioner’s responsive pleading, the answer, but

occasionally the taxpayer may be required to reply to allegations in the

answer. In addition to the pleadings, an aspect of Board/Tax Court pretrial

procedure that traditionally has been of great importance is the stipulation.

Stipulation of factual matters serves to narrow the issues in controversy,

thereby saving time and expense for both the parties and the court as well

as providing a basis for the settlement of many cases. The Tax Court

Press Release accompanying issuance of the Board’s first rules of practice and

procedure, July 28, 1924, filed at the U.S. Tax Court in “Organizing the Board.”

Id.

The original members of the joint committee were members Arundell,

Morris, and Murdock of the Board, and P.C. Alexander, Russell Ryan, and Stanley

S. Surrey of Treasury. Treas. Dep’t Press Release, May 11, 1937, filed at the U.S.

Tax Court in “Stipulations: Memoranda & Correspondence;” R

EPORT OF THE

JOINT COMMITTEE OF THE BOARD OF TAX APPEALS AND CHIEF COUNSEL’S

OFFICE, Dec. 17, 1937, at 1, filed at the U.S. Tax Court in “Petition: Memoranda &

Correspondence” [hereinafter cited as Joint Committee Report].

See 120 T.C. 479–786 (2003).

See 130 T.C. 345–614 (2008).

Pretrial Procedure 541

adopted rules for pretrial discovery somewhat reluctantly in the 1970s, and

those provisions had a somewhat controversial historical development.

These, the most significant aspects of pretrial procedure in the Tax Court,

will be described in detail below.

A. The Deficiency Notice

The Code defines a deficiency as the excess of the sum of tax liability

plus rebates over the sum of the amount shown as due on the return and

previously assessed deficiencies.

If a deficiency exists with respect to taxes

subject to the deficiency procedure, the Commissioner is authorized to send

the taxpayer a notice of deficiency by registered or certified mail.

The

notice serves several distinct purposes. First, it informs the taxpayer of the

Commissioner’s determination that additional tax is due.

Second, it

suspends the Commissioner’s assessment power for 90 days, or until a final

decision of the Tax Court with respect to the deficiency, whichever comes

later.

Third, it represents the taxpayer’s “ticket to the Tax Court,”

since

issuance of the deficiency notice is, in most cases, a prerequisite to Tax

Court jurisdiction.

Additionally, within the context of Tax Court

I.R.C. § 6211(a).

The taxes subject to the deficiency procedure are the income, estate, gift,

public charity, private foundation, retirement plan and real estate investment trust

taxes. I.R.C. § 6212(a). The Technical Amendments Act of 1958, Pub. L. No.

85-866, § 89(b), 72 Stat. 1665, amended § 6212(a) to authorize the Commissioner

to send deficiency notices by either certified or registered mail. Prior thereto, the

only authorized method was by registered mail, and the Tax Court considered

registered mail a jurisdictional necessity. Hamilton v. Commissioner, 13 T.C. 747,

749 (1949); Williams v. Commissioner, 13 T.C. 257, 258 (1949); John A. Gebelein,

Inc. v. Commissioner, 37 B.T.A. 605 (1938). In Boren v. Riddell, 241 F.2d 670 (9th

Cir. 1957), however, the Ninth Circuit disagreed. The court held that authorizing

registered mail did not preclude other methods that adequately informed the

taxpayer. Accord Berger v. Commissioner, 404 F.2d 668, 673 (3d Cir. 1968); Cohen

v. United States, 297 F.2d 760, 772 (9th Cir. 1962); Lifter v. Commissioner, 59 T.C.

818, 823 (1973). Contra Samuel Brodsky, Adequacy of Notice of Deficiency, 18 N.Y.U.

NST. ON FED. TAX’N 997, 1005 (1960) [hereinafter cited as Brodsky].

E.g., Delman v. Commissioner, 384 F.2d 929, 933 (3d Cir. 1967);

Commissioner v. Stewart, 186 F.2d 239, 241 (6th Cir. 1951); Commissioner v. New

York Trust Co., 54 F.2d 463, 465 (2d Cir. 1931). See generally Note, Incorrectly

Addressed 90 Day Letters, 7 T

AX L. REV. 250 (1952).

I.R.C. § 6213(a).

Delman v. Commissioner, 384 F.2d 929, 934 (3d Cir. 1967); Corbett v. Frank,

293 F.2d 501, 502 (9th Cir. 1961).

I.R.C. § 6213(a); TAX CT. R.13 (July 6, 2012 ed.).

542 The United States Tax Court – An Historical Analysis

litigation, another facet of the deficiency notice emerges, the role of the

deficiency notice in pretrial Tax Court procedure.

This latter role was molded in the Board’s early years by numerous

confrontations between the Commissioner and taxpayers.

In these

disputes the Board generally sided with the Commissioner, who regarded

the deficiency notice as independent of the Board’s pleading rules and

beyond its power to control.

In an effort to reshape the role of the

deficiency notice, countless complaints have been lodged that describe the

deficiency notice as uninformative, demonstrate how the litigation

procedure is adversely affected by these notices, and advocate numerous

proposals for change.

Although these efforts have generally failed to

See generally, e.g., Gossett v. Commissioner, 22 B.T.A. 1279, 1284 (1931), aff’d,

59 F.2d 365 (4th Cir. 1932); Carnrick v. Commissioner, 21 B.T.A. 12, 21 (1930);

Coughlin v. Commissioner, 15 B.T.A. 515, 520 (1929); Levine Brothers Co. v.

Commissioner, 5 B.T.A. 689 (1926); Clois L. Greene, 2 B.T.A. 148 (1925);

Cleveland Home Brewing Co., 1 B.T.A. 87 (1924).

See generally DISTRICT OF COLUMBIA BAR ASSOCIATION, REPORT OF THE

COMMITTEE ON RELATIONS WITH THE TAX COURT OF THE UNITED STATES,

March 31, 1948, at 10, 11, filed at the U.S. Tax Court in “Deficiency Notice:

Memoranda & Correspondence” [hereinafter cited as D.C. Bar Report]; Randolph

E. Paul, A Plea For Better Tax Pleading, 18 C

ORNELL L.Q. 507 (1933) [hereinafter

cited as Paul]; Letter from A. Graupner to Board Chairman Black, May 25, 1937,

filed at the U.S. Tax Court in “Deficiency Notice: Memoranda & Correspondence”

[hereinafter cited as Graupner].

S UBCOMMITTEE ON INTERNAL REVENUE TAXATION OF THE COMMITTEE

WAYS AND MEANS, INTERNAL REVENUE ADMINISTRATION, 85th Cong., 1st

Sess. 13, 48 (1957) [hereinafter cited as Subcommittee Report]; Report of the

Comm. on Court Procedure, 19 ABA B

ULLETIN TAXATION SECTION 54 (1966)

[hereinafter cited as ABA 1966]; Report of Comm. on Court Procedure, ABA

AXATION SECTION 114 (1957) [hereinafter cited as ABA 1957]; Report of Comm.

on Court Procedure, ABA T

AXATION SECTION 122 (1956) [hereinafter cited as

ABA 1956]; Report of Comm. on Bureau Practice and Procedure, ABA T

AXATION

SECTION 106 (1954) [hereinafter cited as ABA 1954]; Report of Comm. on Bureau

Practice and Procedure, ABA T

AXATION SECTION 105 (1953) [hereinafter cited as

ABA 1953]; Report of Comm. on Tax Court Procedure, ABA T

AXATION SECTION

ll2 (1947) [hereinafter cited as ABA 1947]; Robert Ash, Factors in Selecting the Forum

in Which to Litigate, 12 N.Y.U. I

NST. ON FED. TAX’N 935, 938 (1954) [hereinafter

cited as Ash]; Adam Y. Bennion, Equivalents of Pre-Trial and Discovery Procedure in Tax

Court of United States, 11 U.S.C. T

AX INST. 405, 409 (l959) [hereinafter cited as

Bennion]; William H. Bowen, Discovery in the Tax Court: Why Not Follow the Federal

Rules?, 44 A.B.A. J. 129 (1958) [hereinafter cited as Bowen]; Samuel Byer, Limitation

of Issues in Tax Litigation, 18 N.Y.U. I

NST ON FED. TAX’N 1035 (1960) [hereinafter

cited as Byer]; Arthur Groman and Hilbert P. Zarky, Rules of Evidence in Tax Court of

United States, 10 U.S.C. T

AX INST. 603, 610 (1958) [hereinafter cited as Groman];

Michael P. Oshatz, Procedural Aspects of Practice Before the Tax Court: Including Small

Claims Division, When and How to Use It, 31 N.Y.U. I

NST ON FED. TAX’N 1471 (1973)

Pretrial Procedure 543

produce a more informative deficiency notice,

they have influenced the

development of other procedures that tend to ameliorate the problem.

Under the statute, the deficiency notice has only a negligible connection

with the Tax Court pleading structure. Issuance of the deficiency notice is,

in most cases, a condition precedent to Tax Court jurisdiction, but it is not

a pleading.

It neither confers jurisdiction nor commences the

proceeding.

In fact, the notice is considered part of the administrative

procedure of assessment and collection of revenues and, to that extent, its

preparation is entirely within the province of the Internal Revenue

Service.

For this reason, only the amount of the deficiency, as reflected in

the adjustments, is essential to the pleadings.

The courts have consistently

held that the Commissioner is not obligated to develop in the deficiency

[hereinafter cited as Oshatz]; Paul, supra note 13; Lester M. Ponder, Trial Court

Litigation—Tax Court, Court of Claims and District Court: A Practicing Lawyers Views, 21

U.S.C. T

AX INST. 117, 126 (1969) [hereinafter cited as Ponder]; Greater Attention to

Procedural Safeguards Necessary to Protect Taxpayers, 7 J. T

AX’N 359 (1957); Practitioners

Criticize 30-day and 90-day Letters as Vague and Non-Specific, 7 J. T

AX’N 34 (1957); D.C.

Bar Report, supra note 13, at 10–11; Graupner, supra note 13; see also Letter from

John Hall, Deputy Assistant Secretary, to Edward C. Rustigan, Attorney, July 10,

1973, filed at the U.S. Tax Court in “Deficiency Notice: Memoranda and

Correspondence” [hereinafter cited as Hall].

In 1988, Congress finally responded to complaints concerning the relative

dearth of information required of a valid deficiency notice. As part of the Technical

and Miscellaneous Revenue Act of 1988, Congress enacted the predecessor to

§ 7522(a). See Pub. L. No. 100-647, § 6233(a), 102 Stat. 3341, 3735. This

provision, effective for notices of deficiency issued after January 1, 1990, requires

the statutory notice of deficiency not only to identify the amounts of any tax,

interest, additional amounts, additions to tax, and penalties alleged to be due, but

also to “describe the basis for” such adjustments. For further discussion of this

provision, see Part VI.A.2.b.(1).

Berger v. Commissioner, 404 F.2d 668, 673 (3d Cir. 1968); Delman v.

Commissioner, 384 F.2d 929, 934 (3d Cir. 1967). See Groman, supra note 14, at

610; Paul, supra note 13, at 512–13; Arnold Raum, Tax Court Litigation, 9 U.S.C.

AX INST. 631, 640 (1957) [hereinafter cited as Raum].

E.g., Berger v. Commissioner, 404 F.2d 668, 673 (3d Cir. 1968); Delman v.

Commissioner, 384 F.2d 929, 934 (3d Cir. 1967).

Levine Brothers Co., 5 B.T.A. 689, 691–92 (1926); Southern California Loan

Ass’n, 4 B.T.A. 223, 225 (1926); I.R.C. § 6212(a). This is further demonstrated by

the Board/Tax Court’s reluctance to promulgate rules regulating the content of the

deficiency notice.

See TAX CT. R. 34(b)(3) (July 6, 2012 ed.); Alexander Sprunt & Son, Inc. v.

Commissioner, 64 F.2d 424, 427 (4th Cir. 1933); Luke v. Commissioner, T.C.

Memo. 1964-76, 23 T.C.M. (CCH) 1022 (1964), aff’d, 351 F.2d 568 (7th Cir. 1965);

Bair v. Commissioner, 16 T.C. 90, 98 (1951), aff’d, 199 F.2d 589 (2d Cir. 1952);

Coughlin v. Commissioner, 15 B.T.A. 515, 520 (1929).

544 The United States Tax Court – An Historical Analysis

notice his rationale for the adjustments.

Although Congress in 1988

statutorily required the Commissioner to “describe the basis” for each

adjustment in the notice of deficiency, Congress indicated that the failure to

do so would not invalidate the notice.

In a similar vein, any theory of

liability expressed in the deficiency notice will not necessarily constitute or

confine the issues.

Despite the limited substance required of a valid

deficiency notice, the Commissioner’s deficiency determination is generally

presumed by the Tax Court to be correct.

In many respects, the

Commissioner v. Forest Glen Creamery Co., 98 F.2d 968, 971 (7th Cir. 1938);

Standard Oil Co. v. Commissioner, 43 B.T.A. 973, 998, (1941), aff’d, 129 F.2d 363

(7th Cir. 1942); Carnrick v. Commissioner, 21 B.T.A. 12, 21 (1930).

See I.R.C. § 7522(a) (enacted by Technical and Miscellaneous Revenue Act of

1988, Pub. L. No. 100-647, § 6233(a), 102 Stat. 3341, 3735). In Shea v. Commissioner,

the Tax Court in a reviewed opinion determined that if the if the notice of

deficiency fails to describe the basis for the deficiency determination and the basis

for the determination requires the admission of additional evidence (that is,

evidence different than that necessary to resolve the deficiency determinations that

were adequately described in the notice), the Commissioner would bear the burden

of proof with respect to the new basis. 112 T.C. 183, 197 (1999). The original

edition of this text contained a thorough discussion of the tension between

taxpayers’ desire for additional information to be provided in the notice of

deficiency and the minimalist requirements of the notice required under the statute,

as upheld by the Board of Tax Appeals and the Tax Court. See H

AROLD

DUBROFF, THE UNITED STATES TAX COURT: AN HISTORICAL ANALYSIS 223–31

(1979).

Bair v. Commissioner, 16 T.C. 90, 98 (1951), aff’d, 199 F.2d 589 (2d Cir.

1952); Gossett v. Commissioner, 22 B.T.A. 1279, 1284 (1931), aff’d, 59 F.2d 365

(4th Cir. 1932); Crowell v. Commissioner, 21 B.T.A. 849, 851 (1930), aff’d, 62 F.2d

51 (6th Cir. 1932); Carnrick v. Commissioner, 21 B.T.A. 12, 21 (1930); Coughlin v.

Commissioner, 15 B.T.A. 515, 520 (1929). Although the theory of the deficiency

notice will not prevent the Commissioner from raising other issues or theories after

the taxpayer files a petition, the Commissioner may be required to affirmatively

plead the issues in his answer if the new matter is inconsistent with the theory of

the deficiency notice. See infra notes 239–294 and accompanying text.

E.g., Welch v. Helvering, 290 U.S. 111, 115 (1933); Albino v. Commissioner,

273 F.2d 450 (2d Cir. 1960); Eagle v. Commissioner, 242 F.2d 635 (5th Cir. 1957).

In many instances, the burden of proof is placed upon the Commissioner either by

statute or Tax Court rule. For example, the Commissioner has the burden of proof

if the deficiency notice pertains to fraud (I.R.C. § 7454(a)), transferee liability

(I.R.C. § 6902(a)), deductions against public policy (I.R.C. § 162(c)), accumulated

earnings tax (I.R.C. § 534(a)), increased deficiencies asserted after the petition is

filed, affirmative defenses, and new matter pleaded in the answer (T

AX CT. R.

142(a) (July 6, 2012 ed.)). Additionally, Congress has provided that the general

burden of proof can be shifted to the Commissioner in certain instances pursuant

to § 7491(a). See Part X.C.4.

Pretrial Procedure 545

deficiency notice is a distinctive procedural device lacking a counterpart in

the pleading structure of other forums.

Notwithstanding the limited theoretical significance of the deficiency

notice, in practice it can play a vital role in the pleadings by informing the

taxpayer why a deficiency has been determined.

Although the ultimate

issue is tax liability, the decisive issues for pleading and trial purposes are

the factual and theoretical foundations supporting the deficiency notice.

Furthermore, in the great majority of cases, the Commissioner’s rationale

for determining a deficiency marks the boundaries of the conflict.

Consequently, supplying this information in the deficiency notice, as

required under § 7522(a), provides the taxpayer an opportunity to

objectively evaluate the decision to contest the deficiency.

If the taxpayer

elects to pursue litigation, the same information will aid in drafting the

petition and in preparing for the trial of the case.

B. The Petition

For matters within the Tax Court’s deficiency jurisdiction,

the

Commissioner’s issuance of a deficiency notice forces the taxpayer to

determine whether the Commissioner’s determination is warranted.

decision to contest the deficiency requires the taxpayer to choose between

the alternative methods and forums.

The taxpayer’s basic choice is

whether to appeal to the Tax Court prior to payment of the deficiency, or

to pay the tax, file a claim for refund and, following disallowance of the

claim, sue for refund in either a Federal district court or the U.S. Court of

Federal Claims.

If the former route is taken, the taxpayer must file a

See, e.g., ABA 1966, supra note 14, at 56; Paul, supra note 13, at 517; Joint

Committee Report, supra note 3.

E.g., Ash, supra note 14, at 938; Graupner, supra note 13, at 3.

E.g., Groman, supra note 14, at 611; Paul, supra note 13, at 519; Ponder, supra

note 14, at 126.

The scope of the Tax Court’s deficiency jurisdiction is described in Part VI.A.

See I.R.C. §§ 621l, 6212, 6213; TAX CT. R. 13 (July 6, 2012 ed.). See note 11

supra, for instances in which a deficiency notice is not a condition precedent to Tax

Court jurisdiction.

Cusack, Federal Tax Procedure: Refund Claims and Suits, 12 THE PRAC. LAW. 45

(Oct., 1966) [hereinafter cited as Cusack]; Marvin Joseph Garbis, Choosing Your

Forum in Civil Tax Litigation, 15 T

HE PRAC. LAW. 41 (Jan., 1969) [hereinafter cited as

Garbis]; Lester M. Ponder, Trial Court Litigation–Tax Court, Court of Claims, and

District Court–A Practicing Lawyer’s Views, 21 U.S.C. T

AX INST. 117 (1969)

[hereinafter cited as Ponder]; Arnold W. Reitze, Jr., Choice of Forum in Tax Litigation,

19 C

ASE W. RES. L. REV. 963 (1968) [hereinafter cited as Reitze].

See generally Cusack, supra note 29; Ponder, supra note 29; Reitze, supra note 29.

546 The United States Tax Court – An Historical Analysis

petition with the Tax Court.

The petition has several important aspects.

First, the filing of a petition within the statutory period operates to confer

jurisdiction on the court to redetermine the deficiency and precludes,

during the pendency of the proceeding, assessment or collection of the

deficiency by the Service.

Second, the petition is a pleading designed to

provide the Tax Court and the Commissioner with “notice of the matters in

controversy and the basis for . . . [the taxpayer’s position].”

Finally, the

petition has been important in efforts by the court over the years to reduce

its backlog of cases. By helping to weed out those appeals which are

meritless or filed for purposes of delaying the assessment of tax, the

petition has reduced the court’s workload.

1. Content of the Petition

In its role as a pleading, the petition has presented few problems. The

Board’s primary objective in promulgating a rule governing the contents of

the petition was to assure that the pleading adequately informed the Board

and the respondent of the issues in controversy.

To achieve this

objective, the Board required that the petition be divided into five parts:

jurisdictional allegations, assignments of error, factual allegations,

propositions of law, and petitioner’s verification.

During the period 1924

to 1926, the original rule was revised to require that the petition disclose

I.R.C. § 6213(a). The Revenue Act of 1924, which established the Board of

Tax Appeals, did not provide a name for the taxpayer’s pleading. Rather, the

legislation simply referred to the pleading as an appeal. Revenue Act of 1924, ch.

234, § 274(a), 43 Stat. 297. The Board settled on the name petition in its first rules

of practice and procedure, B.T.A.

RULE 5 (July, 1924 ed.), and Congress

incorporated this terminology in the subsequent Revenue Acts. Compare Revenue

Act of 1926, ch. 27, § 274(a), 44 Stat. 55, with I.R.C. § 6213(a).

See CHARLES D. HAMEL, PRACTICE AND EVIDENCE BEFORE THE U.S.

BOARD OF TAX APPEALS 89 (1938) [hereinafter cited as HAMEL].

I.R.C. §§ 6213, 7442. The current Tax Court rules specifically list the

jurisdictional requirements. See T

AX CT. R. 13 (July 6, 2012 ed.). In 1948, the Tax

Court received a recommendation that the court adopt a rule which informed the

taxpayer of the jurisdictional requirements. However, the court rejected the

proposed rule because it was “largely educational, rather than a subject for a rule.

Rules can’t tell people how to practice law.” Memorandum to Judge Murdock,

Rules Comm. Chairman, from V. Mersch, Tax Court Clerk, July 30, 1948, at 2, filed

at the U.S. Tax Court in “Petition: Memoranda and Correspondence” [hereinafter

cited as Mersch, 1948].

T AX CT. R. 31(a) (July 6, 2012 ed.).

B.T.A. RULE 5 (July, 1924 ed.).

Id.

Pretrial Procedure 547

both the amount of the deficiency as determined by the Commissioner

and approximately what amount of the deficiency was in controversy.

further modification served to conform the petition with the pleadings in

other forums by excising the requirement of stating a proposition of law

and adding a requirement of a prayer for relief.

With the foundation of the rule firmly established by 1926, the Board

left the principal components of the rule intact for nearly 50 years. The

only revisions between 1926 and 1974 that did anything more than clarify

or expound upon these original elements arose in response to specific

legislation. For example, the Revenue Act of 1928 shifted the burden of

proof from the taxpayer to the Commissioner in fraud and transferee

liability cases.

Accordingly, the Board amended its rules to provide that

the taxpayer need not state the facts sustaining an assignment of error if the

Commissioner had the burden of proof.

Subsequent misinterpretation of

this provision led to a revision emphasizing that an assignment of error by

the petitioner was necessary to raise an issue, even though the

Commissioner shouldered the burden of proof.

Although the requirements for a proper petition seem clear enough, the

Board/Tax Court has been continually plagued with petitions that fail to

meet the specified standards. Perhaps the court’s inclination to permit the

curing of defective petitions for jurisdictional purposes removed what

potentially could have been the strongest incentive to comply with the

rule.

But the concern with providing taxpayers every opportunity to

B.T.A. RULE 5 (Jan. 1, 1925 ed.). In addition, the rule directed taxpayers to

append a copy of the deficiency notice to the petition. Id.

Id.

B.T.A. RULE 5(f) (April 1, 1926 ed.).

Revenue Act of 1928, ch. 852, §§ 601, 602, 45 Stat. 872 (now codified at

I.R.C. §§ 7454, 6902(a)).

B.T.A. RULE 5(c) (Feb. 1, 1931 ed.).

B.T.A. RULE 5(d) (July 1, 1935 ed.). See TAX CT. R. 34(b) (Jan. 1, 1974 ed.);

Rules Comm. Note, T

AX CT. R. 34(b) (Jan. 1, 1974 ed.). The rule was also revised

in 1967, to require that individual taxpayers include their legal residence, and that

corporate taxpayers include their principal place of business in the petition. T

CT. R. 7(c)(4)(B)(1) (Jan. 1, 1967 ed.). This change was prompted by legislation

which placed venue for review of Tax Court decisions in the appropriate circuit

court of appeals depending upon the legal residence of the taxpayer. Act of

November 2, 1966, Pub. L. No. 89-713, § 3(c), 80 Stat. 1109 (amending I.R.C.

§ 7482(b)). See Memorandum to the Judges from Judge Raum, Rules Comm.

Chairman, Dec. 22, 1966, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence.”

The decision to permit an amended petition depended upon the type of

defect as well as the timeliness of the amended petition. Rules Comm. Note, T

CT. R. 34(a) (Jan. 1, 1974 ed.).

548 The United States Tax Court – An Historical Analysis

exercise their statutory right to have the deficiency reviewed prior to

payment presumably convinced the Board/Tax Court to take a less

demanding view of the situation. Nevertheless, there was considerable

dissatisfaction on the Board/Tax Court with the number of petitions that

failed to comply with the rule. An illustration of this dissatisfaction can be

found in the Board’s introductory comment to its 1938 rules edition:

Attention is called to the following: Many petitions filed with this

Board are dismissed for lack of jurisdiction and for failure to comply

with the Rules of Practice. It is therefore of great importance to

petitioners that petitions be prepared and filed properly in

accordance with statutory requirements and the provisions of the

Rules of Practice.

Naturally, most taxpayer representatives were generally aware that a

petition should meet certain minimum standards. As a result, there was a

steady stream of inquiries from taxpayers and, to a lesser extent, from

Internal Revenue seeking information and advice about various aspects of

the rule.

Because the Tax Court was a forum of national jurisdiction with

B.T.A. RULES, Introductory Comment (July 1, 1938 ed.).

See Letter to Judge Murdock, Rules Comm. Chairman, from John W.

Edwards, Acting Division Counsel, Internal Revenue Bureau, Aug. 15, 1946, filed

at the U.S. Tax Court in “Petitions: Memoranda and Correspondence” [hereinafter

cited as Edwards]; Mersch, 1948, supra note 33, at 1; Memorandum to the Judges

from Presiding Judge Murdock, Oct. 14, 1948, at 2, filed at the U.S. Tax Court in

“Petitions: Memoranda and Correspondence” [hereinafter cited as Murdock, 1948];

see also Memorandum to Judge Turner, Rules Comm. Chairman, from Howard

Locke, Tax Court Clerk, March 13, 1959, filed at the U.S. Tax Court in “Petitions:

Memoranda and Correspondence” [hereinafter cited as Locke].

On one occasion, John W. Edwards, Acting Division Counsel for the Bureau,

wrote Judge Murdock requesting him to:

[p]lease inform this office of the effective date of the amendment of Rule

6(d) of the Rules of Practice before the Board of Tax Appeals by the

addition of this sentence: “Issues in respect of which the burden of proof is

by statute placed upon the Commissioner will not be deemed to be raised

by the petitioner in the absence of assignments of error in respect thereof.”

Edwards, supra.

Judge Murdock, noted for his wit, responded:

Dear Office:

I never wrote to an office before and I can’t say that I enjoy it. Just

some dingy dismal old room with no heat or life on Saturdays and Sundays!

Just one of the drawers in the bureau! “Please inform this office” sounds so

impersonal, sort of imperious.

If some real live friendly flesh and blood person came upon the

interesting question of when a certain sentence became a part of the Rules

Pretrial Procedure 549

its offices in Washington, D.C., many of the taxpayers making inquiries

were forced to rely on telephonic and mail communications. The format of

the rule apparently made precise inquiries difficult which, in turn, required

that the court’s response be exceedingly detailed and tedious.

Accordingly, an entreaty from the chief clerk culminated in the Tax Court’s

final attempt at making the rule more understandable.

The rule was

restructured with separately numbered subparagraphs so that taxpayers

would be better able to pinpoint the provision in question and the Clerk

could respond more definitively to the question.

In 1974, the Tax Court comprehensively revised its rules of procedure.

The petition rule, however, remained basically unchanged with one notable

exception: the petitioner’s verification requirement was eliminated.

Until

then, verification, which originally had been required in the Board’s first

rules of practice,

had been one of the more controversial aspects of the

petition. If taxpayers were not questioning a particular application of the

verification rule,

they were questioning the basic need for the procedure

itself.

An early expression of the Board’s attitude towards verification was

contained in its response to a practitioner’s request that the verification

requirement be waived in view of his special circumstances. His clients

of Practice and would really appreciate being advised as to the correct

answer, it would be in the Rules revised to July 1, 1935, as part of Rule 5(d).

But just some cold old office—Ugh! I can’t bring myself to answer.

Sorry

Letter from Presiding Judge Murdock to “Office,” Aug. 20, 1946, filed at the U.S.

Tax Court in “Petitions: Memoranda and Correspondence.”

Mersch, 1948, supra note 33, at 1. See TAX CT. R. 7 (Nov. 3, 1947 ed.).

Mersch, 1948, supra note 33, at 1.

Id.; Murdock, 1948, supra note 45. Compare TAX CT. R. 7 (Nov. 3, 1947 ed.),

with T

AX CT. R. 7 (Dec. 15, 1948 ed.). Apparently, restructuring the rule did not

produce the desired result because eleven years later the court clerk recommended

that the subparagraphs in the rule be eliminated. Locke, supra note 45.

Rules Comm. Note, TAX CT. R. 34(b) (Jan. 1, 1974 ed.); TAX CT. R. 34(b)

(Jan. 1, 1974 ed.). See generally Laurence Goldfein and Richard A. Levine, Tax Court

Proposes Far Reaching Changes in its Rules of Practice and Procedure, 37 J. T

AX’N 66, 67

(1972) [hereinafter cited as Goldfein]; J. Earl Epstein, Proposed Rules of the Tax Court:

A Panel Discussion, 26 T

AX LAW. 377, 379 (1973) [hereinafter cited as Panel

Discussion].

B.T.A. RULE 5(f) (July, 1924 ed.).

E.g., Letter to Chief Judge Tietjens from Donald Libert, attorney, January 11,

1965, filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence”

[hereinafter cited as Libert].

E.g., Report of the Comm. on Tax Court Procedure, ABA TAXATION SECTION 81

(1951) [hereinafter cited as ABA, 1951].

550 The United States Tax Court – An Historical Analysis

were scattered members of an Osage Indian tribe who had little or no

knowledge of the pertinent facts of their case, and their verification would

have been difficult to obtain. The Board’s denial of the request emphasized

that the purpose of the rule was to afford the Board some measure of

assurance that the taxpayer, and not the taxpayer’s representative, had made

the decision to appeal.

Subsequently, however, the rigors of the

verification rule were somewhat relaxed.

In 1931, the verification requirement was eased to permit a duly

appointed attorney in fact to verify the petition, provided that the attorney

in fact acted pursuant to an unrevoked power of attorney and that the

petitioner was absent from the United States.

The purpose of this

relaxation was to ease the burden in those situations in which

communications between the taxpayer and his counsel took place by mail

and therefore satisfaction of the timely filing requirement would be

difficult.

A second, seemingly insignificant change in the verification rule, which

also occurred in 1931, later proved troublesome as it led to a controversy

concerning the interaction between verification and the Board’s jurisdiction

with regard to fiduciaries. The revision permitted a petition filed by a

fiduciary to be verified by only one fiduciary so long as it was signed by a

majority of the other fiduciaries.

Seven years later, in 1938, the Board’s

dismissal of a petition for not complying with the rule was reversed in

Baldwin v. Commissioner.

The Ninth Circuit Court of Appeals concluded

that Congress had contemplated providing each executor with a separate

right to file a petition since each executor was individually liable for any

deficiency. The court refused to allow the Board to condition the exercise

Letter to Chairman Hamel from T. Leahy, attorney, Feb. 17, 1925, filed at the

U.S. Tax Court in “Petitions: Memoranda and Correspondence;” Letter to T.

Leahy, attorney, from Chairman Hamel, Feb. 21, 1925, filed at the U.S. Tax Court

in “Petitions: Memoranda and Correspondence.”

B.T.A. RULE 5(g) (Feb. 1, 1931 ed.).

See Letter to the Board from Samuel Ansell, Aug. 22, 1924, filed at the U.S.

Tax Court in “Petitions: Memoranda and Correspondence.”

B.T.A. RULE 5(g) (Feb. 1, 1931 ed.); see also B.T.A. RULE 5(g) (Feb. 1, 1932

ed.); Memorandum to Members Black, Matthews, and Tramell, from Member

Murdock, Rules Comm. Chairman, May 19, 1931, filed at the U.S. Tax Court in

“Petitions: Memoranda and Correspondence;” Memorandum to Member Murdock,

Rules Comm. Chairman, from Chairman Morris, May 5, 1931, filed at the U.S. Tax

Court in “Petitions: Memoranda and Correspondence;” Memorandum to the

Board from Member Murdock, Rules Comm. Chairman, June 3, 1931, filed at the

U.S. Tax Court in “Petitions: Memoranda and Correspondence.”

94 F.2d 355 (9th Cir. 1938).

Pretrial Procedure 551

of the right by requiring a majority of executors to sign or verify the

petition.

The Board’s reaction to the decision was mixed. Some members

disagreed with the appellate court’s opinion that if two or more executors

were involved each had a separate right to file a petition.

Furthermore,

they contended that since this was the first case in which the rule was

seriously challenged, the Board should postpone any revision until it was

certain of the necessity for such action.

Others generally agreed with the

Ninth Circuit’s decision

and recommended the rule be revised along lines

which would require taxpayers to proffer a satisfactory explanation for a

majority of the fiduciaries failing to join in the petition.

A third faction,

which ultimately prevailed, took a middle course. They recognized that the

general purpose of the rule, which was to promote orderly procedure by

refusing to entertain a petition if “a majority of the fiduciaries are unwilling

to commit themselves to the proceeding,”

was a worthwhile objective.

However, they believed that this objective could be accomplished without

the necessity of having a majority of the fiduciaries either sign or verify the

petition. Their recommendation, which was adopted, was to substitute a

Id. at 356–57. Revenue Act of 1926, ch. 27, § 308, 44 Stat. 75 (now codified

at I.R.C. §§ 6212(a), 6213(a)), authorized the Commissioner to send a notice to “the

executor” and, in turn, gave “the executor” the right to appeal to the Board. The

fact that all statutory references were in the singular could give rise to an inference

that an executor could file an appeal whether his co-executor consented or not.

Memorandum to Members of the Board from Member Murdock, Rules

Comm. Chairman, Jan. 4, 1939, at 3, 4, filed at the U.S. Tax Court in “Petitions:

Memoranda and Correspondence” [hereinafter cited as Murdock, 1939];

Memorandum to Members of the Board from Member Murdock, April 4, 1938,

filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence”

[hereinafter cited as Murdock, April, 1938]; Memorandum to Members of the Rules

Comm. from Member Murdock, Rules Comm. Chairman, March 30, 1938, filed at

the U.S. Tax Court in “Petitions: Memoranda and Correspondence” [hereinafter

cited as Murdock, March, 1938].

Murdock, April, 1938, supra note 59, at 2, 3.

Memorandum to Members of the Board from Member Harron, April 5, 1938,

filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence”

[hereinafter cited as Harron, 1938]; Memorandum to Members of the Rules Comm.

from Member Harron, Rules Comm. Member, March 30, 1938, filed at the U.S.

Tax Court in “Petitions: Memoranda and Correspondence” [hereinafter cited as

Harron]; see also Murdock, 1939, supra note 59.

Murdock, 1939, supra note 59, at 3.

Id. at 3, 4; Murdock, April, 1938, supra note 59, at 2.

552 The United States Tax Court – An Historical Analysis

requirement that a verification “contain a statement that the fiduciaries

signing and verifying have authority to act for the taxpayer.”

In addition to controversy over the operation of the verification rule,

the mechanics of verifying a petition frequently proved troublesome. Until

1969 the Board/Tax Court was an agency in the executive branch, and

consequently subject to a statute that precluded a person acting as a notary

public and counsel in the same case before an executive department.

was not uncommon for an unwary practitioner to be automatically

disqualified from continuing to represent his client for notarizing his client’s

petition.

The problems created by the verification requirement ultimately led the

American Bar Association, in 1951, to recommend that the Tax Court

eliminate verification.

This recommendation did not produce any

immediate change. However, in 1974, with no fanfare or even official

explanation, verification was eliminated

as a “nuisance requirement

without adequate compensatory benefits.”

Nevertheless, the Tax Court

has reserved the right to selectively require verification if, in its discretion, it

is deemed advisable.

The elimination of the automatic verification

B.T.A. RULE 6(h) (Mar. 1, 1940 ed.); Murdock, 1939, supra note 59, at 3–4.

Apparently the Board contemplated staying the proceeding until the executor who

filed the petition without obtaining the signature or verification of a majority of the

co-executors established his authority in a local court to act for the estate. See

Memorandum to Member Murdock from the Board Secretary, Jan. 3, 1939, filed at

the U.S. Tax Court in “Petitions: Memoranda and Correspondence.” At the same

time, the Board added a provision that would require a person filing a petition on

behalf of a corporation to verify his authority to act for the corporation. B.T.A.

RULE 6(h) (Mar. 1, 1940 ed.).

Act of June 29, 1906, ch. 3616, 34 Stat. 622 (codified at D.C. Code, Title 1, §

1-501 (1973)). This statute was subsequently interpreted to apply to all notaries

who practice before executive departments. 26 Op. A

TTY. GEN. 236, 238–39

(1907). The Board/Tax Court acknowledged that it was subject to the statute by

including a restriction to that effect in its rules. T

AX CT. R. 7(c)(4)(D) (Sept. 16,

1968 ed.). See Memorandum to Judge Raum, Rules Comm. Chairman, from

Leonard Messinger, law clerk, Jan. 22, 1965, filed at the U.S. Tax Court in

“Petitions: Memoranda and Correspondence.” The statute applies to executive

departments only and, in 1969, § 7441 was amended to change the Tax Court’s

status to a legislative court. Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83

Stat. 730. Thereafter, the restriction on notaries acting as counsel in the same case

was no longer a statutory necessity, but merely required by the Tax Court’s rules.

AX CT. R. 7(c)(4)(D) (Jan. 25, 1971 ed.).

Libert, supra note 51.

ABA, 1951, supra note 52.

T AX CT. R. 33(a) (Jan. 1, 1974 ed.); Rules Comm. Note, TAX CT. R. 33(a),

34(b) (Jan. 1, 1974 ed.).

Panel Discussion, supra note 49.

T AX CT. R. 33(a) (Jan. 1, 1974 ed.).

Pretrial Procedure 553

requirement conformed Tax Court practice to that applicable in district

courts.

2. Congestion of Appeals

A problem of continuing concern to the Board/Tax Court has been

coping with the large number of petitions it receives.

Within months after

the Board’s creation, thousands of taxpayers elected to invoke its

jurisdiction to redetermine the Commissioner’s deficiency determination.

Although most petitions were filed to obtain an impartial resolution of a

bona fide dispute, many taxpayers viewed the redetermination procedure as

a convenient method of delaying the assessment and collection of taxes.

Still others filed petitions for tactical reasons, considering such a maneuver

an integral part of the settlement procedures.

Taxpayers, however, were

not solely responsible for the burdensome number of appeals. The Bureau

occasionally issued groundless deficiency notices, and this naturally

increased the number of petitions filed.

Furthermore, the Bureau was not

always willing to negotiate settlements in good faith, which meant more

cases had to proceed to trial.

F ED. R. CIV. P. 11(a).

Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and Means,

68th Cong., 1st Sess. 892–93, 906 (1925) (statement of George M. Morris), 912

(statement of James S. Ivins) [hereinafter cited as 1925 House Hearings]; Lyle T.

Alverson, Has the Board of Tax Appeals Failed?, 4 N

AT. INC. TAX MAG. 337 (1926)

[hereinafter cited as Alverson]; George Maurice Morris, American Bar Association Tax

Revision Recommendations, 3 N

AT. INC. TAX MAG. 403, II; George Maurice Morris,

American Bar Association Tax Revision Recommendations, 3 N

AT. INC. TAX MAG. 403,

404 (1925) [hereinafter cited as Morris]; Percy W. Phillips, Possible Methods of

Eliminating Congestion of Tax Appeals, 5 N

AT. INC. TAX MAG. 243 (1927) [hereinafter

cited as Phillips]; Forest D. Siefkin, Has the Board of Tax Appeals Failed? 5 N

AT. INC.

TAX MAG. 45, 46, 63–64 (1927) [hereinafter cited as Siefkin]; Congestion of Tax Cases

Before the Board of Tax Appeals, 4 N

AT. INC. TAX MAG. 303 (1926) [hereinafter cited

as Congestion]; see also Appendix A (detailing the workload of the Board of Tax

Appeals and Tax Court in terms of the number of cases docketed, closed, and

pending in a given year).

Morris, supra note 32, at 404; Congestion, supra note 32, at 304.

Memorandum from Judge Turner, Rules Comm. Chairman, to Judge

Dawson, Sept. 28, 1962, at 1, filed at the U.S. Tax Court in “Petitions: Memoranda

and Correspondence” [hereinafter cited as Turner, 1962].

1925 House Hearings, supra note 72, at 895, 906 (statement of George M.

Morris); Morris, supra note 72, at 404; Siefkin, supra note 72, at 46.

E.g., Letter to Member Morris, Joint Comm. Chairman, from Louis Goldberg,

June 2, 1937, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence” [hereinafter cited as Goldberg]; Letter to Chairman Black from

554 The United States Tax Court – An Historical Analysis

If the Board was to function as an effective forum for tax litigation,

action was necessary to discourage the issuance of meritless deficiency

notices and the filing of frivolous appeals, as well as to facilitate the

disposition of bona fide appeals. Accordingly, over the years, a series of

legislative measures and rule changes, designed to penalize taxpayers who

file frivolous appeals and to hasten the disposition of bona fide

controversies, have been implemented.

With reference to frivolous appeals, the response was immediate. In

1926, Congress authorized the Board to impose a filing fee of up to $10.

The Board promptly exercised this authority by imposing the maximum

filing fee and requiring that it accompany the petition.

The rule, which

was successful in reducing the number of appeals,

was initially interpreted

to require payment of the filing fee as a jurisdictional necessity.

In 1927,

however, the Board’s dismissal of a petition for untimely payment of the fee

was reversed by the Third Circuit Court of Appeals in Weaver v. Blair.

The

circuit court held that there was no congressional intent to impose another

jurisdictional requirement by giving the Board authority to impose a filing

fee.

Thereafter, the Board discontinued the practice of returning the

Byron Harris, May 29, 1937, filed at the U.S. Tax Court in “Petitions: Memoranda

and Correspondence” [hereinafter cited as Harris]; Letter to Member Morris, Joint

Comm. Chairman, from William Johnston, June 10, 1937, filed at the U.S. Tax

Court in “Petitions: Memoranda and Correspondence” [hereinafter cited as

Johnston]; Letter to Chairman Black from Walter Liebman, May 17, 1937, filed at

the U.S. Tax Court in “Petitions: Memoranda and Correspondence” [hereinafter

cited as Liebman]; Letter to Member Morris, Joint Comm. Chairman, from M.

Matlock, May 29, 1937, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence” [hereinafter cited as Matlock]; Letter to Member Morris, Joint

Comm. Chairman, from S. Racine, May 26, 1937, filed at the U.S. Tax Court in

“Petitions: Memoranda and Correspondence” [hereinafter cited as Racine].

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924, § 904, 44

Stat. 106 (now codified at I.R.C. § 7451).

B.T.A. RULE 8 (May 1, 1928 ed.).

See Part III, notes 346–348 and accompanying text.

In John H. Weaver, 5 B.T.A. 1298 (1926), rev’d, 19 F.2d 16 (3d Cir. 1927), the

Board interpreted the rule providing that “[n]o such petition may be filed until such

fee is paid to the Board, nor will the filing of any petition be antedated to a time

prior to payment of such fee,” as imposing another jurisdictional condition to the

Board’s consideration of the petition; see also Willis W. Ritter, Jurisdiction of the Board

of Tax Appeals Under the Act of 1926, 4 N

AT. INC. TAX MAG. 128 (1926).

19 F.2d 16 (3d Cir. 1927).

Id.; see also Lewis-Hall Iron Works v. Blair, 23 F.2d 972 (D.C. Cir. 1972);

Reliance Mfg. v. Blair, 19 F.2d 789 (7th Cir. 1927); Dwyer v. Commissioner, 18

B.T.A. 349, 351 (1929). These decisions were subsequently reflected in the Board’s

rules. B.T.A.

RULE 8 (Feb. 1, 1931 ed.). In 1974, the Tax Court further amended

the rule to expressly reserve the power to waive payment of the fee. T

AX CT. R.

2(a) (Jan. 1, 1974 ed.).

Pretrial Procedure 555

petition to the taxpayer if it was not accompanied by the fee. Rather, the

petition was retained and a notice was sent to remit the fee. If the fee was

subsequently paid, the petition was deemed filed as of the original date of

receipt.

If the fee was not forthcoming, the petition was dismissed.

1981, Congress raised the permissible fee for filing a petition to $60.

The

Tax Court continues to impose the maximum filing fee, unless it grants the

taxpayer’s application for a waiver.

A second legislative effort to discourage frivolous appeals resulted from

an American Bar Association recommendation which advocated

authorizing the Board to impose costs of up to $100 on either party if the

appeal was found to be without merit.

The plan was aimed at taxpayers

“who seem to think that [the Board’s] procedure is simply a barricade to get

behind in order to stop the assessment or the collection of taxes”

as well

as defenses “made by the Commissioner which are without merit and where

the taxpayer’s contention from the evidence in the Commissioner’s files

should have been conceded.”

Congress was apparently hesitant, however,

to impose costs against the Government.

As a consequence, the Board

was only authorized to penalize taxpayers “whenever it . . . [appeared] to the

Board that proceedings before it . . . [had] been instituted by the taxpayer

Memorandum to Members of the Board from Chairman Littleton, May 5,

1927, filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence.”

Id. The Board/Tax Court’s practice was to tentatively deem the petition filed.

However, the petition was not served on the Commissioner until the fee was paid.

If the fee was never paid, then the proceeding would not be at issue since the

Commissioner would not have filed an answer to the petition and, therefore, the

petition would be dismissed. Bioff v. Commissioner, 47 B.T.A. 942, 944 (1942).

See Economic Recovery Act of 1981, Pub. L. No. 97-34, § 751(a), 95 Stat. 349

(amending I.R.C. § 7451(a)).

The Tax Court offers a form for the waiver, made available on the court’s

website at

http://www.ustaxcourt.gov/forms/Application_for_Waiver_of_Filing_Fee.pdf

The proposal read as follows:

VI. Imposition of Costs.—Recommended that power to be given to the

Board to impose costs upon either party to the proceeding where the appeal

or defense presented is found to be obviously without merit. A maximum

limitation upon such costs should be one hundred dollars. If such costs are

determined against the taxpayer they should be added to the deficiency

found. If such costs are awarded against the Commissioner they should

constitute a credit or refund to the appellant.

1925 House Hearings, supra note 72, at 906.

Id. at 892.

Id. at 906.

See id. at 893.

556 The United States Tax Court – An Historical Analysis

merely for delay.”

The Board/Tax Court originally used this power

sparingly,

presumably due to fear that excessive use might intimidate

taxpayers with bona fide disputes who would rather pay the deficiency than

incur the risk of a penalty. However, both the frequency and the amount of

§ 6673 penalties have increased in modern times, as the court has resorted

to the penalty to combat both frivolous filings and abusive invocation of

the court’s jurisdiction.

For its part, the Board endeavored to discourage frivolous appeals by

demanding that the taxpayer verify and his counsel sign the petition.

Such

actions were deemed a certification that there was good reason to bring the

appeal and that it was not frivolous or instituted for delay.

For willful

violation of the rule, taxpayers were subject to the imposition of costs and

their representatives were subject to disciplinary action, which included

suspension and disbarment.

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924, § 911, 44

Stat. 109 (now codified at I.R.C. § 6673); H.R. R

EP. NO. 69-1, at 19 (1925); S. REP.

NO. 69-52, at 36 (1925). The ambiguous word “proceedings” was presumably used

to permit an expansive interpretation of the provision, which would enable the

Board/Tax Court to prevent taxpayers from using any of its rules for delay. See

generally 1925 House Hearings, supra note 72, at 913 (testimony of James Ivins).

See Bateman v. Commissioner, 34 B.T.A. 351, 370–71 (1936); W. E. Beckman

Baker’s Confectioners’ Supply Co. v. Commissioner, 13 B.T.A. 860, 863–64 (1928).

The Board did not exercise the power until 1933. Combs v. Commissioner, 28

B.T.A. 1216 (1933); see also Joe D. Hughes, 2 G

EO. WASH. L. REV. 265 (1934).

Another proposal aimed at decreasing the number of frivolous appeals would have

required taxpayers to pay the tax or give a bond to secure payment prior to

appealing to the Board. Letter to President Franklin Roosevelt, from Secretary of

the Treasury Morgenthau, c. 1936, filed at the U.S. Tax Court in “Petitions:

Memoranda and Correspondence” [hereinafter cited as Morgenthau]; Letter to

Chairman Black from Robert Jackson, Counsel for the Bureau of Internal Revenue,

Sept. 7, 1935, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence” (hereinafter cited as Jackson). This proposal was not pursued,

presumably because it was completely inconsistent with the original purpose for

creating the Board to provide review of the Commissioner’s deficiency

determination prior to payment of the disputed tax.

The origins of the § 6673 penalty and its expanded reach are addressed in Part

X.D.

B.T.A. RULE 5 (April 1, 1926 ed.); see also TAX CT. R. 33(b) (July 6, 2012 ed.)

(providing the current rule)

B.T.A. RULE 5 (April 1, 1926 ed.)

Compare B.T.A. RULE 5 (April 1, 1926 ed.), with B.T.A. RULE 2 (April 1. 1926

ed.). The current rule expressly states that a willful violation of the rule may result

in disciplinary action. Compare T

AX CT. R. 33(b) (July 6, 2012 ed.), with TAX CT. R.

202 (July 6, 2012 ed.). To deter practitioners from persistently filing frivolous

appeals, the American Bar Association recommended that the Board publish a

Pretrial Procedure 557

If the appeal embraced a bona fide controversy, the emphasis was on

encouraging settlement. If settlement was not feasible, then the goal was to

decrease the period between filing of the petition and ultimate resolution of

the appeal. Congress considered a myriad of proposals for enhancing

settlement, including a proposal by the Bureau advocating a mandatory

protest procedure prior to the issuance of a deficiency.

The plan

paralleled the Board’s procedure in that the taxpayer would have 90 days to

file a formal protest to a proposed deficiency.

Failure to file the protest

within the allotted time obviated the need for a deficiency notice, and the

Commissioner could forthwith assess and collect the tax.

If the taxpayer

did file a formal protest, then the grounds and evidence in further litigation

would be restricted to those raised during the protest proceedings unless

good cause existed for a different result.

100

However, Congress was not receptive to such basic changes in the

structure of tax litigation,

101

and the only legislation to encourage settlement

was the expansion of the filing period from 60 to 90 days.

102

The extra 30

days was considered helpful if the parties were to have sufficient time to

reconcile their differences without resort to filing a petition.

103

Implicit in the congressional reticence to dictate the settlement

procedure has been the recognition that the stimulus for settlement would

have to come primarily from Internal Revenue and Board/Tax Court

initiatives. In the early years of tax administration, settlement did not seem

to be one of the Bureau’s highest priorities. The Bureau’s tendency to drag

its feet during settlement negotiations and the reluctance on the part of

Bureau personnel to accept responsibility for the settlement decision were

generally criticized.

104

Over the years, the Service’s procedures have been

extensively revised and refined to enhance the likelihood of settlement.

105

written reprimand to practitioners which would accompany the opinion. 1925

House Hearings, supra note 72, at 892 (statement of George Morris).

Memoranda to Mr. Oliphant from Morrison Shafroth, Chief Counsel, June 4,

1937, filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence”

[hereinafter cited as Shafroth].

Id. at 1, 2.

Id. at 2.

100

Id. at 3.

101

See Morgenthau, supra note 92.

102

Revenue Act of 1934, ch. 277, § 501, 48 Stat. 755; H.R. REP. NO. 73-704, at

34 (1933).

103

H.R. REP. NO. 73-704, at 34 (1933).

104

Congestion, supra note 72, at 304–05; Goldberg, supra note 76; Harris, supra

note 76; Johnston, supra note 76; Matlock, supra note 76; Racine, supra note 76;

Turner, 1962, supra note 74, at 6.

105

See generally Rev. Proc. 60-18, 1960-2 C.B. 988; Hugh F. Culverhouse,

Settlement Procedures Before the Bureau of Internal Revenue, 11 A

LA. LAW. 420 (1950);

558 The United States Tax Court – An Historical Analysis

For its part, the Board/Tax Court has been determined to dispose of as

many appeals as possible by settlement. This goal has been principally

advanced by the gradual evolution of a mandatory stipulation procedure,

which has been credited with either contributing to or actually effectuating

a settlement rate of approximately 70 percent.

106

Although most petitions are disposed of by settlement, many cases are

not so resolved. To deal with these cases, a series of diversified legislative

and administrative measures aimed at expediting the disposition of bona

fide appeals have been implemented. Legislatively, there have been three

significant changes that, in their inception, were perceived as capable of

accomplishing the desired goal. First, under the Revenue Act of 1924, the

Chairman of the Board was authorized to divide the Board membership

into divisions consisting of at least three members.

107

Admittedly, the use

of three-member divisions was more efficient than having the Board hear

every appeal en banc, but it was, nevertheless, an inefficient method of

handling appeals. Many commentators were convinced that divisions

smaller than three Board members would increase the Board’s work

product,

108

and, in 1926, Congress agreed. Accordingly, the Chairman of the

Board was authorized to create divisions consisting of one or more

Bruce Donaldson, Techniques in Presenting and Settling a Case Before the Internal Revenue

Service: District Conference; Appellate Division, 27 N.Y.U. I

NST. ON FED. TAX’N 1343

(1969); Morris R. Friedman, Techniques and Limitations in Dealing with a Conferee, 22

N.Y.U. I

NST. ON FED. TAX’N 95 (1964); Benjamin H. Neblett, Settlement Procedures in

the Technical Staff and Division Counsel’s Office, 1 U.S.C. T

AX INST. 369 (1949); Irving

Rosenzweig, Techniques and Limitations in Dealing with the Appellate Division, 22 N.Y.U.

NST. ON FED. TAX’N 109 (1964); Melvin L. Sears, Revenue Procedure 60-18—New

Techniques for the Early Consideration and Disposition of Tax Court Cases, 36 W

ASH. L.

REV. 373 (1961); Henry C. Stockell, Jr., I.R.S. Presses for Disposition of Tax Court Cases

Before Trial, 14 J. T

AX’N 180 (1961); Henry C. Stockell, Jr., Pre-Session Conference

Procedures are Increasing Settlements of Tax Court Cases, 18 J. T

AX’N 170 (1963); Clifford

W. Stowe, Audit Informal Conference and Appellate Procedures in the Reorganized Bureau, 94

J. A

CCOUNT. 298 (1952); Roger John Traynor, Administrative and Judicial Procedure for

Federal Income, Estate, and Gift Taxes–A Criticism and a Proposal, 38 C

OLUM. L. REV.

1393 (1938); Roger John Traynor & Stanley S. Surrey, New Road Towards the

Settlement of Federal Income, Estate and Gift Tax Controversies, 7 L

AW AND CONTEMPT.

PROB. 336 (1940); James T. Wilkes, Jr., Settlements Before Decision by the Tax Court, 38

AXES 827 (1960); H. Brian Holland et al., Treasury Settlement Procedures, A Panel

Discussion, 50 T

AXES 601 (1972).

106

See Congestion, supra note 72, at 303; Phillips, supra note 72, at 268; Turner,

1962, supra note 74, at 6.

107

Revenue Act of 1924, ch. 234, § 900(f), 43 Stat. 337.

108

1925 House Hearings, supra note 72, at 887–88, 905–06 (statement of

George Morris), 912 (testimony of James Ivins), 929–30 (testimony of Charles

Hamel); Congestion, supra note 72, at 303.

Pretrial Procedure 559

members;

109

the Chairman immediately exercised such authority by creating

one-member divisions.

110

A second legislative change designed to increase the Tax Court’s

productivity was enacted in 1943.

111

The presiding judge was authorized to,

and did, appoint commissioners (later to be designated special trial judges)

for particular cases who would conduct the hearing and then submit

proposed findings of fact to the court or the appropriate division.

112

If the

proposed findings of fact were adopted, the judges of the court were

relieved of the responsibility of conducting the hearing and preparing

findings of fact. In this manner, more hearings could be held and more

appeals resolved. Furthermore, the broadening scope of the special trial

judge’s duties, which now include presiding over pretrial conferences,

hearing motions, writing proposed opinions, and entering decisions in

certain cases,

113

has enhanced the Tax Court’s efficiency in handling

proceedings.

Finally, for many years commentators recommended that the creation of

a small claims division would expeditiously dispose of petitions involving

109

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 906(a), 44 Stat. 106 (now codified at I.R.C. § 7444(c)).

110

HAMEL, supra note 32, at 157–59; William H. Bowen, Interview of Tax Court

Judge Turner, The Tax Court–What Every Tax Man Should Know, 37 T

AXES 117, 117–18

(1959); Phillips, supra note 72, at 244; Siefkin, supra note 72, at 64.

111

Revenue Act of 1943, ch. 63, § 503, 58 Stat. 72 (originally codified at I.R.C.

§ 7456(c); now codified at I.R.C. § 7443A).

112

Id.; H.R. REP. NO. 78-871, at 34, 71–72 (1943); S. REP. NO. 78-627, at 94

(1943); see also Memorandum to the Judges from Presiding Judge Murdock, June 7,

1944, filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence”;

Memorandum to the Judges of the Court from Judge Turner, Rules Comm.

Chairman, June 7, 1944, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence.”

After the proposed findings of fact were submitted to the court or a division

thereof, and served upon both parties, the parties had 20 days to file exceptions

which, would be considered by the division assigned the case. T

AX CT. R. 48(c)

(July 1, 1944 ed.). The parties were allowed 45 days from the filing of the

Commissioner’s proposed findings of fact to file briefs, and an additional 15 days

to file reply briefs. T

AX CT. R. 48(d) (July 1, 1944 ed.).

The idea of appointing commissioners was by no means new, having been

suggested on numerous previous occasions. E.g., Harris, supra note 76; Jackson,

supra note 92; Morgenthau, supra note 92; Phillips, supra note 72, at 244; Joint

Committee Report, supra note 3, at 28. The Tax Court’s use of commissioners and

special trial judges is addressed in Part XII.

113

TAX CT. R. 181–182 (July 6, 2012 ed.). The scope of the special trial judge’s

authority, and the procedures to be followed both in cases in which the special trial

judge may enter the decision and in cases in which the special trial judge may

preside over the trial but not enter the decision, are detailed in Part XII.C–D.

560 The United States Tax Court – An Historical Analysis

sums below a prescribed threshold.

114

As a considerable number of

petitions involve small amounts, many believed that informal disposition of

these cases, conducted without the necessity of a formal trial, would

substantially reduce the backlog of appeals.

115

In 1969, following the

adoption of a special court rule dealing with small cases,

116

Congress created

a small tax case procedure that permitted taxpayers to request, subject to an

opposing motion by the Commissioner, a less formal resolution of the

appeal if the amount in dispute was less than $1,000.

117

As described in

more detail in Part XIII,

118

Congress has periodically raised the ceiling on

the amount in dispute in cases subject to the small tax case procedure to its

current generous level of $50,000.

119

The reasons that motivated Congress to act in 1969, however, were not

the same reasons that prompted the earlier proposals. In fact, the small tax

case procedure was specifically enacted to make the Tax Court more

accessible to taxpayers with small claims who might not otherwise have a

practical opportunity to have an impartial tribunal pass upon the merits of

the Commissioner’s determination.

120

The increasing reach of the small tax

procedure is a testament to the success of this measure in increasing

taxpayer access to judicial review of adverse administrative

determinations.

121

As a result, the small tax case procedure, which was

114

1925 House Hearings, supra note 72, at 887, 905 (statement of George

Morris); Letter to Member Morris, Joint Comm. Chairman, from S. Seidman, June

29, 1937, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence” [hereinafter cited as Seidman, 1937].

115

1925 House Hearings, supra note 72, at 887, 905 (statement of George

Morris); Seidman, supra note 114.

116

See Anne S. Davidson, Litigation in the Small Tax Case Division of the United

States Tax Court–The Taxpayer’s Dream?, 41 G

EO. WASH. L. REV. 538, 539 (1972).

117

Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 733 (amending I.R.C.

§ 7463); S. R

EP. NO. 91-552, at 302 (1969); TAX CT. R. 36 (Dec. 30, 1970 ed.).

118

The small tax case procedure is detailed in Part XIII.A.

119

The most recent increase in the amount in dispute was also the most

significant. As part of the Internal Revenue Service Restructuring and Reform Act

of 1998, Congress increased the prevailing ceiling amount from $10,000 to $50,000.

See Pub. L. No. 105-206, § 3103(a), 112 Stat. 731 (amending I.R.C. § 7463(a)).

120

S. REP. NO. 91-552, at 302 (1969); see also William Drennen, New Status of the

Tax Court, 29 N.Y.U. I

NST. ON FED. TAX’N 1017, 1023–30 (1971); Harold Dubroff,

Federal Taxation, 1973–74 A

NN. SURVEY OF AMER. LAW 265, 265–72 (1974)

[hereinafter cited as Dubroff]; Ronald S. Naveen and Lance Eisenberg, Small Cases

in the Tax Court, 57 A.B.A. J. 1235 (1971); Michael P. Oshatz, Procedural Aspects of

Practice Before the Tax Court: Including Small Claims Division, When and How to Use It, 31

N.Y.U. I

NST. ON FED. TAX’N 1471, 1480–85 (1973); Samuel B. Sterrett, Small Tax

Cases, 50 T

AXES 624 (1972).

121

The development and reach of the small tax case procedure provided under

§ 7463 is addressed in Part XIII.A.

Pretrial Procedure 561

originally perceived as a method of eliminating the backlog of appeals, may

actually be responsible for increasing the number of petitions filed.

Nevertheless, the streamlined procedures applicable to these cases

122

have

resulted in an overall increase in court efficiency.

The Board/Tax Court endeavored to complement these legislative

efforts by gradually developing more efficient and versatile procedures for

handling appeals. One cause of delay in the disposition of many appeals

centered around the Board’s method of placing appeals on trial calendars.

123

Prior to 1938, all proceedings were, as a matter of course, initially placed on

the Washington trial calendar.

124

A subsequent motion by the petitioner,

which was subject to the Board’s discretion, was necessary to place an

appeal on a circuit calendar.

125

This practice occasioned considerable delay,

especially in the case of many last minute motions seeking a change from

one calendar to another.

126

The Board received several suggestions to

revise this procedure

127

and, in 1938, substituted a procedure under which

the petitioner could file with his petition a request to have the petition

placed upon a particular calendar.

128

The Commissioner was likewise given

an opportunity to file with his answer a request different from the

taxpayer’s.

129

The Board would then determine where the appeal would be

heard “with due regard to any request filed and in accordance with the

statutory provision that the time and place of trial shall be fixed ‘with as

122

Dubroff, supra note 120, at 269–72.

123

See Letter to Member Morris, Joint Comm. Chairman, from Julius Barnard,

entitled Circuit Hearings, June 10, 1937, filed at the U.S. Tax Court in “Petitions:

Memoranda and Correspondence” [hereinafter cited as Barnard, 1937];

Memorandum to Members of the Board, from Member Murdock, Rules Comm.

Chairman, Nov. 12, 1937, at 10–12, filed at the U.S. Tax Court in “Petitions:

Memoranda and Correspondence” [hereinafter cited as Rules Committee Report];

Memorandum entitled “Suggested Changes in Rules of Practice of the Board of

Tax Appeals,” from Stanley Surrey, c. 1937, at 1, 2, filed at the U.S. Tax Court in

“Petitions: Memoranda and Correspondence” [hereinafter cited as Surrey];

Memorandum to Chairman Arundell, from Stanley Surrey, Nov. 4, 1937, at 2, 3,

filed at the U.S. Tax Court in “Petitions: Memoranda and Correspondence”

[hereinafter cited as Surrey, 1937].

124

B.T.A. RULE 24 (Nov. 1, 1933 ed.); Rules Committee Report, supra note

123, at 10.

125

Joint Committee Report, supra note 3, at 4–6; Rules Committee Report,

supra note 123, at 10–12; Surrey, supra note 123, at 1–2; Surrey, 1937, supra note

123, at 2–3.

126

See supra note 125; Barnard, 1937, supra note 123.

127

See supra note 126.

128

B.T.A. RULE 26 (July 1, 1938 ed.).

129

Id.

562 The United States Tax Court – An Historical Analysis

little inconvenience and expense to the taxpayer as is practicable.’”

130

Any

motions to change the place of hearing determined in accordance with the

above procedure had to be submitted before notice of the time of the

hearing had been mailed to the parties.

131

Subsequently, the procedure was

further refined to deny the Commissioner the opportunity to file a request

in his answer, except in cases in which the taxpayer failed to make a request

with his petition.

132

Once a place of trial was designated, either party could

file a motion to change the designated place of hearing, but such a motion

had to be based on justifiable grounds.

133

The Tax Court deemed this

change advisable because at these hearings, it was generally the case “that

the respondent was not particularly concerned in having a place of hearing

different from that desired by the petitioner.”

134

The revised procedure

removed this needless burden on the motions calendar as the hearing on

conflicting requests, necessary under the prior procedure, was eliminated in

many cases.

135

Another potential method of reducing the number of appeals is the joint

petition.

136

By this procedural device, a taxpayer with several deficiency

notices, or several taxpayers with deficiency notices that present similar

legal or factual questions, may file a single petition. Thus, if permitted, joint

petitions would not only reduce the number of petitions and assure that

similar cases be tried together, but they would also eliminate the necessity

of a motion and hearing to consolidate.

137

Nevertheless, the Board/Tax

Court, until recently, has been reluctant to permit joint petitions, for both

statutory and pragmatic reasons. The tax laws grant “the taxpayer” the

right to file a petition.

138

The use of the singular noun “taxpayer” raises the

inference that joint petitions are not within the statutory intendment.

139

130

Id. The statutory reference is to the Revenue Act of 1926, ch. 27, § 907(e),

44 Stat. 108 (now codified at I.R.C. § 7446).

131

B.T.A. RULE 26 (July 1, 1938 ed.).

132

TAX CT. R. 26 (Feb. 9, 1943 ed.).

133

Id.; Memorandum to the Judges from Judge Turner, Rules Comm.

Chairman, Jan. 15, 1943, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence” [hereinafter cited as Turner, 1943].

134

Turner, 1943, supra note 133.

135

Id. The current rule is substantially the same as the 1943 version of the rule.

Compare T

AX CT. R. 26 (Feb. 9, 1943 ed.), with TAX CT. R. 140, 174(a) (July 6, 2012

ed.); see also Appendix I, Form 5, T

AX CT. R. (July 6, 2012 ed.), for a listing of the

cities where the Tax Court regularly holds circuit hearings.

136

Letter to Member Morris from Julius Barnard, entitled Consolidated

Petitions, June 10, 1937, filed at the U.S. Tax Court in “Petitions: Memoranda and

Correspondence.”

137

Id.

138

Compare Revenue Act of 1924, ch. 234, § 274(a), 43 Stat. 297, with INT. REV.

CODE OF 1939, ch. 1, § 272(a), 53 Stat. 82, and I.R.C. § 6213(a).

139

Powers v. Commissioner, 20 B.T.A. 753, 755 (1930).

Pretrial Procedure 563

Additionally, joint petitions could create procedural difficulties unless the

parties could guarantee a continuing identity of issues as the appeal

progressed.

140

The Commissioner’s right to increase the deficiency as to

any taxpayer, combined with the taxpayers’ right to amend their petitions

and proceed upon separate and distinct theories, convinced the Board/Tax

Court to circumscribe the filing of joint petitions carefully.

141

The application of this reasoning, however, depends to a great extent

upon which type of joint petition is filed. Generally, there are three

separate categories of joint petitions.

142

The first category includes any

taxpayer who receives multiple deficiency notices.

143

The second category

is comprised of multiple taxpayers who jointly receive a deficiency notice.

144

The third category consists of multiple taxpayers who receive separate

deficiency notices.

145

Initially, as to each category, the Board steadfastly

stood by its rule against joint petitions.

146

The gradual erosion of the rule

that subsequently developed was, in part, due to criticism that the practice

of demanding separate petitions in all cases was unnecessary as well as too

expensive and time consuming. Notwithstanding that the Board/Tax

Court ascribed its relaxation of the rule against joint petitions to benefits

accruing to taxpayers, the benefits accruing to the Board/Tax Court in

terms of fewer petitions, joint hearings, and joint opinions were equally

obvious. The first relaxation occurred in 1940, when the Board allowed a

single taxpayer to combine several deficiency notices in one petition.

147

The

Board concluded that this type of petition was no different than a petition

contesting a single deficiency notice issued with respect to different tax

140

Id. at 757.

141

It should be noted that, in most cases involving joint petitions, the

consequences of the Board/Tax Court’s refusal to allow the petition did not

prejudice the taxpayers. Generally, the taxpayers were permitted to file separate

amended petitions and the filing date of these petitions related back to the original

filing date of the joint petition. See Weisser v. Commissioner, 32 B.T.A. 755, 758–

60 (1935); Sparrow v. Commissioner, 20 B.T.A. 865 (1930); Held v. Commissioner,

20 B.T.A. 863, 864 (1930); Powers v. Commissioner, 20 B.T.A. 753, 757 (1930).

142

See TAX CT. R. 34(a), 61 (Jan. 1, 1974 ed.).

143

See Egan v. Commissioner, 41 B.T.A. 204 (1940); TAX CT. R. 34(a). (Jan. 1,

1974 ed.); Rules Comm. Note, T

AX CT. R. 34(a) (Jan. 1, 1974 ed.).

144

See Bryant v. Commissioner, 33 T.C. 201 (1959); TAX CT. R. 34(a) (Jan. 1,

1974 ed.); Rules Comm. Note, T

AX CT. R. 34(a) (Jan. 1, 1974 ed.).

145

See TAX CT. R. 61 (Jan. 1, 1974 ed.); see generally Randolph F. Caldwell, Jr.,

Tax Court Has New Rules of Practice and Procedure, 59 A.B.A. J. 1301, 1302–03 (1973)

[hereinafter cited as Caldwell, 1973]; Goldfein, supra note 49, at 66–67.

146

See Weisser v. Commissioner, 32 B.T.A. 755, 758–60 (1935); Sparrow v.

Commissioner, 20 B.T.A. 865 (1930); Held v. Commissioner, 20 B.T.A. 863, 864

(1930); Powers v. Commissioner, 20 B.T.A. 753, 757 (1930).

147

Egan v. Commissioner, 41 B.T.A. 204 (1940).

564 The United States Tax Court – An Historical Analysis

years. The revision was of obvious benefit to taxpayers who otherwise

would be forced to expend time and money drafting separate petitions and

paying multiple filing fees.

148

The Board/Tax Court was not so liberal in the case of joint petitions in

the second and third categories, initially refusing to permit these joint

petitions with one limited exception. If a deficiency notice was jointly

issued to separate taxpayers, a joint petition could be filed only if the joint

recipients were married, had filed a joint return, and presented a joint

defense.

149

Finally, in 1974, in what was heralded as “a welcome innovation” that

could result in savings of time and expense for taxpayers and their

counsel,

150

the Tax Court authorized the broad use of joint petitions

151

subject to discretion of the court to sever the claims if deemed

appropriate.

152

In the case of a joint deficiency notice issued to separate

taxpayers, the rules generally permit the filing of a joint petition.

153

If a

joint petition is filed in connection with the issuance of separate deficiency

notices to several taxpayers, the Tax Court initially allowed a joint petition

only if “all or part of each participating party’s tax liability arises out of the

same transaction, occurrence, or series of transactions and occurrences and,

in addition, there is a common question of law or fact relating to those

parties.”

154

However, effective July 1, 1990, the Tax Court eliminated the

prospect of permissive prepetition joinder of taxpayers who received

separate notices of deficiency. Instead, joinder of multiple parties generally

was limited to instances in which the parties had been issued a single notice

of deficiency.

155

The Tax Court explained its general elimination of

permissive joinder in terms of administrative ease:

The amendment is intended to alleviate the administrative burden

that prepetition joinder of petitioners in deficiency and liability cases

has placed on the Court. This burden has been particularly acute

whenever counsel seeks to enter an appearance or withdraw as to

148

Id. at 205.

149

Bryant v. Commissioner, 33 T.C. 201 (1959).

150

Report of Views of Members of the A.B.A. Section of Taxation, Special

Subcommittee on Division of Tax Court Rules, Proposed Rules of Practice and Procedure

of the United States Tax Court, 26 T

AX LAW. 393, 394 (1973).

151

TAX CT. R. 34(a), 61 (Jan. 1, 1974 ed.). See Caldwell, 1973, supra note 145;

Goldfein, supra note 49.

152

TAX CT. R. 34(a), 61(b) (Jan. 1, 1974 ed.).

153

TAX CT. R. 34(a) (Jan. 1, 1974 ed.). This provision has remained

substantially the same under the current rules. See T

AX CT. R. 34(a) (July 6, 2012

ed.).

154

TAX CT. R. 61(a) (Jan. 1, 1974 ed.).

155

See TAX CT. R. 61(a), 93 T.C. 893 (1989).

Pretrial Procedure 565

some, but not all, of the petitioners who have joined in the petition,

or whenever a settlement has been reached as to some, but not all, of

the petitioners.

156

At the time it eliminated permissive prepetition joinder, the Tax Court

clarified that a husband and wife who had been issued a notice or notices of

deficiency in his or her individual capacity could nonetheless file a joint

petition.

157

Hence, absent a single notice of deficiency issued to multiple

parties, prepetition joinder of parties is now limited to spouses.

C. The Answer

After the taxpayer files a petition the initiative shifts to the

Commissioner to file his responsive pleading, the answer, which functions

to define the issues in controversy between the taxpayer and the

Government. In the answer, the Commissioner admits or denies the

petitioner’s allegations and pleads affirmatively to the extent required by

statute and court rule. One of the first questions that arose with respect to

the answer was whether the Board could compel its filing by the

Commissioner, and in default thereof enter judgment for the petitioner.

Other questions of a less fundamental nature have also arisen over the years

which have resulted in the answer being one of the most controversial

aspects of Board/Tax Court practice. Important among these have been

questions involving the Commissioner’s practice of filing general denials

and the necessity and consequences of affirmative allegations in the answer.

1. Filing Requirements

Originally, the rules of practice provided the Commissioner with 20 days

to file an answer.

158

The Board soon concluded, however, that a longer

period would be more conducive to informative pleading.

159

Consequently,

in 1925, the period was extended to 60 days.

160

Although the original rules

156

Rules Comm. Note, TAX CT. R. 61(a), 93 T.C. 864 (1989).

157

See TAX CT. R. 34(a)(1), 93 T.C. 867 (1989); see also Rules Comm. Note, TAX

CT. R. 34(a)(1), 93 T.C. 867 (1989).

158

B.T.A. RULE 9 (July, 1924 ed.).

159

Press Release, United States Board of Tax Appeals, Nov. 24, 1925, filed at

the U.S. Tax Court in “Responsive Pleadings: Memoranda and Correspondence”

[hereinafter cited as Press Release].

160

B.T.A. RULE 9 (Nov. 1, 1925 ed.). The Board expressed the following

reasons for the revision: “[T]he time . . . for filing answer has been extended from

twenty to sixty days in an effort to allow the Commissioner ample opportunity to

consider the taxpayer’s petition, assemble papers, and, if necessary, communicate

566 The United States Tax Court – An Historical Analysis

neglected to provide for amended pleadings,

161

the Board soon issued a

revision to allow discretionary amendments upon timely motion.

162

Subsequently, the rule was further amended to permit amended answers as

of right under limited circumstances.

163

with the Collector of Internal Revenue.” Press Release, supra note 159. Every

revision since 1925 has provided for a 60-day filing period. See T

AX CT. R. 36(a)

(July 6, 2012 ed.). However, in 1931, the 60-day period was suspended in response

to a request by the Internal Revenue Bureau. The Bureau claimed, and the Board

agreed, that a “temporary serious emergency” existed due to the unusually large

numbers of petitions filed between March 1 and May 31, 1931, and that it would be

exceedingly difficult to meet the 60-day limitation. Therefore, the filing period was

expanded to six months for petitions filed between the two dates. Order

suspending Rule 14, April 10, 1931, filed at the U.S. Tax Court in “Responsive

Pleadings: Memoranda and Correspondence.”

161

B.T.A. RULES (July, 1924 ed.).

162

B.T.A. RULE 13 (Sept. 27, 1924 ed.). The oversight was brought to the

Board’s attention in a letter responding to a request by the Board for suggestions

and criticisms of the rules. Letter from William Spalding, attorney, to the United

States Board of Tax Appeals, Aug. 5, 1924, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda and Correspondence” [hereinafter cited as

Spalding].

In 1926, the rule was amended to provide that “[u]pon motion made, the Board

may, in its discretion, at any time before the conclusion of the hearing, permit a party to a

proceeding to amend the pleadings to conform to the proofs.” B.T.A.

RULE 18

(April 1, 1926 ed.) (emphasis added). The phrase “before the conclusion of the

hearing” paralleled a statutory provision which permitted the Commissioner to

claim an increased deficiency “at or before the hearing.” Revenue Act of 1926, ch.

27, § 273(e), 44 Stat. 56 (now I.R.C. § 6214(a)). Generally, the Commissioner was

required to show cause for the amended answer, Behan v. Commissioner, 32 B.T.A.

1088, 1089 (1935), aff’d, 90 F.2d 609 (2d Cir. 1937), and, if affirmative relief were

sought, the rules required a statement of the underlying facts to accompany the

proposed pleading. Fair v. Commissioner, 27 T.C. 866, 875 (1957). See T

AX CT. R.

14 (Aug. 15, 1955 ed.). The motions to amend were subject to the Board/Tax

Court’s discretion. See Henningsen v. Commissioner, 243 F.2d 954, 959 (4th Cir.

1957); Commissioner v. Erie Forge Co., 167 F.2d 71, 76 (3d Cir. 1948); Gemma v.

Commissioner, T.C. Memo. 1967-208, 26 T.C.M. (CCH) 1024 (1967); Fifth Avenue

Bank of New York v. Commissioner, 32 B.T.A. 701, 704 (1935), aff’d, 84 F.2d 787,

790 (3d Cir. 1936); Estate of Wickham v. Commissioner, 22 B.T.A. 1393, 1398

(1931), aff’d, 65 F.2d 527 (8th Cir. 1933); Gilman v. Commissioner, 18 B.T.A. 1277,

1283 (1930), aff’d, 53 F.2d 47 (8th Cir. 1931); Eagle Dye Works, 1 B.T.A. 638, 640

(1925).

163

TAX CT. R. 41(a) (July 6, 2012 ed.), provides in pertinent part:

A party may amend a pleading once as a matter of course at any time before

a responsive pleading is served. If the pleading is one to which no

responsive pleading is permitted and the case has not been placed on a trial

calendar, then a party may so amend it at any time within 30 days after it is

served.

Pretrial Procedure 567

Alternatively, the Commissioner may file a motion to dismiss the

petition. In the first major rules revision, the Board remedied its initial

failure to afford the Commissioner this option and permitted a motion to

be filed within 20 days after serving the petition.

164

After four years of

experience under this rule, the Board expanded the filing period to 45 days,

having concluded that a longer period was necessary for effective and

efficient pleading.

165

Although moving and answering were presented as alternatives,

166

the

Commissioner could file both simultaneously without jeopardizing his

rights under the motion if expressly reserved.

167

If, on the other hand, the

Commissioner only filed a motion, the necessity of answering was

suspended until disposition of the motion,

168

after which the Commissioner

had a “reasonable period, ordinarily 60 days,” to answer.

169

The filing periods described above for moving and answering have

withstood the test of time and are incorporated into the current rules.

170

cannot be inferred, however, that these periods were always adequate.

Under certain circumstances, extensions of time might be desirable and

necessary. Consequently, the filing requirements were complemented by a

procedure that permitted time extensions “for good and sufficient

164

Compare B.T.A. RULE 9 (July, 1924 ed.), with B.T.A. RULE 9 (Sept. 27, 1924

ed.).

165

B.T.A. RULE 14 (May 1, 1928 ed.).

166

E.g., compare B.T.A. RULE 9 (Sept. 27, 1924 ed.), with TAX CT. R. 36(a) (Jan.

1, 1974 ed.).

167

United States Trust Company, 1 B.T.A. 1086, 1087 (1925). Cf. TAX CT. R.

31(c) (July 6, 2012 ed.), which provides in pertinent part:

defense alternatively or hypothetically. When two or more statements are

made in the alternative and one of them would be sufficient if made

independently, the pleading is not made insufficient by the insufficiency of

one or more of the alternative statements. A party may state as many

separate claims or defenses as he has regardless of consistency or the

grounds on which based.

168

French & Co. v. Commissioner, 10 B.T.A. 665, 671 (1928).

169

HAMEL, supra note 32, at 100. See, e.g., Covert Gear Co., 4 B.T.A. 1025,

1027 (1926). B.T.A.

RULE 20(b) (Dec. 15, 1948 ed.) formalized the procedure by

providing:

If a motion is filed or an order issued in respect to the adequacy of any

petition, the time prescribed in Rule 14 shall begin to run from the date

upon which the Court takes final action with respect to the motion or the

order unless the Court orders otherwise.

170

TAX CT. R. 36(a) (July 6, 2012 ed.).

568 The United States Tax Court – An Historical Analysis

cause.”

171

The Commissioner made relatively frequent use of this extension

procedure in fraud and transferee liability cases,

172

and at one point the

Bureau recommended a general 90-day answering period in these cases.

173

Although the court conceded that an expanded filing period might reduce

the number of such requests for extensions,

174

it declined to amend the rule

until 1974 when, rather than expanding the answering period, both

extension and contraction of all time periods were made discretionary with

the court.

175

On occasion the Commissioner failed to move or answer timely, or after

an unsuccessful motion, failed to answer timely. The failure to provide for

this contingency cannot be attributed to mere oversight. The Board was

aware of speculation that, since both the Board and the Bureau were

agencies in the executive branch and the extent of the Board’s jurisdiction

over the Bureau was unclear, it might not have the authority to compel an

answer or to render a decision for the taxpayer on the basis of the

Commissioner’s failure to answer.

176

Presumably for this reason, the Board

171

B.T.A. RULE 12 (July, 1924 ed.). The motion had to be in writing and state

the reasons why an extension was requested. The rule was amended in 1926 to

provide specifically that it did not apply to the filing of a petition, and that “good

and sufficient cause” had to be demonstrated. B.T.A.

RULE 20 (April 1, 1926 ed.).

See generally Shell Company of California v. Commissioner, 10 B.T.A. 1324 (1928);

Shults Bread Co. v. Commissioner, 10 B.T.A. 268 (1928), aff’d, 37 F.2d 442 (D.C.

Cir. 1929).

172

Memorandum from R. Hertzog, to Chief Judge Kern, Aug. 10, 1953, filed

at the U.S. Tax Court in “Responsive Pleadings: Memoranda and Correspondence”

[hereinafter cited as Hertzog]; Memorandum from Chief Judge Kern, to Judge

Murdock, Rules Comm. Chairman, Aug. 14, 1953, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda and Correspondence” [hereinafter cited as

Kern, 1953].

173

Hertzog, supra note 172.

174

Kern, 1953, supra note 172.

175

TAX CT. R. 25(c) (Jan. 1, 1974 ed.); Rules Comm. Note, TAX CT. R. 25(c)

(Jan. 1, 1974 ed.). This flexibility has been retained in the current rule. See T

AX CT.

R. 25(c) (July 6, 2012 ed.). Cf. FED. R. CIV. P. 6(b)(1), which provides as follows:

(b) E

XTENDING TIME.

(1) In General. When an act may or must be done within a specified

time, the court may, for good cause, extend the time:

(A) with or without motion or notice if the court acts, or if a request is

made, before the original time or its extension expires; or

(B) on motion made after the time has expired if the party failed to act

because of excusable neglect.

The shorter moving and answering periods in federal district court may have

also influenced the Tax Court to reserve the power to order shorter filing periods

in appropriate cases. See F

ED. R. CIV. P. 12.

176

Willis W. Ritter, Pitfalls in Practice Before the Board of Tax Appeals, 3 NAT. INC.

TAX MAG. 297, 299–300 (1925) [hereinafter cited as Ritter, 1925].

Pretrial Procedure 569

chose to proceed cautiously rather than risk a confrontation. For example,

the original rule which mandated that the Commissioner “shall file an

answer”

177

was soon amended in favor of a more conservative approach

which provided “the Commissioner shall have 20 days within which” to

move or answer.

178

This change in wording was significant in its implied

concession that the Board could not compel the Commissioner to answer.

Additionally, the Board was reluctant, until 1931, to delineate expressly the

consequences of the Commissioner’s failure to answer.

179

Consequently,

the Board had to improvise on a case-by-case basis when faced with the

issue. At first, it seemed satisfied to grant discretionary time extensions that

were not dependent upon timely motion.

180

An orderly procedure,

however, demanded a less arbitrary and more definitive method of dealing

with tax controversies. Furthermore, it was essential, for policy reasons,

that the Board not only promulgate rules of procedure that fairly allocated

the burden of pleading, but that the court also uniformly administer the

rules.

181

The Board received some guidance from the Court of Appeals for the

District of Columbia in its decision in Board of Tax Appeals v. United States ex

rel. Shults Bread Co.,

182

which severely restricted the available options. The

Board had exercised its discretion to waive the time limitations by allowing

the Commissioner to submit his pleading on a motion made subsequent to

the filing period. In affirming the decision, the court of appeals stressed

that the Commissioner had a statutory right to be heard,

183

and because

there was no statutory requirement that the Commissioner file an answer,

the Board’s procedural rules could not limit that statutory right.

184

The

177

B.T.A. RULE 9 (July, 1924 ed.).

178

B.T.A. RULE 9 (Sept. 27, 1924 ed.).

179

It is also possible that the Board was reluctant to promulgate a rule

penalizing the Commissioner, because of the impropriety of anticipating an

occasional failure to comply with the rules. See Letter from Judge Murdock, Rules

Comm. Chairman, to E. Griswold, Dec. 11, 1947, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda and Correspondence.”

180

Board of Tax Appeals v. U.S. ex rel. Shults Bread Co., 37 F.2d 442 (D.C.

Cir. 1929); Leininger v. Commissioner, 19 B.T.A. 621 (1930), rev’d, 86 F.2d 791 (6th

Cir. 1931), rev’d, 285 U.S. 136 (1932); Baldwin v. Commissioner, 14 B.T.A. 506, 507

(1928).

181

See Letter from R. Miller, Chairman, ABA Committee on Federal Taxation,

to Member Murdock, Rules Comm. Chairman, April 22, 1937, p. 2, filed at the U.S.

Tax Court in “Responsive Pleadings: Memoranda and Correspondence”

[hereinafter cited as Miller].

182

37 F.2d 442 (D.C. Cir. 1929).

183

Revenue Act of 1926, ch. 27, § 1000, amending Revenue Act of 1924,

§ 907(a), 44 Stat. 107 (now codified at I.R.C. § 7458).

184

37 F.2d at 443.

570 The United States Tax Court – An Historical Analysis

court concluded that the Commissioner’s failure to answer would, under no

circumstances, justify a default judgment.

When the petition for redetermination was filed with the Board in

the present case, the duty was imposed upon the Board to proceed

with the case. The objections set forth in the petition to the findings

of the Commissioner presented issues between petitioner and the

Commissioner for redetermination by the Board, whether the

Commissioner answered the petition or not. The issues thus

presented by the petition, in the absence of answer, were such as

must be supported by proof. In other words, there was not such a

prima facie case as would authorize or justify a judgment in default.

The jurisdiction to redetermine forbids such a judgment.

185

Shortly thereafter, the Board promulgated a rule consistent with the

Shults Bread Co. holding which nevertheless encouraged responsive pleading

by the Commissioner. The rule stated that “[e]ach and every material

allegation of fact set out in the petition and not denied in the answer . . .

shall be deemed to be admitted.”

186

On its face, this rule seemed preferable

to the prior ad hoc procedure in two respects. First, the Board avoided the

appearance of partiality towards the Commissioner since the sanctions

imposed on the Commissioner for failing to answer paralleled the sanctions

imposed on the petitioner for failing to reply.

187

Second, the rule provided

the necessary element of certainty which was missing under its predecessor.

Nevertheless, the rule was not particularly suited to the requirements of tax

practice. The revenue losses likely to be suffered by the Government if an

onerous consequence attached to the Commissioner’s failure to answer

could not be ignored.

188

As a result, there was less than vigorous

enforcement of the rule, which in turn created resentment over the “habit

of leniency to the Government which prevail[ed] in the Courts of this

neighborhood.”

189

Therefore, the rule was amended in 1938, in favor of a

show cause procedure.

190

185

Id. at 444.

186

B.T.A. RULE 19 (Feb. 1, 1931 ed.).

187

Id.; Miller, supra note 181.

188

Miller, supra note 181.

189

Id. See generally Brooklyn Union Gas Co. v. Commissioner, 22 B.T.A. 507

(1931), aff’d, 62 F.2d 505 (2d Cir. 1933); Leininger v. Commissioner, 19 B.T.A. 621

(1930), rev’d, 86 F.2d 791 (6th Cir. 1931), rev’d, 285 U.S. 136 (1932).

190

B.T.A. RULE 18 (Jan. 1, 1938 ed.). The rule resembled a Bureau proposal

which advocated a show cause hearing prior to the imposition of any penalty for

failing to answer timely. Memorandum from R. Ryan, Joint Comm. Member, to

Member Morris, Joint Comm. Chairman, May 14, 1937, at 1–2, filed at the U.S. Tax

Pretrial Procedure 571

To invoke the revised rule, the petitioner was required to file a motion

advising the Board of the undenied factual allegations. The Commissioner

then had to demonstrate that good cause existed to receive an extension;

otherwise, the undenied allegations were deemed admitted. If the taxpayer

neglected to file a motion within 45 days after the expiration of the 60-day

period, the petition’s factual allegations were deemed denied.

191

The

interest in uniform application of the rules was satisfied since the same rule

was applied in the case of a petitioner’s failure to reply.

192

In 1955, the

Board confined this procedure to the taxpayer’s failure to reply,

193

and the

pre-1938 procedure regarding answers was reinstated. The reinstated

procedure provided that undenied factual allegations contained in the

petition were to be deemed admitted, unless the court permitted a

discretionary filing extension after a showing of good cause.

194

The 1974 revision witnessed an abrupt departure from the traditional

approach. The Tax Court, due to its change in status in 1969 to an article I

court,

195

which presumably released it from the constraints of the Shults

decision, instituted a procedure based on the Federal Rules of Civil

Procedure.

196

The rule now permits the court to hold any party in default

who has failed to comply with its rules.

197

Alternatively, the court may

decide an issue against any party failing to comply with its rules who has the

burden of proof, and the decision “shall be treated as a dismissal.”

198

The

effect of a decision “rendered upon a default or in consequence of a

dismissal” will be an adjudication on the merits,

199

subject to being set aside,

however, upon motion “for reason deemed sufficient by the Court.”

200

Court in “Responsive Pleadings: Memoranda and Correspondence” [hereinafter

cited as Ryan].

191

B.T.A. RULE 18 (Jan. 1, 1938 ed.).

192

Id.

193

TAX CT. R. 18 (Aug. 15, 1955 ed.).

194

TAX CT. R. 20 (Aug. 15. 1955 ed.). The Commissioner satisfied the good

cause standard if the failure to file was not the result of willful misconduct and did

not prejudice the taxpayer. Dixon v. Commissioner, 60 T.C. 802 (1973); Rea v.

Commissioner, 60 T.C. 717 (1973); Estate of Quirk v. Commissioner, 60 T.C. 520

(1973).

195

Tax Reform Act of 1969, Pub. L. No. 91-172, § 951, 83 Stat. 730 (amending

I.R.C. § 7441).

196

Compare FED. R. CIV. P. 41, 55, with TAX CT. R. 123 (Jan. 1, 1974 ed.).

197

TAX CT. R. 123(a) (July 6, 2012 ed.).

198

TAX CT. R. 123(b) (July 6, 2012 ed.).

199

TAX CT. R. 123(d) (July 6, 2012 ed.).

200

TAX CT. R. 123(c) (July 6, 2012 ed.).

572 The United States Tax Court – An Historical Analysis

2. The General Denial

The usual responsive pleading of the Commissioner has been a general

denial.

201

The Commissioner’s continued reliance on this pleading

technique has aroused considerable criticism among the tax bar.

202

Notwithstanding a consensus that this format of pleading is

counterproductive, it has persisted for decades.

203

The emergence of the general denial as the Commissioner’s standard

responsive pleading cannot be attributed to the Board’s failure to provide

the requisite guidelines. By 1926, the rules directed the Commissioner to

prepare an answer that informed the Board and the taxpayer of the nature

of the defense.

204

In an effort to realize this objective, the rules required

admissions and denials to be specific.

205

If strictly observed, this rule could

have checked the developing trend towards the general denial; but there

were numerous incentives which encouraged and practically dictated the

opposite result.

206

First, strategies inherent in the adversarial system

201

E.g., Ash, supra note 14, at 938; Paul, supra note 13, at 514; Letter from J.

Barnard to Member Morris, Joint Comm. Chairman, June 10, 1937, filed at the U.S.

Tax Court in “Responsive Pleadings: Memoranda and Correspondence”

[hereinafter cited as Barnard].

202

E.g., Ash, supra note 14, at 938; Paul, supra note 13, at 514; D.C. Bar Report,

supra note 13, at 9–15.

203

E.g., Paul, supra note 13, at 514; D.C. Bar Report, supra note 13, at 9–15;

Letter from J. Seidman, to H. Reiling, Assistant General Counsel’s Office, Oct. 30,

1936, filed at the U.S. Tax Court in “Responsive Pleadings: Memoranda and

Correspondence” [hereinafter cited as Seidman, 1936]. See infra note 206.

204

B.T.A. RULE 14 (April 1, 1926 ed.). This provision was first incorporated

into the rules in 1924. B.T.A.

RULE 9 (Sept. 27, 1924 ed.). The original rules

merely required the Commissioner to admit or deny the petition’s material factual

allegations. B.T.A.

RULE 9 (July, 1924 ed.).

205

B.T.A. RULE 14 (April 1, 1926 ed.).

206

See Robert Ash, Guides in the Preparation of Protests, Briefs, and Tax Court

Pleadings, 4 N.Y.U. I

NST. ON FED. TAX’N 243, 258–59 (1946) [hereinafter cited as

Ash]; Bennion, supra note 14, at 417–19; Randolph F. Caldwell, Jr., Tax Court

Procedure: Problems But Not Pitfalls, 27 N.Y.U. I

NST. ON FED. TAX’N 1435, 1439

(1969) [hereinafter cited as Caldwell]; Martin D. Cohen, Litigation Techniques That

Increase Your Chances for Success in the Tax Court, 35 J. T

AX’N 340 (1971) [hereinafter

cited as Cohen]; Goldfein supra note 49, at 67; Groman, supra note 14, at 611;

Albert L. Hopkins, The United States Board of Tax Appeals, 12 A.B.A. J. 466, 468

(1926) [hereinafter cited as Hopkins]; Paul, supra note 13, at 514; Homer Sullivan,

Procedure Before The United States Board of Tax Appeals, 2 N

AT. INC. TAX MAG. 325,

326 (1924) [hereinafter cited as Sullivan]; Barnard, supra note 201; D.C. Bar Report,

supra note 13, at 9–15; Joint Committee Report, supra note 3, at 22–23; Letter from

Chairman Black to J. Seidman, Jan. 12, 1937, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda and Correspondence” [hereinafter cited as

Seidman, 1937]; Seidman, 1936, supra note 203; Letter from M. Teall, attorney, to

Pretrial Procedure 573

encouraged the Commissioner to keep the issues as elastic as possible.

207

the answer was drafted in general and indefinite terms, it was less likely to

be inconsistent with the deficiency determination, thus preventing a

possible shift in the burden of proof.

208

Second, many petitions were

drafted in such a manner “that it [was] difficult, if not impossible, to

specifically admit or deny the allegations of those petitions without

substantial prejudice to the Commissioner’s case.”

209

Third, the Chief

Counsel’s Office was understaffed, which made it difficult to allocate the

time necessary to carefully draft a specific and informative answer.

210

Fourth, due to the internal stratification of the Chief Counsel’s Office, the

attorneys who drafted the answer were encountering the case for the first

time. Their unfamiliarity with the facts

211

and lack of personal stake or

responsibility in the case created pressures that tended to result in the filing

of a general denial.

212

Finally, the Commissioner’s practice of prefacing the

Chairman Arundell, March 26, 1932, filed at the U.S. Tax Court in “Responsive

Pleadings: Memoranda and Correspondence” [hereinafter cited as Teall].

207

Bennion, supra note 14; Groman, supra note 14.

208

Bennion, supra note 14; Groman, supra note 14; see also B.T.A. RULE 30

(April 1, 1926 ed.).

209

Joint Committee Report, supra note 3, at 22–23.

210

Id.

211

D.C. Bar Report, supra note 13, at 11; Paul, supra note 13.

212

D.C. Bar Report, supra note 13, at 11. From 1924, to the present, there

have been several indications that the Commissioner had issued instructions to file

more informative answers. Statements in 1926 indicated that the earlier practice of

filing general denials had been discontinued. Hopkins, supra note 206. In 1938, the

Joint Committee’s Report concluded: “[I]n this connection we are advised that the

Chief Counsel has recently issued specific instructions to his attorneys to make

every effort in that direction [improving answer’s quality] and that there has already

been substantial improvement.” Joint Committee Report, supra note 3, at 23. In

1971, despite continuous criticism, the Chief Counsel stated his policy as follows:

It has long been the position of this office that facts alleged in the petition

which are known to be true by our attorneys should be admitted. Recently

we have gone a step further and issued instructions to our trial attorneys

that errors alleged in the petition to adjustments in the deficiency notice

giving rise in part to the deficiency should also be admitted in the answer if,

in fact, the statutory notice makes an incorrect determination as to any of

the adjustments. In other words, if the Government was in error as to part

of the determined deficiency, such error will be admitted in the answer

rather than wait until the entire case is settled or the case tried as has been

in the past the usual practice.

Letter from K. Martin Worthy, Chief Counsel, to M. Cohen, Sept. 8, 1971, in

Cohen, supra note 206, n.4, at 340–41. The unending flow of criticism, however,

makes these statements suspect.

574 The United States Tax Court – An Historical Analysis

general denial with “specifically” was tantamount to technical compliance

with the rule, which made a successful challenge difficult.

213

The respondent’s failure to plead his position fully in the answer was

encouraged by the Board’s reluctance to take the requisite corrective

measures.

214

For example, in the first appeal decided by the Board, John H.

Parrott,

215

the petitioner moved to have a more specific answer filed. The

Commissioner resisted, arguing that since the deficiency was presumptively

correct, a general denial of the petition was the only answer necessary. The

Board apparently acquiesced in the Commissioner’s position,

216

and the

practice of general denials was thus commenced. In 1924, soon after the

decision in Parrott, the Board revised the answer rule to require that answers

“fully and completely . . . advise the taxpayer and the board of the nature of

the defense.”

217

However, little change in actual practice resulted from this

revision.

218

In 1926, the Board introduced the motion for a further and

better statement of a pleading

219

which possessed the potential to arrest this

trend. However, its potential went unrealized for almost 30 years. In the

words of one disenchanted practitioner,

[T]he rule sounds just dandy, but it does not work as it sounds. I

have made numerous attempts to smoke out the Commissioner’s

position by attempting to invoke the rule, and have yet to succeed.

And I cannot find any reported Board or Tax Court case which

indicates the rule has ever helped a taxpayer.

220

213

Teall, supra note 206, at 1. See generally Ash, supra note 206.

214

Ash, supra note 206, at 258, 259; see also Caldwell, supra note 206, at 1439–41;

Cohen, supra note 206, at 340–41; D.C. Bar Report, supra note 13.

215

1 B.T.A. 1 (1924). See Sullivan, supra note 206, at 326.

216

Sullivan, supra note 206, at 326.

217

B.T.A. RULE 9 (Sept. 27, 1924 ed.).

218

E.g., Sullivan, supra note 206, at 326.

219

B.T.A. RULE 19 (April 1, 1926 ed.). There is some evidence that the Board,

prior to this date, entertained such motions with respect to petitions. Charles D.

Hamel, The United States Board of Tax Appeals, 2 N

AT. INC. TAX MAG. 293, 296

(1926).

220

Ash, supra note 206, at 259. The procedure has been used successfully,

however, especially in net worth fraud cases. Licavoli v. Commissioner, 15 T.C.M.

(CCH) 862 (1956), aff’d, 252 F.2d 268 (6th Cir. 1958); Gerald J. Mehlman, The

Motion for a Further and Better Statement in Net Worth Fraud Cases, 10 T

AX L. REV. 267

(1954). See generally Bennion, supra note 14, at 412–15; Caldwell, supra note 206, at

1439–40; Herbert S. Mednick, Pre-Trial Strategy in a Tax Case: Techniques and

Limitations in Dealing with Regional Counsel, 22 N.Y.U. I

NST. ON FED. TAX’N 125,

135–37 (1964) [hereinafter cited as Mednick]; Edward Pesin, Techniques in Proving a

Tax Case, 17 N.Y.U. I

NST. ON FED. TAX’N 37, 45 (1959) [hereinafter cited as Pesin];

Arnold Raum, Tax Court Litigation, 9 U.S.C.

TAX INST. 631, 641–43 (1957)

[hereinafter cited as Raum]; Herbert L. Zuckerman, Check List of Do’s and Don’ts in

Pretrial Procedure 575

In the view of many, the prevailing practice with regard to the answer

had an adverse effect on the conduct of Tax Court proceedings by

curtailing the necessary exchange of information.

221

Prior to 1974, the

pleadings and stipulations were the primary methods of defining and

narrowing the issues since discovery and admissions procedures were

unavailable.

222

The general denial not only diminished the informational

content of the answer, but also compelled the parties to place a heavier

emphasis on alternate methods of narrowing the issues.

223

As a result,

many taxpayers expended unnecessary time and money proving formal

facts, facts the Commissioner knew to be true, which many times were

actually contained in Government files.

224

Additionally, the Board/Tax

Court was burdened with both an increased motion practice as taxpayers

sought more informative answers, and with lengthier trials if the motion

was denied and all the facts had to be formally proved.

225

Furthermore, the

general denial had repercussions for the Commissioner who also had to

devote more time to opposing taxpayer motions as well as participating in

lengthier trials.

Handling a Tax Fraud Case, 29 N.Y.U. INST. ON FED. TAX’N 987, 1011 (1971)

[hereinafter cited as Zuckerman]. However, as a result of the 1974 rules revision,

the motion for a more definite statement has been restricted to cases in which such

a statement is necessary in order for a responsive pleading to be framed. T

AX CT.

R. 51(a) (Jan. 1, 1974 ed.). See infra notes 229–232 and accompanying text.

221

See Paul, supra note 13, at 514; D.C. Bar Report, supra note 13, at 10–15;

Joint Committee Report, supra note 3, at 22–23.

222

See Rules Comm. Note, TAX CT. R. 70, 71, 72, 73, 90 (Jan. 1, 1974 ed.).

223

Cf. Joint Committee Report, supra note 3, at 22, 23.

224

Paul, supra note 13, at 514; Joint Committee Report, supra note 3, at 22, 23;

Teall, supra note 206. The following examples are illustrative:

In one instance a taxpayer alleged under oath that he was married and had

four children, all of which was denied. The petitioner was put to great

trouble and expense in proving the simple facts by doctor’s certificates,

marriage certificate, absence of divorce, etc. In another case the taxpayer

alleged under oath that he had filed certain tax returns in the Collector’s

Office of a distant state, which facts were denied. It required a great deal of

trouble to prove those facts and it later developed that the Government

attorney had the returns in his file all the time.

D.C. Bar Report, supra note 13, at 13.

225

D.C. Bar Report, supra note 13; Joint Committee Report, supra note 3, at

22–23. To the extent facts were stipulated, however, the taxpayer’s burden of

proof was eased.

576 The United States Tax Court – An Historical Analysis

Initially, criticism of uninformative answers was directed mainly at the

Commissioner,

226

but as time passed commentary tended to focus on

proposals to reform Board/Tax Court practice. One suggestion called for

verified answers. The Commissioner would have been required to certify

that admitted allegations were true, and that denials were specifically

premised on knowledge, information and belief, or insufficient

information.

227

Another suggestion would have required the Commissioner

to bear the taxpayer’s cost of proving facts, when the respondent

unreasonably refused to admit them.

228

226

See, e.g., Paul, supra note 13; Letter from J. Barnard to Member Morris, Joint

Comm. Chairman, June 10, 1937, filed at the U.S. Tax Court in “Responsive

Pleadings: Memoranda and Correspondence;” Joint Committee Report, supra note

3, at 22–23.

227

Memorandum from Member Murdock, Rules Comm. Chairman, to

Members Trammell, Black and Matthews, April 2, 1932, filed at the U.S. Tax Court

in “Responsive Pleadings: Memoranda and Correspondence.” The Board had

previously rejected the idea on the grounds that the Commissioner had insufficient

knowledge of the taxpayer’s affairs. Teall, supra note 206. If the recommendation

had been adopted, the following affidavit would have been required:

COUNSEL’S CERTIFICATE

I hereby certify that I prepared the foregoing answer; that, in course of

preparation thereof, I made, personally, a careful examination of the file of

this case in the possession of the General Counsel for the Commissioner of

Internal Revenue; that said answer specifically admits each and every

allegation of fact of the petition which, from my knowledge or information

of this case, I believe to be true; that each and every denial of fact in said

answer made is based upon my belief that the allegation denied is in fact

untrue, or else upon my own want of information, from said file or

otherwise, sufficient to enable me to form a belief as to whether the

allegation denied is in fact true or untrue; and that each and every

affirmative allegation of fact made in said answer is believed by me to be

true.

Teall, supra note 206.

228

See Paul, supra note 13. This recommendation was based upon N.Y. CIV.

PRAC. ACT § 323 which provided:

Admission of facts. Any party, by notice in writing, given not later than ten

days before the trial, may call on any other party to admit, for the purposes

of the cause, matter or issue only, any specific fact or facts mentioned in

such notice. In case of refusal or neglect to admit the same within six days

after service of such notice, or within such further time as may be allowed

by the court or a judge, the expenses incurred in proving such fact or facts

must be ascertained at the trial and paid by the party so neglecting or

refusing, whatever the result of the cause, matter or issue may be, unless at

the trial or hearing the court or a judge certify that the refusal to admit was

reasonable, or unless the court or a judge, at any time, shall order or direct

otherwise. Any admission made in pursuance of such notice is to be

Pretrial Procedure 577

The plethora of criticisms and proposals appeared to fall on deaf ears

until 1956, when the Tax Court commenced a campaign against

uninformative answers that gradually proliferated into a multi-faceted

attack. The first major breakthrough occurred in Licavoli v. Commissioner,

229

in which the court gave notice that more specific pleading would be

required. The Commissioner had failed to comply with a court order

granting the taxpayer’s motion for a further and better statement of the

answer, and the court struck those pleadings which were the subject of the

motion.

230

Thereafter, until 1974, a motion for a further and better

statement was an integral part of taxpayers’ arsenal for challenging general

denials.

231

As a result of the 1974 rules revision, the motion for a further

and better statement was generally confined to pleadings requiring a

responsive pleading.

232

This change in practice, however, did not signal a

termination of the Tax Court’s efforts to compel informative answers.

233

Rather, it indicated an emphasis favoring a more diversified approach that

allowed taxpayers to insist upon specific pleading and to ascertain the

underlying factual basis of the answer. In 1974, the answering requirements

were strengthened in three aspects, and these revisions have been carried

forward in the present rules. First, the Commissioner must identify which

allegations the Commissioner has insufficient information to either admit or

deny.

234

Second, if only part of an allegation is denied, the part admitted

deemed to be made only for the purposes of the particular cause, matter or

issue, and not as an admission to be used against the party on any other

occasion or in favor of any person other than the party giving the notice.

The court or a judge, at any time, may allow any party to amend or

withdraw any admission so made on such terms as may be just.

Cf. F

ED. R. CIV. P. 36, 37(c).

229

Licavoli v. Commissioner, 15 T.C.M. (CCH) 862 (1956), aff’d, 252 F.2d 268

(6th Cir. 1958).

230

Id.

231

See Bennion, supra note 14; Caldwell, supra note 206; Mednick, supra note

220; Raum, supra note 220; Zuckerman, supra note 220.

232

TAX CT. R. 51(a) (Jan. 1, 1974 ed.); Rules Comm. Note, TAX CT. R. 51(a)

(Jan. 1, 1974 ed.); Estate of Allensworth v. Commissioner, 66 T.C. 33 (1976).

233

Compare TAX CT. R. 51(a) (Jan. 1, 1974 ed.), with TAX CT. R. 36, 70, 71, 72,

73, 90 (Jan. 1, 1974 ed.). In Licavoli v. Commissioner, 15 T.C.M. (CCH) 862, 864

(1956), aff’d, 252 F.2d 268 (6th Cir. 1958), the Tax Court indicated that one of the

important considerations in its decision to make the motion for a further and better

statement more readily available was the absence of discovery procedures. Now

that both admission and discovery have been introduced into Tax Court procedure,

the need for the motion for a further and better statement is diminished.

234

TAX CT. R. 36(b) (Jan. 1, 1974 ed.). See Goldfein, supra note 49, at 67. The

allegation of facts which the Commissioner has insufficient information to admit or

578 The United States Tax Court – An Historical Analysis

and the part denied must be specified.

235

Third, although verification is not

generally required, the court, in its discretion, reserves the right to require

verification of any pleading.

236

The taxpayer can seek enforcement of the

new pleading requirements by a motion to strike.

237

In addition to this

remedy, the Tax Court introduced admission and discovery procedures that

supplement both the pleadings and stipulations in narrowing the issues by

making the factual basis of the Commissioner’s litigating position

available.

238

3. Affirmative Allegations

Under certain circumstances, the Commissioner cannot be content with

merely filing a general denial because affirmative pleading is mandated by

statute or court rule. The importance of affirmative pleading lies principally

in its relationship to the burden of proof rules.

The Board’s original rules directed the Commissioner to “set forth any

new matters of fact and any propositions of law” in the answer.

239

At the

same time, the rules, without qualification, placed the burden of proof on

the taxpayer.

240

By 1925, however, the Board made clear that, as to

defenses and affirmative relief, the Commissioner would have the burden

of proof.

241

In 1926, both the answer and burden of proof rules were

amended to reflect this practice. The Commissioner was required to plead

“new matters upon which [he] relies for defense or affirmative relief”

242

and

the burden of proof for the new matter of fact affirmatively pleaded was

shifted to the Commissioner.

243

These rules were not, however, entirely

satisfactory. For example, strictly construed, the rules permitted the

Commissioner to avoid the burden of proof as to fraud by simply raising

deny are deemed denied. A similar proposal, which was rejected in 1948, provided

in part:

When the answer contains a denial of a fact alleged in the petition, the

Commissioner shall state what the fact is or what he alleges the fact to be

on information and belief, or that he is without any information of the fact

which is denied.

D.C. Bar Report, supra note 13, at 15.

235

TAX CT. R. 36(b) (Jan. 1, 1974 ed.).

236

TAX CT. R. 33(a) (Jan. 1, 1974 ed.); Rules Comm. Note, TAX CT. R. 33(a)

(Jan. 1, 1974 ed.).

237

TAX CT. R. 52 (Jan. 1, 1974 ed.).

238

TAX CT. R. 70, 71, 72, 73, 90 (Jan. 1, 1974 ed.).

239

B.T.A. RULE 9 (July, 1924 ed.).

240

B.T.A. RULE 20 (July, 1924 ed.).

241

General Lead Batteries Co., 2 B.T.A. 392, 395 (1925); see also 1925 House

Hearings, supra note 72, at 907.

242

B.T.A. RULE 14 (April 1, 1926 ed.).

243

B.T.A. RULE 30 (April 1, 1926 ed.).

Pretrial Procedure 579

the issue in the deficiency notice and thereby technically preventing any

allegations of fraud in the answer being classified as new matter. The Board

endorsed this approach until the Third Circuit Court of Appeals, in Budd v.

Commissioner,

244

and Congress, in the Revenue Act of 1928,

245

declared the

applicability of the common law rule, which required the party alleging

fraud to prove it.

246

Five years later, in 1931, the answer and burden of proof rules were

once again amended,

247

and as revised remained unchanged until 1974. The

Commissioner was directed to plead affirmatively in his answer in three

instances: when the Commissioner alleged an affirmative defense, asked for

affirmative relief, or by statute had the burden of proof.

248

A separate

amendment was made in the burden of proof rule to provide that the

taxpayer had the burden of proof “except as otherwise provided by statute

and except that in respect of any new matter pleaded in his answer, it shall

be upon the respondent.”

249

Clearly, as to matter with respect to which the

Commissioner had the statutory burden of proof, the answer and burden of

proof rules were consistent—the burden of pleading followed the burden

of proof.

250

However, it was not clear that the allegations of “new matter

pleaded in the answer” which caused a shift in the burden under the burden

of proof rule were identical with the “defenses” and “affirmative relief”

required to be affirmatively pleaded by the answer rule.

251

This difference

in language created the potential for an incongruous interpretation of the

two rules which could have resulted in the Commissioner being required to

plead affirmatively without a corresponding shift in the burden of proof or

vice versa. The need for identity in the terminology of both rules was

brought to the Board’s attention,

252

but apparently the Board was not

244

43 F.2d 509 (3d Cir. 1930). See Kerbaugh v. Commissioner, 29 B.T.A. 1014,

1015–16 (1934), aff’d. 74 F.2d 749 (1st Cir. 1935).

245

Revenue Act of 1928, ch. 852, §§ 601, 602, 45 Stat. 872 (now codified at

I.R.C. §§ 7454, 6902(a)).

246

This change in practice was reflected in the 1931 revision of both the

answer and the burden of proof rules. B.T.A.

RULES 14, 30 (Feb. 1, 1931 ed.).

247

B.T.A. RULES 14, 30 (Feb. 1, 1931 ed.).

248

B.T.A. RULE 14 (Feb. 1, 1931 ed.).

249

B.T.A. RULE 30 (Feb. 1, 1931 ed.).

250

Compare B.T.A. RULE 14 (Feb. 1, 1931 ed.), with B.T.A. RULE 30 (Feb. 1,

1931 ed.).

251

See, e.g., Samuel Byer, Limitation of Issues in Tax Litigation, 18 N.Y.U. INST. ON

FED. TAX’N 1035 (1960); Memorandum to Member Arundell, Joint Comm.

Chairman, c. 1937, at 1–2, filed at the U.S. Tax Court in “Responsive Pleadings:

Memoranda and Correspondence” [hereinafter cited as Arundell]; Ryan, supra note

190, at 2–3; Surrey, supra note 123, at 2–3, 7–8; Surrey, 1937, supra note 123, at 4–5.

252

Joint Committee Report, supra note 3, at 9; Ryan, supra note 190; Surrey,

supra note 123; Surrey, 1937, supra note 123.

580 The United States Tax Court – An Historical Analysis

prepared at that time to commit itself to a complete integration of the

rules.

253

Therefore, the distinctions, if any, between the two rules were left

to case law.

Affirmative defenses pleaded in the answer, such as res judicata and

waiver,

254

were clearly included in the term new matter and shifted the

burden of proof to the Commissioner.

255

Analysis was not so simple,

however, with regard to “affirmative relief.” Allegations seeking affirmative

relief, which also caused a shift in the burden of proof, were generally

classified by case law into two basic categories: increased or different

deficiencies,

256

and pleading new matter as distinguished from the broader

burden of proof new matter.

257

The Bureau was well aware of the

procedural disadvantages of shifting the burden and attempted to influence

the Board’s noncommittal position by commencing a campaign aimed at

preventing a shift in the burden of proof in both cases, although it was

generally recognized that both types of allegations should be pleaded.

258

In the case of increased deficiencies, the Board was compelled by statute

to allow the Commissioner to claim an increased deficiency at or before the

hearing.

259

There was, however, no statutory provision mandating a shift in

the burden of proof. The Bureau attempted to persuade the Board not to

253

See Joint Committee Report, supra note 3, at 9.

254

See TAX CT. R. 39, 142 (Jan. 1, 1974 ed.).

255

E.g., Hull v. Commissioner, 87 F.2d 260, 262 (4th Cir. 1937); see also 1925

House Hearings, supra note 72, at 907; Surrey, supra note 123, at 7–8. The Tax

Court’s current rules expressly recognize that affirmative defenses must be pleaded

and list those most common. Compare T

AX CT. R. 39 (Jan. 1, 1974 ed.), with TAX

CT. R. 142 (Jan. 1, 1974 ed.).

256

See, e.g., Estate of Tony Cordeiro v. Commissioner, 51 T.C. 195, 203 (1968);

Beck Chemical Equipment Corp. v. Commissioner, 27 T.C. 840, 856 (1957);

Rainbow Gasoline Corp. v. Commissioner, 31 B.T.A. 1050, 1060 (1935); Hemphill

v. Commissioner, 25 B.T.A. 1351, 1356 (1932); Cook v. Commissioner, 25 B.T.A.

92, 95 (1932); Stewart & Bennett, Inc. v. Commissioner, 20 B.T.A. 850, 855 (1930);

National Tea Co. v. Commissioner, 17 B.T.A. 1222, 1228–29 (1929). See generally 2

AURENCE F. CASEY, FED. TAX PRAC. 14–19 (1955) [hereinafter cited as CASEY].

257

The new matter generally referred to in the following cases had to be

affirmatively pleaded and the Commissioner had to assume the burden of proof,

but the new matter was not classified as increased or different deficiencies or an

affirmative defense. E.g., Estate of Falese v. Commissioner, 58 T.C. 895, 899

(1972); Estate of Gorby v. Commissioner, 53 T.C. 80, 91 (1969); Axelroad v.

Commissioner, T.C. Memo. 1962-118, 21 T.C.M. (CCH) 626, 631 (1962); Cedar

Valley Distillery, Inc. v. Commissioner, 16 T.C. 870, 879 (1951); Campbell v.

Commissioner, 11 T.C. 510, 511 (1948); O'Meara v. Commissioner, 8 T.C. 622, 628

(1947).

258

Ryan, supra note 190, at 2–3; Surrey, supra note 123, at 7–8; Surrey, 1937,

supra note 123, at 4–5.

259

Revenue Act of 1926, ch. 27, § 274(e), 44 Stat. 56 (now I.R.C. § 6214(a)).

Pretrial Procedure 581

shift the burden of proof in these cases, on the ground that the only

difference between an original and increased deficiency was that the

Commissioner issued the former, whereas the Appeals Division determined

the latter.

260

The Board was not convinced; it reasoned that the respondent

could “not consistently rely on” the presumption that the original

determination was correct “and at the same time urge that the

determination [was] wrong by asking for an increase.”

261

In the case of pleading new matter, however, the issues were

considerably more complex due to severe definitional problems.

262

The

Bureau anticipated the definitional problems inherent in the term “new

matter” and attempted to convince the Board to make a clarifying revision

that more specifically defined the term.

263

The Bureau’s primary fear was

that explanatory factual allegations pleaded in the answer would be

classified as affirmative relief and would thereby be considered as new

matter, which would shift the burden of proof.

264

The Board appreciated

the definitional problems, but concluded that a better term than new matter

was not available.

265

The Board felt that it would be inordinately difficult if

not impossible to anticipate all allegations which might constitute new

matter for purposes of affirmative relief.

266

In retrospect, the Commissioner’s apprehension—that explanatory

factual allegations and new matter would be confused—appears to have

been well founded in view of two distinct definitional problems with the

term which subsequently arose. First, there were two kinds of new matter:

pleading new matter and burden of proof new matter. The former had a very

narrow definition, including only those affirmative relief allegations which

were not categorized as increased or different deficiencies;

267

the latter had a

260

Surrey, 1937, supra note 123, at 4–5; see also Ryan, supra note 190, at 2–3.

261

Cascade Milling & Elevator Co. v. Commissioner, 25 B.T.A. 946, 948

(1932); see also

Papineau v. Commissioner, 28 T.C. 54, 57 (1957). The same analysis

would apply to different deficiency adjustments that did not increase the actual

amount of the deficiency. See C

ASEY, supra note 256, at 14–19.

262

Joint Committee Report, supra note 3, at 9; Surrey, 1937, supra note 123, at

4–5.

263

Surrey, supra note 123, at 7–8; Surrey, 1937, supra note 123 at 4–5.

264

Ryan, supra note 190, at 2–3.

265

See Joint Committee Report, supra note 3, at 9.

266

See Arundell, supra note 251, at 1–2.

267

See Estate of Horvath v. Commissioner, 59 T.C. 551, 556–57 (1973); Estate

of Falese v. Commissioner, 58 T.C. 895, 899 (1972); Estate of Gorby v.

Commissioner, 53 T.C. 80, 91 (1969); McSpadden v. Commissioner, 50 T.C. 478,

493 (1968); Sorin v. Commissioner, 29 T.C. 959, 969 (1958), aff’d, 271 F.2d 741 (2d

Cir. 1959); Papineau v. Commissioner, 28 T.C. 54, 57 (1957); Tauber v.

Commissioner, 24 T.C. 179, 185 (1955); Cedar Valley Distillery, Inc. v.

Commissioner, 16 T.C. 870, 879 (1951).

582 The United States Tax Court – An Historical Analysis

very broad definition, encompassing all allegations in the answer which

shifted the burden of proof other than statutory shifts in the burden of

proof.

268

The confusion was exacerbated by the Board/Tax Court’s failure

in its published decisions to acknowledge the sense in which the term was

being used.

269

Nevertheless, pleading new matter was consistently treated

as new matter for purposes of the burden of proof.

270

To the extent that the different definitions of new matter for purposes

of pleading and burden of proof caused confusion, such confusion was

eliminated in the 1974 rules revision by the complete integration of the

answer and burden of proof rules.

271

Pursuant to that revision, the

Commissioner is directed to plead affirmatively only when the

Commissioner has the burden of proof.

272

The burden of proof is generally

placed upon the taxpayer, with four exceptions.

273

Two of the exceptions,

affirmative defenses

274

and statutory shifts in the burden of proof,

275

were

expressly included in prior versions of the answer rule.

276

The other two

exceptions, increased deficiencies

277

and new matter,

278

are the two

categories of affirmative relief which, under prior answer rules, required

affirmative pleading.

279

It should be noted that the 1974 rule revision

confined the definition of new matter to the former pleading definition as a

268

B.T.A. RULE 30 (Feb. 1, 1931 ed.). Compare Estate of Falese v.

Commissioner, 58 T.C. 895, 899 (1972) (pleading new matter); Estate of Gorby v.

Commissioner, 53 T.C. 80, 91 (1969) (pleading new matter); Hull v. Commissioner,

87 F.2d 260, 261–62 (4th Cir. 1937) (affirmative defense) with Estate of Cordeiro v.

Commissioner, 51 T.C. 195, 203 (1968) (increased deficiency); Markle v.

Commissioner, 17 T.C. 1593, 1599 (1952) (increased deficiency); Rainbow Gasoline

Corp. v. Commissioner, 31 B.T.A. 1050, 1060 (1935) (increased deficiency).

269

See supra notes 267–268.

270

See supra notes 256, 268.

271

Compare TAX CT. R. 36(b) (Jan. 1, 1974 ed.), with TAX CT. R. 142(a) (Jan. 1,

1974 ed.).

272

TAX CT. R. 36(b) (Jan. 1, 1974 ed.). See Rules Comm. Note, TAX CT. R.

36(b) (Jan. 1, 1974 ed.).

273

TAX CT. R. 142(a) (Jan. 1, 1974 ed.).

274

Compare TAX CT. R. 142(a) (Jan. 1, 1974 ed.), with TAX CT. R. 39 (Jan. 1,

1974 ed.).

275

TAX CT. R. 142(a) (Jan. 1, 1974 ed.). The more common instances of the

statutory shift in the burden of proof are also listed in the rule. T

AX CT. R. 142(b),

(c), (d), (e) (Jan. 1, 1974 ed.).

276

Compare TAX CT. R. 142(a) (Jan. 1, 1974 ed.), with B.T.A. RULE 14 (Feb. 1,

1931 ed.).

277

TAX CT. R. 142(a) (Jan. 1, 1974 ed.).

278

Id.

279

Compare TAX CT. R. 142(a) (Jan. 1, 1974 ed.), with B.T.A. RULE 14 (Feb. 1,

1931 ed.).

Pretrial Procedure 583

subdivision of affirmative relief, rather than the sweeping, all-inclusive

definition of the term under previous burden of proof rules.

280

The second problem involved defining when allegations in the answer

constituted pleading new matter. The decision to classify these allegations

as either explanatory factual allegations or pleading new matter, which, in

turn, ultimately determined whether the issue would be entertained and

who had the burden of proof, generally depended upon two factors: the

timeliness of the allegations and their consistency with the deficiency notice.

If the allegations were made by answer or amended answer prior to the

hearing, then the only real issue was whether the allegations were consistent

with the general theory of the deficiency notice.

281

If the allegations were

consistent with the deficiency notice, the burden of proof remained on the

taxpayer since the allegation simply explained or expounded upon the

general theory of the deficiency notice.

282

On the other hand, in the case of

an inconsistency, the burden of proof was shifted to the Commissioner

since the allegation constituted new matter.

283

The standard that guided the

decisions, as explained in Sorin v. Commissioner,

284

was usually the specificity

of the deficiency notice. Affirmative allegations were more likely to be

classified as explanatory allegations, or in the court’s terminology, a new

theory (as opposed to a new matter), if the deficiency notice was phrased in

vague and general terms.

285

On the other hand, new matter was a more

typical conclusion if the deficiency notice pinpointed an exact reason for

280

See TAX CT. R. 36(b), 142(a) (Jan. 1, 1974 ed.); note 249 and accompanying

text supra.

281

Braunstein v. Commissioner, 36 T.C. 22, 68–69 (1961), aff’d, 305 F.2d 949

(2d Cir. 1962), aff’d, 374 U.S. 65 (1963); Estate of Scharf v. Commissioner, 38 T.C.

15, 27–28 (1962), aff’d, 316 F.2d 625 (7th Cir. 1963); Spangler v. Commissioner, 32

T.C. 782, 793–94 (1959); Papineau v. Commissioner, 28 T.C. 54, 57 (1957); Tauber

v. Commissioner, 24 T.C. 179, 185 (1955); Security-First Nat’l Bank of Los Angeles

v. Commissioner, 36 B.T.A. 633, 637 (1937).

282

Braunstein v. Commissioner, 36 T.C. 22, 68–69 (1961), aff’d, 305 F.2d 949

(2d Cir. 1962), aff’d, 374 U.S. 65 (1963); Estate of Scharf v. Commissioner, 38 T.C.

15, 27–28 (1962), aff’d, 316 F.2d 625 (7th Cir. 1963); Spangler v. Commissioner, 32

T.C. 782, 793–94 (1959).

283

Sorin v. Commissioner, 29 T.C. 959, 969 (1958), aff’d, 271 F.2d 741 (2d Cir.

1959); Papineau v. Commissioner, 28 T.C. 54, 57 (1957); Tauber v. Commissioner,

24 T.C. 179, 185 (1955); Cedar Valley Distillery, Inc. v. Commissioner, 16 T.C. 870,

879 (1951); Security-First Nat’l Bank of Los Angeles v. Commissioner, 36 B.T.A.

633, 637 (1937).

284

29 T.C. 959, 969 (1958), aff’d, 271 F.2d 741 (2d Cir. 1959). For discussion

of the interpretation of a new matter in subsequent decisions, see Part X.C.3.

285

See supra note 282.

584 The United States Tax Court – An Historical Analysis

the deficiency determination, because of the increased likelihood of

inconsistency.

286

If the Commissioner made the allegations in his opening statement, or

any time thereafter, the Board/Tax Court generally approached the issue

from one of two perspectives. First, the Board/Tax Court might decide

that the taxpayer had no prior notice of the new allegations and, therefore,

was prejudicially surprised.

287

Such a finding would preclude any

consideration of the issue

288

and generally would become more likely the

longer the Commissioner waited to raise the issue.

289

The other approach

involved the usual new matter analysis with the correlative allocation of the

burden of proof.

290

The Tax Court has consistently refused to delineate by rule the

circumstances under which affirmative allegations will be classified as new

matter,

291

presumably for the same reasons it rejected the Bureau’s proposal

to that effect in 1937.

292

Nevertheless, the principle enunciated in Sorin

appears to be a manageable standard. Furthermore, the Tax Court has

clarified the analytic approach to new matter. In Estate of Horvath v.

Commissioner,

293

the Tax Court combined the prejudicial surprise and new

matter/new theory approaches into a two-part analysis. The court held that

prior to a determination of the new matter issue, it must be decided if the

taxpayer was prejudicially surprised. Only upon determining that the

taxpayer was not prejudicially surprised will the Tax Court address the

allocation of the burden of proof by venturing into the new matter/new

theory dichotomy.

294

286

See supra note 283.

287

Allied Tube & Conduit Corp. v. Commissioner, T.C. Memo. 1975-281, 34

T.C.M. (CCH) 1218, 1223–24 (1975); Estate of Horvath v. Commissioner, 59 T.C.

551, 555–56 (1973); Nat Harrison Associates, Inc. v. Commissioner, 42 T.C. 601,

617 (1964); Theatre Concessions, Inc. v. Commissioner, 29 T.C. 754, 760–61

(1958); Baird v. Commissioner, 42 B.T.A. 970, 976 (1940).

288

See supra note 287.

289

Allied Tube & Conduit Corp. v. Commissioner, T.C. Memo. 1975-281, 34

T.C.M. (CCH) 1218, 1223–24 (1975).

290

Estate of Falese v. Commissioner, 58 T.C. 895, 899 (1972); Estate of Gorby

v. Commissioner, 53 T.C. 80, 91 (1969); McSpadden v. Commissioner, 50 T.C. 478,

493 (1968); Tauber v. Commissioner, 24 T.C. 179, 185 (1955); Cedar Valley

Distillery, Inc. v. Commissioner, 16 T.C. 870, 879 (1951); Security-First Nat’l Bank

of Los Angeles v. Commissioner, 36 B.T.A. 633, 637 (1937).

291

See TAX CT. R. 36, 142 (July 6, 2012 ed.).

292

See supra notes 263–266 and accompanying text.

293

59 T.C. 551 (1973).

294

Id. at 555–56; see also Quick v. Commissioner, 110 T.C. 172 (“As with other

amendments, we must consider whether granting respondent’s motion will surprise

and/or unfairly disadvantage petitioners.”); Allied Tube & Conduit Corp. v.

Pretrial Procedure 585

D. The Reply

Prior to 1931, a reply was not considered essential to the expeditious

disposition of tax controversies.

295

Issue was joined upon filing of the

answer, and any affirmative allegations contained therein were deemed

denied.

296

However, increased incidents of affirmative allegations in the

answer, partially attributable to statutory amendments that placed the

burden of proof on the Commissioner in fraud and transferee liability

cases,

297

led the Board to institute a formal reply procedure in 1931.

298

From 1931 to 1938, the reply provided an irrepressible source of

controversy.

299

The Board, striving to adapt the reply concept to the

Commissioner, T.C. Memo. 1975-281, 34 T.C.M. (CCH) 1218, 1223–24 (1975)

(refusing to consider issue raised for the first time in post-trial briefing).

295

See, e.g., B.T.A. RULES (1924–1931 eds.).

296

B.T.A. RULE 17 (April 1, 1926 ed.).

297

Revenue Act of 1928, ch. 852, §§ 601, 602, 45 Stat. 871 (now codified at

I.R.C. §§ 7454(a), 6902(a)).

298

B.T.A. RULES 15, 17, 19 (Feb. 1, 1931 ed.). Revenue Act of 1928, ch. 852,

§§ 601, 602, 45 Stat. 872 (now codified at I.R.C. §§ 7454(a), 6902(a)) (burden of

proof on Commissioner in fraud and transferee cases).

299

See Joint Committee Report, supra note 3, at 8–9; Letter from R. Miller,

American Bar Ass’n Comm. on Fed. Tax. Chairman, to Member Murdock, Rules

Comm. Chairman, April 22, 1937, filed at the U.S. Tax Court in “Responsive

Pleadings: Memoranda & Correspondence” [hereinafter cited as Miller, April 22,

1937]; Letter from Member Murdock, Rules Comm. Chairman, to the General

Counsel and American Bar Ass’n Comm. on Fed. Tax., Feb. 23, 1937, filed at the

U.S. Tax Court in “Responsive Pleadings: Memoranda & Correspondence”

[hereinafter cited as Murdock, Feb., 1937]; Letter from Member Murdock, Rules

Comm. Chairman, to R. Miller, American Bar Ass’n Comm. on Fed. Tax.

Chairman, April 23, 1937, filed at the U.S. Tax Court in “Responsive Pleadings:

Memoranda & Correspondence” [hereinafter cited as Murdock, 1937];

Memorandum from Member Murdock, to Members of the Board, April 30, 1935,

filed at the U.S. Tax Court in “Responsive Pleadings: Memoranda &

Correspondence” [hereinafter cited as Murdock, 1935]; Memorandum from

Member Murdock, Rules Comm. Chairman, to Chairman Black, Nov. 8, 1937, filed

at the U.S. Tax Court in “Responsive Pleadings: Memoranda & Correspondence;”

“Memorandum in re Rules,” from Member Murdock, Rules Comm. Chairman, c.

1937, filed at the U.S. Tax Court in “Responsive Pleadings: Memoranda &

Correspondence” [hereinafter cited as Murdock]; Memorandum from Rules

Comm. to the Board, Nov. 12, 1937, at 13, 14, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda & Correspondence” [hereinafter cited as Rules

Comm.]; Ryan, supra note 190, at 2–3; Surrey, supra note 123, at 4; Surrey, 1937,

supra note 123, at 3, 4.

586 The United States Tax Court – An Historical Analysis

peculiarities of tax practice,

300

vacillated among a spectrum of possibilities

including a verified, compulsory reply, as well as the complete abolition of

the procedure.

301

Ultimately, in a major revision effort in 1938, the Board

settled on a compromise procedure that restricted the situations demanding

a reply and simultaneously provided a compelling incentive to reply under

the prescribed circumstances.

302

At various times between 1938 and 1974, the Board/Tax Court

attempted to clarify the 1938 procedure.

303

These revisions, like their

predecessors, concentrated on filing requirements and the form and content

of the reply. Whether these modifications were successful, however, is

open to question.

304

1. Filing

Filing encompasses three important and distinct issues: whether a reply

is required, when it must be filed, and what sanctions result from a failure

to file timely. Each of these questions was addressed by the 1931 and

subsequent revisions.

a. Requirement to Reply

The 1931 revision directed the filing of a reply

[i]f the answer of the Commissioner sets forth facts upon which he

relies for affirmative relief, or contains a statement of the facts upon

which he relies to sustain an issue in respect of which the burden of

proof is placed upon him by statute. . . .

305

The rule thus required a reply in two of the instances when the

Commissioner had the burden of proof: when the Commissioner asked for

affirmative relief in the answer, and when a statute placed the burden of

proof on the Commissioner. The rule’s application to the Commissioner’s

request for affirmative relief was relatively clear: If the Commissioner’s

answer asserted new matter or a new deficiency, either in addition to or in

place of the original deficiency, a reply was mandatory.

306

In effect, the

reply represented the taxpayer’s initial pleading with respect to the new

300

See, e.g., Surrey, supra note 123.

301

See, e.g., id.

302

B.T.A. RULES 15, 18 (Jan. 1, 1938 ed.).

303

TAX CT. R. 15, 18 (Aug. 15, 1955 ed.); TAX CT. R. 37 (Jan. 1, 1974 ed.).

304

See infra notes 311–324 and accompanying text.

305

B.T.A. RULE 15 (Feb. 1, 1931 ed.).

306

If a reply was not filed, the affirmative allegations were deemed admitted.

West Town State Bank v. Commissioner, 32 B.T.A. 531 (1935).

Pretrial Procedure 587

matter or deficiency and fulfilled a function similar to the petition. The

major difference between the two was that the reply had no jurisdictional

implications.

The rule was not that clear, however, when the answer contained

allegations of fraud,

307

a matter on which the Commissioner, by statute, had

the burden of proof.

308

The wording of the rule implied that a reply was

necessary whenever fraud was in issue.

309

Nevertheless, the Board soon

ruled that a reply would not be required if the Commissioner’s answer

simply repeated allegations of fraud originally contained in the notice of

deficiency which the taxpayer had already denied in his petition.

310

In 1955, further ambiguity was introduced by a revision that apparently

required a reply whenever the answer contained material allegations of

facts.

311

Despite the apparent breadth of the new rule, subsequent decisions

made clear that the court’s intent was only to require a reply if the answer

307

E.g. , Murdock, Feb., 1937, supra note 299.

308

B.T.A. RULES 14, 30 (Feb. 1, 1931 ed.); Revenue Act of 1928, ch. 852,

§§ 601, 602, 45 Stat. 871 (now codified at I.R.C. §§ 7454(a), 6902(a)). The other

issue on which the Commissioner shouldered the burden of proof, transferee

liability, apparently caused no controversy.

309

See Statler v. Commissioner, 27 B.T.A. 342, 345 (1932). For an excellent

discussion of when fraud is involved, see Kerbaugh v. Commissioner, 29 B.T.A.

1014 (1934), aff’d, 74 F.2d 749 (1st Cir. 1935).

310

Beringer v. Commissioner, 29 B.T.A. 250, 251 (1933), wherein the Board

stated “if the answer merely reiterates affirmatively matters already covered by his

notice of deficiency and assailed by the petition, there is no requirement that the

petitioner shall as to those matters file a reply, and his failure to do so is not

prejudicial.” In Nicholson v. Commissioner, 32 B.T.A. 977, 984 (1935), aff’d, 20 F.2d

978 (8th Cir. 1937), the Board extended this exception by not requiring a reply if

the denial of fraud in the petition was germane to the contents of the deficiency

notice and not anticipatory to the answer. However, if the petitioner did not deny

fraud, but simply set up a defense in avoidance, then fraud was deemed admitted.

Mauch v. Commissioner, 35 B.T.A. 617, 625 (1937), aff’d, 113 F.2d 555 (3d Cir.

1940).

311

TAX CT. R. 15 (Aug. 15, 1955 ed.). This language was first suggested by

Stanley Surrey in 1937 in the following proposed amendment:

If the answer of the Commissioner sets forth allegations of fact, the

petitioner shall, within 45 days after a copy of such answer is mailed to him

or his counsel of record by registered mail, file a reply which shall contain:

(1) A specific admission or denial of each material allegation of fact

contained in the answer;

(2) A clear and concise statement of any additional facts upon which he

relies for defense.

Surrey, supra note 123.

588 The United States Tax Court – An Historical Analysis

contained material allegations which the Commissioner had the burden of

proving.

312

The rule, modified as part of the major rules revision of 1974, provided

as follows:

Form and Content. In response to each material allegation in the

answer and the facts in support thereof on which the Commissioner

has the burden of proof, the reply shall contain a specific admission

or denial.

313

Strictly construed, the rule failed to inform taxpayers under what

circumstances a reply was required, because it only related to the form and

content of the reply. But, when read in conjunction with the Tax Court

Rules Committee note, it is evident that no change in practice was

intended.

314

Consequently, a reply was required “after service . . . of an

answer in which material facts are alleged.”

315

The ambiguity of the

previous rule, however, was removed, and it became clear that a reply was

required only when the answer contains “material allegations . . . on which

the Commissioner has the burden of proof. . . .”

316

The rule in its current

form retains this approach.

317

312

Gilday v. Commissioner, 62 T.C. 260, 262 (1974); Gay v. Commissioner,

T.C. Memo. 1966-237, 25 T.C.M. (CCH) 1220 (1966); Watson v. Commissioner,

T.C. Memo. 1964-155, 23 T.C.M. (CCH) 927 (1964); Baglivo v. Commissioner,

T.C. Memo. 1962-127, 21 T.C.M. (CCH) 663 (1962); Wolfe v. Commissioner, T.C.

Memo. 1961-131, 20 T.C.M. (CCH) 655 (1961); Morris v. Commissioner, 30 T.C.

928 (1958); Accardi v. Commissioner, T.C. Memo. 1957-73, 16 T.C.M. (CCH) 311

(1957); Lugauskas v. Commissioner, T.C. Memo. 1957-56, 16 T.C.M. (CCH) 242

(1957). This conclusion is also supported by the 1974 rules revision that requires a

reply only when the answer contains material allegations in respect of which the

Commissioner has the burden of proof. T

AX CT. R. 37(b) (Jan. 1, 1974 ed.). The

official Note to the 1974 rules revision states that it made no change in the

substance of the rule as modified in 1955. Rules Comm. Note, T

AX CT. R. 37 (Jan.

1, 1974 ed.).

313

TAX CT. R. 37(b) (Jan. 1, 1974 ed.).

314

Rules Comm. Note, TAX CT. R. 37 (Jan. 1, 1974 ed.).

315

TAX CT. R. 15 (Aug. 15, 1955 ed.).

316

TAX CT. R. 37 (Jan. 1, 1974 ed.); Gilday v. Commissioner, 62 T.C. 260, 262

(1974). The 1931 answer rule required defenses as well as affirmative relief to be

pleaded in the answer. B.T.A.

RULE 14 (Feb. 1, 1931 ed.). The 1931 reply rule, on

the other hand, only required the taxpayer to file a reply if the answer contained

affirmative relief allegations. B.T.A.

RULE 15 (Feb. 1, 1931 ed.). The natural

inference was that a reply was unnecessary with respect to affirmative defenses.

The 1955 revision of the reply rule, as subsequently interpreted, eliminated this

confusion by requiring a reply in response to material factual allegations the

Commissioner had the burden of proving. T

AX CT. R. 15 (Aug. 15, 1955 ed.). See

Pretrial Procedure 589

b. Timely Filing

The 1931 revision established a clear timetable for replying. After the

answer was sent to the petitioner by registered mail,

318

the rule provided

that “the petitioner shall, within 45 days . . . file a reply.”

319

Inexplicably, in

1955, the Tax Court removed this unambiguous direction and changed the

rule to provide that “[t]he petitioner . . . shall have 45 days within which to

file a reply. . . .”

320

Although no change in practice was intended, and

subsequent interpretations should have eliminated any lingering doubts,

321

this wording was significant because its failure to instruct the taxpayer in

express terms to reply was another potential source of misunderstanding.

Perhaps a preoccupation with symmetry and consistency offers the best

explanation, inasmuch as the wording paralleled the phrasing of the answer

rule.

322

However, with respect to the answer, this phrasing was

supra note 312. The current rule expressly requires a reply to affirmative defenses

pleaded in the answer if the Commissioner files a motion requesting a reply. T

CT. R. 37(b), 39, 142 (Jan. 1, 1974 ed.).

317

TAX CT. R. 37(b) (July 6, 2012 ed.).

318

B.T.A. RULE 15 (Feb. 1, 1931 ed.). In 1955, the registered mail requirement

was dropped in favor of the methods of service contained in Rule 22. T

AX CT. R.

15, 22 (Aug. 15, 1955 ed.).

319

B.T.A. RULE 15 (Feb. 1, 1931 ed.). All subsequent revisions have provided

45 days as the initial reply period.

320

TAX CT. R. 15 (Aug. 15, 1955 ed.).

321

Compare Gilday v. Commissioner, 62 T.C. 260, 262 (1974); Gay v.

Commissioner, T.C. Memo. 1966-237, 25 T.C.M. (CCH) 1220 (1966); Myers v.

Commissioner, T.C. Memo. 1966-238, 25 T.C.M. (CCH) 1228 (1966); Sauer v.

Commissioner, T.C. Memo. 1964-74, 23 T.C.M. (CCH) 1019 (1964); Baglivo v.

Commissioner, T.C. Memo. 1962-127, 21 T.C.M. (CCH) 663 (1962); Wolfe v.

Commissioner, T.C. Memo. 1961-131, 20 T.C.M. (CCH) 655 (1961); Morris v.

Commissioner, 30 T.C. 928 (1958); Lugauskas v. Commissioner, T.C. Memo. 1957-

56, 16 T.C.M. (CCH) 242 (1957); Greene v. Commissioner, T.C. Memo. 1957-28,

16 T.C.M. (CCH) 133 (1957), with McDonald v. Commissioner, T.C. Memo. 1955-

96, 14 T.C.M. (CCH) 327 (1955); Corinblit v. Commissioner, T.C. Memo. 1955-

148, 14 T.C.M. (CCH) 545 (1955); Bowen v. Commissioner, T.C. Memo. 1954-92,

13 T.C.M. (CCH) 640 (1954); Herring v. Commissioner, T.C. Memo. 1953-77, 12

T.C.M. (CCH) 248 (1953); Berdine v. Commissioner, T.C. Memo. 1953-98, 12

T.C.M. (CCH) 324 (1953); Blankman v. Commissioner, T.C. Memo. 1952-338, 11

T.C.M. (CCH) 1166 (1952); Black v. Commissioner, 19 T.C. 474 (1952); Galvin v.

Commissioner, 7 T.C.M. (CCH) 402 (1948); Downer v. Commissioner, 4 T.C.M.

(CCH) 358 (1945); Weiss v. Commissioner, T.C. Memo. 1943-32, 1 T.C.M. (CCH)

447 (1943).

322

Compare TAX CT. R. 15(a) (Aug. 15, 1955 ed.) with TAX CT. R. 14(a) (Aug. 15,

1955 ed.). A second change made by the 1955 revision provides further evidence

590 The United States Tax Court – An Historical Analysis

purposefully adopted to avoid a confrontation regarding the Board’s

jurisdiction to compel the Commissioner to answer.

323

Although the Tax

Court was not so constrained in the case of the reply, it reaffirmed its

commitment to this language by including it in the 1974 revision.

324

The

language persists today.

325

c. Failure to Reply

The consequences attending the taxpayer’s failure to reply, usually the

result of misunderstanding

326

or ignorance,

327

framed one of the more

sensitive issues facing the Board. Ultimately, it provided the impetus for

change in this area.

The 1931 rule provided that “[e]ach and every allegation of fact . . . set

out in the answer and not denied in the reply, where a reply is required by

these Rules, shall be deemed to be admitted.”

328

This rule proved highly

controversial. Many practitioners opposed the imposition of penalties for

failing to reply timely.

329

They challenged both the Board’s power to relieve

the Commissioner of his statutory burden of proof

330

and the propriety of a

policy that placed such importance on a minor error.

331

In their view, the

only discernible purpose of a reply was to facilitate framing the issues, and

this could be accomplished regardless of how late it was filed.

332

Even among those who approved of the Board’s approach, there was

considerable disagreement concerning the meaning of “deemed to be

of a movement toward symmetry between the answer and reply. As an alternative

to replying, the petitioner was permitted “30 days within which to move with

respect to the answer.” T

AX CT. R. 15(a) (Aug. 15, 1955 ed.). A similar option had

been made available to the Commissioner with respect to the petition 31 years

earlier. B.T.A.

RULE 9 (Sept. 27, 1924 ed.); TAX CT. R. 14(a) (Aug. 15, 1955 ed.).

See Memorandum from Victor Mersch, Tax Court Clerk, to Judge Murdock, Rules

Comm. Chairman, Oct. 6, 1949, filed at the U.S. Tax Court in “Responsive

Pleadings: Memoranda & Correspondence” [hereinafter cited as Mersch]. In 1974,

the Tax Court continued this trend by modeling the reply rule after the answer rule.

Compare T

AX CT. R. 36 (Jan. 1, 1974 ed.), with TAX CT. R. 37 (Jan. 1, 1974 ed.).

323

See supra notes 176–200 and accompanying text.

324

TAX CT. R. 37 (Jan. 1, 1974 ed.).

325

TAX CT. R. 37(a) (July 6, 2012 ed.).

326

See generally introductory Comment, B.T.A. RULES (Jan. 1, 1938 ed.); notes

346–348 and accompanying text infra.

327

Ash, supra note 206, at 258.

328

B.T.A. RULE 19 (Feb. 1, 1931 ed.).

329

Miller, April 22, 1937, supra note 299; Murdock, supra note 299; Murdock,

Feb., 1937, supra note 299.

330

Murdock, Feb., 1937, supra note 299.

331

Miller, April 22, 1937, supra note 299.

332

Id.; Murdock, Feb. 1937, supra note 299, at 2.

Pretrial Procedure 591

admitted.” Some read the phrase as requiring undenied factual allegations

to be conclusively presumed admitted, thereby effectively relieving the

Commissioner of the burden of proof.

333

They argued that the Board’s

statutory authority to promulgate its rules of procedure

334

would be

subverted unless meaningful sanctions were imposed upon petitioners who,

without cause, failed to reply timely.

335

Others interpreted “deemed to be

admitted” as not totally foreclosing the petitioner on undenied allegations

contained in the answer. They agreed that integrating a coercive element

into the rule would expedite compliance. However, they questioned the

efficacy of a conclusive presumption, claiming the benefits of the procedure

were far exceeded by its disadvantages. In their view, affording the

Commissioner a rebuttable presumption would be as effective in producing

replies, would avoid inequitable and onerous results, and would be more

defensible on appeal.

336

Only a few cases involved the issue, and the Board was not compelled

to adopt definitively either position.

337

This was primarily attributable to

the rule that generally permitted the Board to accept untimely filings if the

party could show “good and sufficient cause” for the delay.

338

The same

savings provision was employed by the Board to relieve parties from the

333

Murdock, Feb., 1937, supra note 299.

334

Revenue Act of 1926, ch. 27, § 907(a), 44 Stat. 107 (now codified at I.R.C.

§ 7453).

335

Murdock, 1937, supra note 299; Murdock, Feb., 1937, supra note 299, at 2.

336

Murdock, supra note 299; Murdock, Feb., 1937, supra note 299, at 1; see also

Miller, April 22, 1937, supra note 299; Memorandum from Judge Murdock, Rules

Comm. Chairman to Judge Raum, Tax Court Judge, March 3, 1953, filed at the U.S.

Tax Court in “Responsive Pleadings: Memoranda & Correspondence” [hereinafter

cited as Murdock, 1953].

337

Prior to 1938, the Board had not decided whether a petitioner could present

evidence on the issue of fraud after failing to reply. In Statler v. Commissioner, 27

B.T.A. 342, 344 (1932), the first case dealing with a failure to reply, the conclusive

versus rebuttable presumption issue was not addressed. Rather, it was simply held

that the undenied allegations were deemed admitted. See also Nicholson v.

Commissioner, 32 B.T.A. 977 (1935); Kerbaugh v. Commissioner, 29 B.T.A. 1014,

1016 (1934), aff’d, 74 F.2d 749 (1st Cir. 1935); Beringer v. Commissioner, 29 B.T.A.

250, 251 (1933), in which the meaning of “deemed to be admitted” was not

reached because the Board decided a reply was unnecessary. In Mauch v.

Commissioner, 35 B.T.A. 617, 625 (1937), aff’d, 113 F.2d 555 (3d Cir. 1940), no reply

was filed and the undenied allegations of fraud were deemed admitted. However,

the Board also held that the evidence introduced by the Commissioner supported a

finding of fraud. Cf. Murdock, Feb., 1937, supra note 299.

338

B.T.A. RULE 20 (Feb. 1, 1931 ed.); Miller, April 22, 1937, supra note 299, at

4, 5; see also Murdock, 1937, supra note 299, at 1.

592 The United States Tax Court – An Historical Analysis

application of other controversial sanctions.

339

Nevertheless the solution

afforded by the relief provision was not wholly satisfactory. “Good and

sufficient cause” was inherently ambiguous, and its application by an

individual Board member could well be affected by his view of the necessity

for a timely reply. As a result, the consequences of a late reply were largely

dependent upon which member presided at the hearing.

340

These vagaries

in the application of the rule elicited considerable criticism

341

and, in 1937,

in an effort to develop a universally acceptable procedure, the Board

solicited recommendations from the Bureau and the tax bar.

342

The Commissioner expressed indifference to the subtleties of the

alternatives under consideration.

343

However, the Commissioner stressed

that the uncertainty of the reply procedure was responsible for an

inefficient allocation of time and money since Government attorneys had to

be prepared to prove facts theoretically deemed admitted.

344

The

Commissioner indicated support for any uniformly enforced procedure,

including the abolition of the reply, but an inconsistently enforced

procedure was intolerable.

345

On the other hand, Robert Miller, Chairman

of the American Bar Association committee on federal taxation, was not as

concerned with the uncertain application of the reply rule as with the

apparent harsh implications of failure to reply timely. He sympathized with

the plight of the practitioners who did not regularly practice before the

Board and who were therefore unfamiliar with its procedural rules;

346

any

procedure that did not account for this situation was, in Miller’s view,

ill-conceived.

347

Additionally, he argued that the usual reply was

339

E.g., supra notes 170–200 and accompanying text.

340

Murdock, supra note 299; Rules Comm., supra note 299, at 14.

341

Murdock, supra note 299; Rules Comm., supra note 299, at 14.

342

Murdock, Feb., 1935, supra note 299. The letter concluded: “[I]f the

[present] rule is clear and not too harsh, it should stand. If it is clear but too harsh,

then it ought to be modified. If the words ‘deemed to be admitted’ are not clear,

the rule needs clarification.” Id. at 3.

343

See Murdock, supra note 299, in which it was indicated that the Bureau

supported treating undenied allegations as prima facie evidence. The tenor of its

position was that any uniformly enforced procedure would be acceptable.

344

Joint Committee Report, supra note 3, at 9; Murdock, supra note 299; Rules

Comm., supra note 299, at 14.

345

Murdock, supra note 299; Rules Comm., supra note 299, at 14.

346

Miller, April 22, 1937, supra note 299, at 2. It was claimed that the Board

did provide compensatory relief under the 1931 procedure in two related fashions.

The Board was “not disposed to be too strict where taxpayers and their

representatives plead ignorance of the rules.” Secondly, “most all rules of the

Board [could] be waived by a Board Member if a good cause [was] shown for the

violation of the rule.” Murdock, 1937, supra note 299, at 1.

347

Miller, April 22, 1937, supra note 299, at 2.

Pretrial Procedure 593

tantamount to a general denial, and only a misguided procedure would

elevate such an insignificant pleading to pivotal importance.

348

The Board yielded in 1938, but in the process, reaffirmed its

commitment to a reply procedure.

349

Ostensibly, the purpose of the

revision was to enable Government attorneys to ascertain prior to trial

whether fraud had to be proven.

350

However, the curious hybrid

promulgated by the Board represented a compromise procedure obviously

influenced by other considerations.

351

It satisfied the uniformity criterion of

the Commissioner by providing an explicit procedure that specifically dealt

with a failure to reply.

352

Simultaneously, it catered to Miller’s specifications

by restricting the adverse consequences of a failure to reply.

353

The previous rule, which automatically deemed all undenied factual

allegations admitted, was confined to cases in which a reply was filed which

failed to deny such allegations.

354

A new, more complex, procedure was

provided to deal with a failure to reply timely.

[W]here a reply is required by these rules, but no reply is filed, the

adverse party, within 45 days after the expiration of the time fixed by

these rules for filing . . . the reply . . . may file a motion with the

Board calling attention to the fact that the pleading has not been

filed within the specified time and certain material allegations of fact

have not been denied, and requesting the Board to enter its order

that those particular undenied allegations shall be deemed to be

admitted. The Board will serve a copy of this motion upon the other

348

Miller, April 22, 1937, supra note 299.

349

B.T.A. RULES 15, 18 (Jan. 1, 1938 ed.).

350

Joint Committee Report, supra note 3, at 9; Rules Comm., supra note 299, at

14. Cf. Murdock, supra note 299.

351

In Tucker, v. Commissioner, T.C. Memo. 1952-27, 11 T.C.M. (CCH) 99, 102

(1952), the following reasons were advanced for the rule:

That rule was designed to make sure that the petitioner would be made

doubly aware, first by the service of the answer, and, second, by the service

of the order to show cause, of the necessity of a reply if he had any basis for

denying the allegations of the answer. Its purpose was also to require no

further proof of fraud in cases in which the petitioner chose, by failing to

deny the allegations, to require no evidentiary proof.

See Murdock, 1953, supra note 336.

352

B.T.A. RULE 18 (Jan. 1, 1938 ed.); Joint Committee Report, supra note 3, at

9; Rules Comm., supra note 299, at 14.

353

Compare B.T.A. RULE 18 (Jan. 1, 1938 ed.), with Miller, April 22, 1937, supra

note 299.

354

B.T.A. RULE 18 (Jan. 1, 1938 ed.).

594 The United States Tax Court – An Historical Analysis

party and issue an order to show cause, returnable on or before a day

certain.

355

On its face, the rule seemed to require taxpayers to offer a satisfactory

explanation for failing to reply timely, as a condition precedent to obtaining

relief. However, this was not the intent of the provision. The Board

contemplated affording taxpayers two unrestricted opportunities to reply.

356

If the petitioner did not take advantage of the initial filing period, then the

Commissioner’s motion would serve as an express reminder that unless a

reply was forthcoming, specified undenied allegations would be

presumptively deemed admitted.

357

Additionally, although subsequent

355

Id.

356

Cf. Tucker v. Commissioner, T.C. Memo. 1952-27, 11 T.C.M. (CCH) 99,

102 (1952); Rules Comm., supra note 299, at 14. The intent of the rule, which was

consistent with its interpretation, can be deciphered from the following:

The Court realized that in cases where the Commissioner had the burden of

proof, particularly in fraud cases, failure of a petitioner to know the rule

requiring a reply might permit a decision on the pleadings that there was

fraud and if it did not deny the petitioner his right to introduce proof to the

contrary, at least it might work a great hardship on one every now and then.

I think also there was some feeling that the Circuit Courts were not or

would not be too happy in such a situation so the cumbersome procedure

was adopted in order to bring the matter of the necessity of a reply

definitely to the attention of the taxpayer whether or not he was smart

enough to know that the rule required a reply.

Murdock, 1953, supra note 336.

When needed, a reply is to be filed within 45 days of service of answer (Rule

15). If not filed, respondent within 45 days thereafter may move to hold

the undenied allegations of the answer deemed admitted. But if the reply is

then received, it is filed. Mr. Swecker observes that the time for reply is thus

90 days, with respondent and the Court sending a reminder that a reply is

overdue.

Mersch, supra note 322, at 4.

It should be noted that the above description of the reply procedure is not

entirely accurate. If a reply was not filed within the initial 45-day period, the

Commissioner had another 45 days within which to file a motion. The taxpayer

had until the return date of the motion to file the reply.

357

See Berdine v. Commissioner, T.C. Memo. 1953-108, 12 T.C.M. (CCH) 344

(1953); Corcoran v. Commissioner, T.C. Memo. 1953-4, 12 T.C.M. (CCH) 89

(1953); Tucker v. Commissioner, T.C. Memo. 1952-27, 11 T.C.M. (CCH) 99, 102

(1952); Kawaguchi v. Commissioner, T.C. Memo 1946-91, 5 T.C.M. (CCH) 293

(1946). In the following cases, allegations of fraud, transferee liability, or increased

deficiency were deemed admitted. E.g., Edwards v. Commissioner, T.C. Memo.

1953-78, 12 T.C.M. (CCH) 249 (1953) (fraud); Herring v. Commissioner, T.C.

Memo. 1953-77, 12 T.C.M. (CCH) 248 (1953) (fraud); Downer v. Commissioner,

T.C. Memo. 1945-112, 4 T.C.M. (CCH) 358 (1945) (fraud); McGlue v.

Pretrial Procedure 595

interpretations of the rule did not directly address the issue, it was evident

that any reply filed prior to the return date of the Commissioner’s motion

was considered timely.

358

If the Commissioner neglected to file the motion

timely, undenied allegations were deemed denied without the benefit of a

reply.

359

Notwithstanding the imprecision of the 1938 rule, from its

inception the procedure was an unqualified success,

360

and has only been

changed in minor respects.

361

2. Content and Form

The content of the reply has never been controversial. The 1931 rule,

which directed petitioners to file a reply containing “a specific admission or

denial of each material allegation of fact contained in the answer” and any

facts upon which he relied for defense,

362

went unaltered until the 1974

revision.

363

The absence of disputes with regard to content is somewhat

Commissioner, 45 B.T.A. 761, 766 (1941) (fraud); Black v. Commissioner, 19 T.C.

474 (1952) (increased deficiency); Belford v. Commissioner, 11 T.C.M. (CCH) 1210

(increased deficiency); Blankman v. Commissioner, T.C. Memo. 1952-338, 11

T.C.M. (CCH) 1166 (1952) (increased deficiency); Galvin v. Commissioner, 7

T.C.M. (CCH) 402 (1948) (transferee liability).

358

There is no case refusing to allow a taxpayer to file a reply prior to the

return date of the show cause order.

359

B.T.A. RULE 18 (Jan. 1, 1938 ed.).

360

Judge Murdock’s response to a suggestion that the rule be re-evaluated best

illustrates the confidence in the rule. “I do not believe we have had any case since

the adoption of the rule where the taxpayer has had any basis for complaint. The

Commissioner does not find the rule too burdensome and I would be disposed to

leave it as it is.” Murdock, 1953, supra note 336.

361

In 1955, the rule was clarified to expressly grant taxpayers the right to file

the reply on or before the day fixed for the hearing of the Commissioner’s motion.

AX CT. R. 18(c)(2) (Aug. 15, 1955 ed.). The 1974 revision also made minor

changes in the phrasing of the rule, but the substance of the rule remained intact.

Compare T

AX CT. R. 18(c) (Aug. 15, 1955 ed.), with TAX CT. R. 37(c) (Jan. 1, 1974

ed.). In 1951, it was recommended that the procedure be simplified as follows:

Whenever the answer of the respondent includes allegations which bring it

within Rule 15, the said answer shall be entitled “ANSWER

REQUIRING

REPLY” and shall at the end thereof, in the lower left-hand corner, the

name and address of the person upon whom the petitioner shall serve his

reply.

Memoranda from V. Mersch, Tax Court Clerk, to Judge Kern, July 27, 1951, filed

at the U.S. Tax Court in “Responsive Pleadings: Memoranda & Correspondence.”

However, this proposal was never adopted.

362

B.T.A. RULE 15 (Feb. 1, 1931 ed.).

363

Compare B.T.A. RULE 15 (Feb. 1, 1931 ed.), with TAX CT. R. 15(b), (Jan. 25,

1971 ed.).

596 The United States Tax Court – An Historical Analysis

surprising, since the phrasing of the rule paralleled the provision governing

the answer.

364

The latter rule has been a constant source of irritation to the

tax bar, which objects to the Commissioner’s usual reliance on

uninformative general denials in his answer.

365

In view of the widespread

taxpayer ignorance of the Board/Tax Court’s procedural rules, it is doubtful

that taxpayers observed the reply rule any better than the Commissioner

fulfilled the requirements of the answer rule.

366

Rather, the incongruity is

probably attributable to the infrequent use of the reply and the fact that few

commentators have espoused the Service’s position on this matter.

In 1974, the rule underwent an extensive revision aimed at making the

reply more informative.

367

The court attempted to restrict the use of the

general denial by the following measures: (1) insisting that admissions and

denials be specific; (2) requiring that taxpayers indicate whether they

possess sufficient information to admit or deny allegations; (3) directing

that petitioners qualify denials if only part of an allegation is denied; and (4)

demanding that there be included a “clear and concise statement of every

ground, together with the facts in support thereof, on which the petitioner

relies affirmatively or in avoidance of any matter in the answer on which the

Commissioner has the burden of proof.”

368

The motivating force for this

change is somewhat obscure. The normal impetus for revision, discontent

with existing practice, was not present. The controversy over the answer,

369

combined with a determination to cast the contents of the answer and reply

in the same mold,

370

were probably the decisive factors.

With respect to the form of the reply, the central issue has been whether

verification should be mandatory. Initially, the Board did not consider

verification of the reply necessary.

371

In 1935, movement towards

verification began when the Board’s Rules Committee recommended

mandatory verification of the reply and answer.

372

The Board rejected the

proposal, concluding the issue deserved further consideration.

373

364

Compare B.T.A. RULE 14 (Feb. 1, 1931 ed.), with B.T.A. RULE 15 (Feb., 1,

1931 ed.).

365

See supra notes 201–238 and accompanying text.

366

See CASEY, supra note 256, at 63, in which it is indicated that the Tax Court

has not strictly enforced the rule relative to the content of the reply.

367

TAX CT. R. 36, 37 (Jan. 1, 1974 ed.).

368

Id. The rule that emerged from the 1974 rules revision remains substantially

the same today. See T

AX CT. R. 37 (July 6, 2012 ed.).

369

See supra notes 201–238 and accompanying text.

370

Compare TAX CT. R. 37 (Jan. 1, 1974 ed.), with TAX CT. R. 36 (Jan. 1, 1974

ed.); Rules Comm. Note, T

AX CT. R. 37 (Jan. 1, 1974 ed.); Mersch, supra note 322,

at 4; see also supra note 322 and accompanying text.

371

B.T.A. RULES (Feb. 1, 1931 ed.) did not mention verification of the reply.

372

Murdock, 1953, supra note 299, at 2.

373

Id.

Pretrial Procedure 597

Apparently there was little sentiment for requiring the Commissioner’s

pleadings to be verified, and in light of this fact it was deemed inexpedient

to require verification of the petitioner’s reply.

374

The question was resolved in 1938

375

after strong lobbying by the

Bureau of Internal Revenue for verification of the reply.

376

The Bureau,

which opposed requiring verification of answers, had no difficulty in

justifying the apparent disparity:

[T]he requirement of verification would eliminate the denial of

matters obviously true, thus obviating the need for proof of these

matters, and would place the taxpayer on record in regard to factual

matters. Although adoption of this suggestion would result in all of

the petitioner’s pleadings being verified while those of the

Government would remain unverified, it was thought that the

difficulties attending verification by the Government would justify a

difference in treatment if verification of the reply was thought

desirable.

377

The Board, however, was well aware of the uproar certain to be heard if the

proposal was adopted.

[T]here would be considerable dissatisfaction among taxpayers and

their counsel if this rule were adopted. Those persons might be

expected to point to the inadequacy of the Commissioner’s answers

and to ask why additional burden should be placed upon the

petitioner as to the pleadings, when by far the greater fault lies with

the Commissioner, who not only does not verify his answers, but in

too many instances files a general denial even denying facts he knows

to be true.

378

A suggestion from Robert Miller, who advocated verification of the reply

and answer only after a showing of good cause,

379

ultimately provided the

Board with a compromise procedure capable of maintaining a delicate

balance between the competing considerations.

380

“[D]ifficulties attending

374

Id.; Rules Comm., supra note 299 at 13; Surrey, 1937, supra note 123, at 3.

375

B.T.A. RULE 15 (Jan. 1, 1938 ed.).

376

See Ryan, supra note 190, at 2; Surrey, 1937, supra note 123, at 3; Surrey, supra

note 123, at 4; see also Rules Comm., supra note 299, at 13.

377

Surrey, 1937, supra note 123, at 3.

378

Rules Comm., supra note 299, at 13.

379

Miller, April 22, 1937, supra note 299, at 5; Murdock, 1937, supra note 299.

380

B.T.A. RULE 15 (Jan. 1, 1938 ed.).

598 The United States Tax Court – An Historical Analysis

verification by the Government” ruled out verification of the answer,

381

but

the Board accommodated most interests by requiring verification of the

reply only if good cause was demonstrated.

382

In 1974, the court subjected

all pleadings to a similar rule—verification is not required unless specifically

directed by the court.

383

E. Stipulations

The pretrial stipulation procedure has been described as “the bedrock of

Tax Court practice;”

384

according to many, it is largely responsible for the

court’s ability to keep current with the thousands of cases docketed each

year.

385

By eliminating the necessity of proof at trial with respect to

uncontroverted issues of fact, pretrial stipulations result in savings of time

and expense for both the court and the parties.

386

Moreover, the necessity

of complying with the stipulation procedure forces opposing counsel to

consult and to develop the facts of their case in advance of trial.

387

As a

result, issues are perceived and litigating risks are evaluated at an early stage

of the proceedings. Many observers believe that the high rate of pretrial

settlements that obtains in the Tax Court

388

is largely due to this facet of its

practice.

389

381

Surrey, 1937, supra note 123, at 3.

382

B.T.A. RULE 15 (Jan. 1, 1938 ed.).

383

TAX CT. R. 33 (Jan. 1, 1974 ed.).

384

Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974).

385

JOHN P. FRANK, AMERICAN LAW: THE CASE FOR RADICAL REFORM 139–

41 (1969); Gerald D. Babbitt & William Morris, An Introduction to the Tax Court of the

United States, 21 T

AX LAW. 615, 626–28 (1967) [hereinafter cited as Babbitt &

Morris]; Randolph F. Caldwell, Jr., Tax Court Has New Rules of Practice and Procedure,

59 A.B.A. J. 1301, 1304 (1973) [hereinafter cited as Caldwell, 1973]; John W. Kern,

The Process of Decision in the United States Tax Court, 8 N.Y.U. I

NST. ON FED. TAX’N

1013, 1013 (1950); Memorandum from Judge Raum to Chief Judge Murdock, Dec.

14, 1959, at 2, filed at the U.S. Tax Court in “Stipulations: Memoranda &

Correspondence” [hereinafter cited as Raum, Dec. 14, 1959].

386

Charles D. Hamel, The United States Board of Tax Appeals , 2 NAT’L INC. TAX

MAG. 293, 307 (1924); Willis W. Ritter, Pitfalls in Practice Before the Board of Tax

Appeals, 3 N

AT’L INC. TAX MAG. 297, 301 (1925).

387

Robert R. Veach, Stipulating Facts in Tax Court, 34 TAXES 669, 674 (1956)

[hereinafter cited as Veach].

388

Throughout the history of the court, the rate of settlement has averaged

between 70 percent and 90 percent of cases docketed.

389

Caldwell, 1973, supra note 385, at 1304; Percy W. Phillips, Possible Methods of

Eliminating Congestion of Tax Appeals, 5 N

AT’L INC. TAX MAG. 243, 270 (1927);

Memorandum from Judge Raum, Rules Comm. Chairman, entitled “Pre-trial

Procedure,” Feb. 11, 1960, at 1, filed at the U.S. Tax Court in “Stipulations:

Memoranda & Correspondence;” Memorandum from Judge Turner, Rules Comm.

Pretrial Procedure 599

Three related controversies have arisen throughout the history of the

stipulation procedure in the Tax Court. The first involved whether

stipulation procedures ought to be mandatory or permissive. Although the

stipulation procedure was successful from its initial adoption on a purely

voluntary basis, pressures grew to make the procedure even more efficient,

and the court moved toward mandatory stipulation of undisputed facts in

every case. With the adoption of mandatory stipulations, the controversy

shifted to the question of what procedural forms would be most successful

in requiring recalcitrant parties to stipulate. The direction here has been

toward increasing the court’s supervisory duties with respect to stipulations.

Finally, a good deal of attention has centered on the relationship of the

stipulation procedure to the issue of pretrial discovery. The Federal Rules

of Civil Procedure, adopted in 1938, provided for liberal pretrial

discovery,

390

and subsequent changes in the federal discovery rules made

them even more expansive.

391

Although these rules, which govern district

Chairman, to the Judges of the Tax Court, Apr. 8, 1963, at 1, filed at the U.S. Tax

Court in “Stipulations: Memoranda & Correspondence;” Memorandum from Judge

Turner, Rules Comm. Chairman, to Judge Dawson, Sept. 28, 1962, at 3, filed at the

U.S. Tax Court in “Stipulations: Memoranda & Correspondence” [hereinafter cited

as Turner, Sept. 28, 1962].

Judge Raum, a staunch supporter of the stipulation procedure, once observed

that

It may well be said therefore that we have a ‘built-in’ pretrial procedure that

is productive of an astonishing amount of narrowing of issues, stipulating of

facts, and settlement of entire cases. And our Rule 31 [prior to 1974, rule

31(b) prescribed the stipulation procedure] is either directly responsible for

all of this or, at the very least is an important factor in the ultimate result.

Raum, Dec. 14, 1959, supra note 385, at 2.

390

FED. R. CIV. P. 26–37, 308 U.S. 645, 694–713 (1939).

391

Id. In 1970, the federal discovery rules underwent the first comprehensive

review since 1938. Included in the amendments were the following changes:

Scope of Discovery. New provisions are made and existing provisions

changed affecting the scope of discovery: (1) The contents of insurance

policies are made discoverable (Rule 26(b)(2)). (2) A showing of good cause

is no longer required for discovery of documents and things and entry upon

land (Rule 34). However, a showing of need is required for discovery of

“trial preparation” materials other than a party’s discovery of his own

statement and a witness’ discovery of his own statement; and protection is

afforded against disclosure in such documents of mental impressions,

conclusions, opinions, or legal theories concerning the litigation. (Rule

26(b)(3)). (3) Provision is made for discovery with respect to experts

retained for trial preparation, and particularly those experts who will be

called to testify at trial (Rule 26(b)(4)). (4) It is provided that interrogatories

and requests for admission are not objectionable simply because they relate

to matters of opinion or contention, subject of course to the supervisory

600 The United States Tax Court – An Historical Analysis

court proceedings, have never applied to the Board of Tax Appeals or the

Tax Court,

392

there have always been those who believed the Tax Court

should adopt its own discovery procedures.

393

For many years the Tax

Court resisted the pressure to adopt pretrial discovery. This resistance was

justified primarily on the basis of the stipulation procedure and its

importance in the settlement of cases. Because stipulations were so

successful, there was no need for broad discovery rules; moreover, the

adoption of such rules might diminish the effectiveness of stipulations, a

result to be avoided at all costs. Finally, in 1974, the court introduced

pretrial discovery into its rules of practice.

394

However, this change was

accompanied by the warning that pretrial discovery would not be permitted

to encroach upon the stipulation procedure, and should be used only to

supplement the stipulation process.

395

1. Stipulations from 1924 to 1945

The Board’s first rules of practice and procedure, adopted in 1924,

contained provisions recognizing stipulations as part of the pretrial

power of the court (Rules 33(b), 36(a)). (5) Medical examination is made

available as to certain nonparties (Rule 35(a)).

Advisory Committee’s Explanatory Statement Concerning 1970 Amendments of

the Discovery Rules (1970).

392

See Rule Making Act of 1934, ch. 651, 48 Stat. 1064; Starr v. Commissioner,

226 F.2d 721, 722 (7th Cir. 1955); Katz v. Commissioner, 188 F.2d 957, 959 (2d

Cir. 1954).

393

Randolph F. Caldwell, Jr., Tax Court Procedure: Problems but Not Pitfalls, 27

N.Y.U. I

NST. ON FED. TAX’N 1435, 1443 (1969) [hereinafter cited as Caldwell,

1969]; Michael Kaminsky, The Case for Discovery Procedure in the Tax Court, 36 T

AXES

498 (1958) [hereinafter cited as Kaminsky]; Converse Murdoch, Discovery Against the

United States in Civil Tax Proceedings, 13 V

ILL. L. REV. 58, 59 (1967); Herman T.

Reiling, Procedure in Federal Tax Litigation, 14 T

AXES 598, 599 (1936) [hereinafter

cited as Reiling].

394

TAX CT. R. 70 (Jan. 1, 1974 ed.).

395

TAX CT. R. 91(a)(2) (Jan. 1, 1974 ed.). Judge Raum remarked:

An indispensable requirement of every well-tried case is a stipulation of

facts. The Court has regarded this as the dominant objective of every case.

The various procedures in Title VII through XI were not meant, in any way,

to serve as a substitute for as complete a stipulation as the parties are able to

agree upon. Rather, they were intended to assist in the development of

facts prior to trial as early as possible in the litigation so as to strengthen the

stipulation process and to minimize the last minute pressures that have

characterized the formulation of a stipulation in the past.

J. Earl Epstein, Proposed Rules of the Tax Court: A Panel Discussion Sponsored by the

Section of Taxation, Annual Meeting—San Francisco, Aug. 12, 1972, 26 T

AX LAW. 377,

380 (1972) [hereinafter cited as Panel Discussion].

Pretrial Procedure 601

procedure.

396

As written, the early rules only provided for permissive

stipulations and contained no procedure to effectuate the stipulation

process. The initiative usually came from the party desiring to stipulate,

who was largely at the mercy of the cooperative spirit of the opposing

party. Nevertheless, even during this early period the Board recognized the

importance of stipulations and attempted to induce agreements between the

parties through informal pressures. Thus, the Board did not hesitate to

express its disapproval when an entirely unstipulated appeal was presented

for trial, and in such cases postponement of the hearing was not unusual.

397

The early years witnessed important rulings respecting the requirements

for valid stipulations and the purposes to which they could be applied. To

be effective, the stipulation had to be signed by both parties and filed with

the Board;

398

failure to comply with these formalities rendered the

stipulation ineffective.

399

The Board also required the stipulation to be clear

and concise since the Board refused to interpret ambiguous statements to

the prejudice of either party.

400

On one occasion the Board rejected an

argument that it should point out deficiencies in stipulations and provide

counsel with an opportunity to correct them.

401

The Board’s function was

judicial, not inquisitorial; moreover, the management of its heavy workload

required that it accept stipulations at face value.

Occasionally, parties attempted to stipulate matters that went beyond

the proper province of the stipulation procedure. In this connection the

Board ruled that jurisdictional defects, such as an untimely petition, could

not be cured by stipulation.

402

Moreover, conclusions of law could not be

stipulated since the Board would not permit the parties to restrict its power

to decide legal issues.

403

Similarly, the Board would not be bound by a

stipulation that was in contravention of statute.

404

Such a stipulation not

only was violative of the statute, but also contravened the principle limiting

stipulations to factual issues.

396

B.T.A. RULE 30 (July 1, 1924 ed.).

397

2 LAURENCE F. CASEY, FEDERAL TAX PRACTICE § 7.38 n.40 (1955).

398

B.T.A. RULE 30 (July 1, 1924 ed.).

399

See Cole v. Commissioner, 30 T.C. 665, 674 (1958).

400

See Estate of Harse, 1 B.T.A. 1056, 1057 (1925).

401

Ohio Clover Leaf Dairy Co. v. Commissioner, 9 B.T.A. 433, 434 (1927).

402

See Blackstone v. Commissioner, 12 B.T.A. 456, 458–59 (1928); Mohawk

Glove Corp., 2 B.T.A. 1247, 1247 (1925); Alfred C. Ruby, 2 B.T.A. 377, 378 (1925).

403

Ohio Clover Leaf Dairy Co. v. Commissioner, 8 B.T.A. 1249, 1255 (1927);

2 L

AURENCE F. CASEY, FEDERAL TAX PRACTICE § 7.38 n.41 (1955).

404

Littauer v. Commissioner, 25 B.T.A. 21, 28 (1931).

602 The United States Tax Court – An Historical Analysis

Although it appeared as though the stipulation procedure generally

functioned satisfactorily,

405

some proposals for improvement were made

during the Board’s early years.

406

One proposal advocated mandatory

stipulations prior to the hearing with concomitant power in the Board to

determine undisputed facts from an examination of the Commissioner’s

files should the parties fail to stipulate.

407

In addition to modifying the

stipulation procedure, this proposal would have substantially changed the

Board’s function as a purely judicial, non-investigatory body. Because there

was general approval of the Board’s court-like nature, this proposal

attracted little support.

The 1937 joint committee of the Board and Treasury, organized to study

recommendations for facilitating the orderly disposition of cases,

408

sought

reduction in Board congestion by procedural methods of eliminating

uncontested issues. Initially, Treasury showed an inclination toward

achieving this end by requiring stipulation in more cases.

409

Ultimately,

however, most of the committee’s work was directed to improvements in

pleadings rather than stipulations. The committee also considered

recommending that the Board adopt pretrial discovery patterned after the

then proposed Federal Rules of Civil Procedure,

410

but this proposal was

dropped when the Chief Counsel’s Office withdrew its endorsement

because of doubts concerning the Board’s authority to enforce discovery

rules.

411

Moreover, the committee was not convinced of any “immediate

need” for such rules;

412

it concluded that in view of the Board’s rules “on

depositions, interrogatories, and production of documents, and the

Commissioner’s power to compel disclosure of information, further

consideration of these suggestions may well be left for the future.”

413

405

See Forest D. Siefkin, Procedural Methods of the Board of Tax Appeals, 14 A.B.A.

J. 365, 367 (1928).

406

Board of Tax Appeals, 11 NAT’L INC. TAX MAG. 143, 143–44 (1933).

407

Id.

408

See supra note 3 and accompanying text.

409

Treasury Dept. Press Service Release No. 10-25, at 2 (May 11, 1937).

410

Preliminary Report of the Joint Committee of the Board of Tax Appeals

and Chief Counsel’s Office § 13, c. Dec. 17, 1937, filed at the U.S. Tax Court in

“Pretrial Discovery: Memoranda & Correspondence.”

411

Id.

412

Report of the Joint Committee of the Board of Tax Appeals and Chief

Counsel’s Office, Dec. 17, 1937, at 12, filed at the U.S. Tax Court in “Petition:

Memoranda & Correspondence.”

413

Id.

Pretrial Procedure 603

2. The 1945 Revision

The first major revision of the stipulation procedure occurred in 1945 in

response to specific problems raised by the renegotiation cases. Since 1942

a series of acts had provided for the renegotiation of government contracts

to eliminate excessive profits of government contractors and

subcontractors.

414

In 1943, a statutory procedure was established under

which an administrative determination of excessive profits could be

reviewed in a de novo proceeding in the Tax Court.

415

The Tax Court had

exclusive jurisdiction in these cases until 1971, when such jurisdiction was

then vested in the Court of Claims.

416

Most of the evidence in a

renegotiation case consisted of books, reports, and other documents, which

generally are undisputed. Due to the quantity of such documentary

evidence, the Department of Justice, which represented the Government in

renegotiation cases, moved the Tax Court in Gifford Hill Pipe Co.

417

to order

an audit of the contractor that would be made available to the Government

to aid in the preparation of its case.

418

The motion was granted and the

procedure proved successful in expediting the case. As a result, the Justice

Department thereafter proposed that the court require the full stipulation

of facts in all renegotiation cases without resort to a motion and order.

419

The court also was impressed with the results in Gifford Hill. Yet, rather

than promulgate a specific rule applicable only to renegotiation cases, the

court elected to redraft the stipulation rule, thereby making the procedure

applicable generally in the hope of reducing the number of “isolated cases”

414

The first renegotiation act was enacted in 1942 as part of the Sixth

Supplemental National Defense Appropriation Act, 1942. Act of Apr. 28, 1942,

ch. 247, § 403, 56 Stat. 245. Renegotiation procedures have remained in the law

since that time as the result of a series of temporary statutes that have been

periodically extended. See R

EPORT BY THE STAFF OF THE JOINT COMMITTEE ON

INTERNAL REVENUE TAXATION, AN EVALUATION OF PROPOSALS TO EXTEND

AND

AMEND THE RENEGOTIATION ACT OF 1951, at 11–13 (1975).

415

Revenue Act of 1943, ch. 63, § 701(b), 58 Stat. 86, amending Sixth

Supplemental National Defense Appropriation Act, 1942, ch. 247, § 403(e), 56 Stat.

246.

416

Act of July 1, 1971, Pub. L. No. 92-41, § 3, 85 Stat. 98, amending

Renegotiation Act of 1951, ch. 15, 65 Stat. 21.

417

11 T.C. 802 (1948), aff’d, 180 F.2d 655 (5th Cir. 1950).

418

See Memorandum and Order, May 4, 1945, filed at the U.S. Tax Court in

“Stipulations: Memoranda & Correspondence;” see also Memorandum from

Presiding Judge Turner to the judges of the court, June 27, 1945, at 2, filed at the

U.S. Tax Court in “Stipulations: Memoranda & Correspondence” [hereinafter cited

as Turner, June 27, 1945].

419

Turner, June 27, 1945, supra note 418, at 2.

604 The United States Tax Court – An Historical Analysis

in which attorneys appeared at the hearing prepared to enter extensive

exhibits of books and accounts.

420

As originally proposed, the revised rule stated that the court expected

the parties to stipulate all evidence lending itself to stipulation, and “[a]

party desiring to introduce such evidence must so advise his adversary. . . so

that the parties may endeavor to stipulate the evidence to the fullest extent”

possible.

421

The Chief Counsel was concerned that this wording would

require the Government to effect full disclosure of evidence that it intended

to introduce at trial.

422

The court responded to this problem by

compromising its efforts to achieve mandatory stipulation. It continued the

prior rule’s seemingly permissive language that the parties “may agree upon

any facts” prior to trial,

423

and substituted “shall confer with his

adversary”

424

for the controversial “must so advise his adversary”

425

as to

matters to be stipulated. However, at the same time, the court evidenced its

determination to require stipulation by demanding that “both parties shall

endeavor to stipulate evidence to the fullest extent to which either complete

or qualified agreement can be reached.”

426

The court’s willingness to dilute

the proposed rule reflected its misgivings concerning its power to enforce a

mandatory stipulation procedure.

427

The legislation under which it operated

provided it with no powers to coerce recalcitrant parties,

428

and it was an

agency in the executive branch lacking the inherent powers of courts to

enforce process and punish contempt.

The court further attempted to assume control of the procedure while

reducing controversies by providing that an objection to materiality or

relevancy would not be regarded as a proper excuse for refusal to

stipulate.

429

The objection could be reserved in the stipulation or raised at

the hearing.

430

This limitation on procedural objections to stipulations was

420

Id. at 3.

421

Id. at 1.

422

Memorandum from Presiding Judge Turner to Judge Murdock, Rules

Comm. Chairman, Oct. 1, 1945, at 1, filed at the U.S. Tax Court in “Stipulations:

Memoranda & Correspondence” [hereinafter cited as Turner, Oct. 1, 1945].

423

TAX CT. R. 31(b) (Nov. 1, 1945 ed.) (emphasis added).

424

Id.

425

Turner, June 27, 1945, supra note 418, at 1.

426

TAX CT. R. 31(b) (Nov. 1, 1945 ed.).

427

Turner, Sept. 28, 1962, supra note 389, at 2.

428

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 105.

429

TAX CT. R. 31(b) (Nov. 1, 1945 ed.).

430

Id. Practitioners have been cautious of this rule, warning that rarely has the

Tax Court refused to accept a fact once stipulated. Martin D. Cohen, Litigation

Techniques That Increase Your Chances for Success in the Tax Court, 35 J. T

AX’N 340, 341

(1971); Veach, supra note 387, at 671. The 1974 revision provided that “the court

will consider any objection . . . made at the commencement of the trial or for good

cause shown made during the trial.” T

AX CT. R. 91(d) (Jan. 1, 1974, ed.).

Pretrial Procedure 605

clearly proper inasmuch as the court, not the parties, was the proper arbiter

of such controversies.

The new rule also dealt specifically with the problem of modification of

a stipulation. The analogy of a stipulation to a bilateral contract is clear,

431

and the court traditionally had been reluctant to permit the qualification or

withdrawal of a stipulation properly entered in the record.

432

However,

criticism by the Chief Counsel of the harshness of a rule which required the

parties to stipulate at their peril

433

led the court to reconsider its position. A

review of relevant authorities

434

ultimately convinced it to allow

modification, change, or withdrawal of a stipulation in those cases in which

enforcement would be unconscionable or contrary to the interest of

justice.

435

Finally, in apparent recognition of a flaw in the original procedure that

failed to provide a method for initiating the stipulation process, the court

placed the burden on the party desiring to introduce the evidence sought to

be stipulated.

436

By doing so, the court could ascertain which party was

responsible for failing to initiate the procedure.

3. Putting Teeth into the Rule: 1955 Revision

The court’s skepticism regarding its ability to compel compliance with a

mandatory stipulation procedure forced it to disguise the mandate in 1945.

The requirement that the parties “shall endeavor” to stipulate was couched

in terms of the permissive “may agree” to a stipulation. The experience

with the new rule, however, soon allayed the fears. In the words of Judge

Turner:

Due to our lack of power to enforce orders, we had our fingers

crossed as to the reception of the new rule by the parties. Even so,

431

See Saigh v. Commissioner, 26 T.C. 171, 177 (1956).

432

The Court’s reluctance to permit the parties to alter a stipulation properly

admitted in evidence is indicated by the fact that as originally proposed, the rule

provided that “[e]vidence tending to qualify, change, or contradict any stipulated

fact will not be received.” Turner, June 27, 1945, supra note 418, at 1.

433

See Turner, Oct. 1, 1945, supra note 422, at 1.

434

See id.; Memorandum from A. Cypert, clerk, to Presiding Judge Turner,

entitled “New Rule on Stipulations,” Aug. 28, 1945, filed at the U.S. Tax Court in

“Stipulations: Memoranda & Correspondence.”

435

See TAX CT. R. 31(b) (Aug. 1, 1946, ed.), which provided that “[t]he Court

may set aside a stipulation where justice requires, but will not receive evidence

tending to qualify, change, or contradict any fact properly introduced into the

record by stipulation.”

436

Id.

606 The United States Tax Court – An Historical Analysis

we decided to put on a bold front and couched the rule in mandatory

terms. To our gratification and satisfaction it worked far beyond our

fondest expectations.

437

The tax bar’s reception of the court’s authority to promulgate such a

rule was sufficiently favorable to enable the court to make a more daring

revision in 1955. No longer uncertain respecting its power to require

stipulation, the court announced that it “expect[ed] the parties to stipulate

evidence to the fullest extent”

438

possible.

4. Revisions of the 1960s

Several factors contributed to the effectiveness of the pretrial stipulation

procedure, all of which indicated it would enjoy continued success. The

inherent advantages of stipulating, such as factual development of a case

and greater likelihood of settlement, were incentives to stipulate. The

stipulation procedure was also a convenient method of meeting the burden

of proof, and parties so employing it could rely on the court not to interpret

ambiguous stipulations to their detriment.

439

Finally, a party could not

refuse to stipulate without being required to give an explanation to the

court. An explanation satisfactory to the court was seldom heard,

440

and

failure to stipulate had a tendency to arouse the court’s displeasure, thereby

“[placing] counsel in a bad light before his case” had started.

441

Notwithstanding the inducements to stipulate and the expressions of

approval of the procedure by its proponents, the 1950s and 1960s

witnessed a mounting dissatisfaction with the status quo. Considerable

criticism came from those who favored the adoption of liberal pretrial

discovery.

442

These critics questioned the virtue of the court’s exclusive

reliance on stipulations as a means of pretrial preparation. In particular,

they challenged the asserted importance of stipulations in the 70 percent to

90 percent settlement rate.

443

In their view, many of the cases clogging the

court’s calendar were only filed to gain a negotiating advantage and were

437

Turner, Sept. 28, 1962, supra note 389, at 2.

438

TAX CT. R. 31(b) (Aug. 15, 1955 ed.).

439

See Norfolk Nat’l Bank of Commerce & Trust v. Commissioner, 66 F.2d 48,

50 (4th Cir. 1933); Conservative Gas Co. v. Commissioner, 30 B.T.A. 552, 555

(1934).

440

Veach, supra note 387, at 670–71.

441

Id.

442

William H. Bowen, Discovery in the Tax Court: Why Not Follow the Federal

Rules, 44 A.B.A. J. 129 (1958); Kaminsky, supra note 393.

443

See Turner, Sept. 28, 1962, supra note 389, at 6.

Pretrial Procedure 607

never intended to go to trial.

444

Thus, they contended the stipulation

procedure played no part in the settlement of these cases.

Criticism, however, was not limited to those who advocated the

adoption of pretrial discovery. An apparent oversight in the rule generated

criticism from all quarters, and this oversight was ultimately corrected in a

1962 revision. The rule had failed to provide a procedure whereby a

reluctant party could be forced to stipulate. Consequently, in numerous

cases, the parties failed to stipulate in a meaningful manner, and the case

went to trial with either a meaningless stipulation, or none at all.

445

times, the failure to stipulate was the result of misunderstanding, so that

one party would arrive at the call of the calendar thinking he and opposing

counsel were in substantial agreement only to have the other party reject the

proposal.

446

In other cases, either one or both of the parties had delayed

committing themselves to a stipulation hoping to gain a tactical

advantage.

447

These difficulties may have been intensified because of the atmosphere

prevalent at the Internal Revenue Service. In the waning months of the

Truman Administration, a scandal involving the Service and the Tax

Division of the Justice Department was disclosed.

448

The scandal, which

444

Id.

445

See J. Earl Epstein, The New Stipulating Procedures in the Tax Court; How They

are Working, 22 J. T

AX’N 180, 181 (1965).

446

Memorandum from Judge Turner, Rules Comm. Chairman, to the Judges

of the Tax Court, Mar. 5, 1962, at 2, filed at the U.S. Tax Court in “Stipulations:

Memoranda & Correspondence” [hereinafter cited as Turner, Mar. 5, 1962].

447

Id.

448

In a 1951 letter to a federal judge, a retired intelligence agent of the Bureau

of Internal Revenue alleged that perhaps as many as 63 percent of the tax evasion

prosecutions recommended by Bureau intelligence units throughout the country

were being stifled by senior officials in both the Bureau and the Department of

Justice. Although not directly related to these allegations, a subcommittee of the

Ways and Means Committee commenced work on June 1, 1951, to explore the

activities and alleged improprieties of those charged with enforcement of the tax

laws. Within a month of the subcommittee’s first meeting, a rash of resignations by

various Bureau officials had occurred. The investigations continued and the

subcommittee, chaired by Representative Cecil R. King, a California Democrat,

persisted in attempting to discover “why so many” tax fraud cases recommended

for prosecution had been dropped at “higher levels.”

The subcommittee’s hearings attracted much publicity and generally were of a

sensational nature. By the time the subcommittee had completed its assignment in

1952, its activities had proved to be a factor in the resignations, retirements upon

request, or dismissals of approximately 200 persons within the Bureau. Of that

number, 53 were said to have been forced out for accepting bribes or gratuities, 71

for such reasons as failure to discharge duties properly and rules infractions, 24 for

608 The United States Tax Court – An Historical Analysis

involved officials at the highest levels of tax administration, suggested that

special treatment had been obtained by favored taxpayers.

449

As a result of

these disclosures the Service had, in the words of Judge Turner, taken an

“awful kicking around” on the Hill and in the papers.

450

Subsequently, in

an effort to dispel criticism, the Service began resolving most, if not all,

doubts against the taxpayer which resulted in a noticeable increase in

deficiencies and appeals.

451

Counsel for taxpayers complained that the

Service was not auditing cases in good faith, but was “setting up claims for

the purpose of chiseling taxpayers out of added amounts purely on a give

and take basis.”

452

Taxpayers responded by refusing to confer with

government auditors and demanding immediate issuance of deficiency

notices, hoping to gain a bargaining edge in settlement.

453

The Service, for

its part, commonly failed to cooperate in the stipulation procedure.

454

some cases, for example, the Government received a signed stipulation

from the taxpayer and then neglected to file it with the court until calendar

call, thereby reserving the power to repudiate at the eleventh hour.

455

As a

result of these and other factors, many cases were called at calendar without

facts being stipulated.

456

Such problems strengthened the hand of those advocating either

substantial change in the stipulation procedure or adoption of pretrial

discovery. Initially, judges of the Tax Court were inclined to regard the

pressure for formal pretrial discovery as “mostly noise,”

457

and continued to

embezzlement of funds or government property, 21 for failure to pay proper tax,

and five for falsification or distortion of government records and reports. Several

high ranking government officials were among those implicated. Most notable

were Joseph D. Nunan, Jr., Commissioner of the Bureau from 1944 to 1947, who

was sentenced to five years imprisonment and fined $15,000 for income tax

evasion; Daniel A. Bolich, former assistant commissioner, who was sentenced to

five years imprisonment and fined $15,000 for conspiracy to obstruct justice; and

T. Lamar Caudle, former Assistant Attorney General in charge of the Justice

Department’s Tax Division, who was removed from office for engaging in “outside

activities . . . incompatible” with his duties. See generally N

EWSWEEK, Nov. 26, 1951,

at 30; T

IME, Sept. 22, 1952, at 27; N.Y. TIMES, Apr. 15, 1955, at 48, col. 2; N.Y.

TIMES, Aug. 4, 1954, at 46, col. 2; N.Y. TIMES, Dec. 26, 1952, at 1, col. 2.

449

See generally supra note 448.

450

Turner, Sept. 28, 1962, supra note 389, at 3.

451

Id. at 3–4.

452

Id. at 3.

453

Id. at 4.

454

Id.

455

Bernard V. Lentz, Tax Court Procedure: Pretrial Techniques Affecting Stipulations

and Settlement, 17 N.Y.U. I

NST. ON FED. TAX’N 125, 131 (1959).

456

Turner, Mar. 5, 1962, supra note 396, at 2.

457

Turner, Sept. 28, 1962, supra note 389, at 5.

Pretrial Procedure 609

extol the virtues of the existing stipulation rule.

458

However, as defects in

the stipulation procedure became more obvious and pressure increased

from taxpayers and the American Bar Association,

459

the court changed its

view. In 1962, it acknowledged that the pretrial stipulation procedure

needed reform. While some hoped for a major pretrial procedure revision,

the court considered continued use of a strengthened stipulation procedure

to be a better alternative.

460

The court believed that pretrial discovery

would unnecessarily increase its workload by requiring it to intervene in

many of those controversies constituting the 70 percent to 90 percent of

the docketed cases which were resolved either by stipulation or

settlement.

461

Furthermore, the court was convinced that stricter

supervision would remedy the defects in the stipulation procedure in those

cases in which it was not working because those who had previously

attempted to resist the rule would be coerced into compliance.

462

At the

same time, it considered this approach essential to avoid needlessly

complicating the larger number of cases in which stipulations had always

worked.

463

The amendment allowed a party who wished to stipulate and found the

opposing party uncooperative to obtain ex parte an order to show cause

why the evidence sought to be stipulated should not be accepted for

purposes of the case. The order would be granted upon motion made

within 30 to 10 days before the scheduled trial date and was returnable at

trial calendar call. As a part of the motion, the moving party was required

to disclose the facts and evidence he desired to stipulate together with his

sources so that his adversary would have sufficient information to make an

informed and accurate stipulation.

464

458

Raum, Dec. 14, 1959, supra note 385, at 2.

459

“Indeed, certain members of the American Bar Association have been

persistently urging the adoption of . . . [pretrial discovery] by the Tax Court, and

their pressures may ultimately result in the A.B.A.’s taking a firm stand on this

matter, recommending legislation to the Congress dealing with this subject.”

Raum, Dec. 14, 1959, supra note 385, at 1.

460

Turner, Sept. 28, 1962, supra note 389, at 6–8; Turner, Mar. 5, 1962, supra

note 446, at 4.

461

Raum, Dec. 14, 1959, supra note 385, at 2; Turner, Sept. 28, 1962, supra note

389, at 6.

462

Turner, Mar. 5, 1962, supra note 446, at 4.

463

Turner, Sept. 28, 1962, supra note 389, at 6.

464

The governing procedure provided as follows:

(5) Results of noncompliance by a party. If at the date of issuance of trial notice

in a case a party has failed to confer with his adversary, or has refused or

failed to stipulate facts and evidence which are not in dispute or fairly

should not be in dispute, as required under paragraph (2) hereof, and after

trial notice, still fails or refuses to stipulate, the party proposing to stipulate

610 The United States Tax Court – An Historical Analysis

Both the Chief Counsel and the tax bar had pressured the court for an

earlier return date, but the court insisted upon a return date at calendar call

for a variety of reasons.

465

Of primary concern was the question of where

such a motion would be heard. The demonstrable advantages of an earlier

return date did not, in the court’s opinion, justify a judge making a special

trip to the place of the upcoming session to hear a motion.

466

On the other

hand, an early return date in Washington was rejected on the ground that

severe administrative difficulties would thereby be created. In the court’s

view, such a procedure would swamp the regular motions calendar and

require special calendars,

467

a result the already overburdened court sought

to avoid. Additionally, the court considered unsatisfactory having the

Internal Revenue Service attorneys located in Washington handle an early

return date

468

since these attorneys would not be the same attorneys with

general responsibility for the cases.

469

Finally, a Washington return date

would constitute a hardship for many taxpayers. Travel to Washington for

these motions would be unnecessarily time consuming, inconvenient, and

expensive.

470

Noting that taxpayers’ counsel frequently complained about

being required to come to Washington on procedural matters under the

existing practice, the court concluded they would not react favorably to

further travel.

471

In addition to the lack of an acceptable location to hold

the hearings, the court had two other objections to an early return date.

First, it questioned the necessity of such a procedure since a conscientious

attorney would not run the risk of failing to stipulate after the issuance of

may within 30 days, but not less than 10 days prior to the date set for call of

the case from a trial calendar, file with the Court a motion for an order to

show cause why the facts and evidence covered in his proposal to stipulate

should not be accepted as established for the purposes of the case. The

facts and evidence covered by the motion shall be shown with particularity

and by numbered paragraphs. The motion shall contain adequate

references to the sources of the matter set forth, and where the sources of

material are in possession or under control of the moving party, the motion

shall also show that the opposing party has had reasonable access thereto.

The motion shall be accompanied by proof of service on the opposing party

or his counsel. Upon the filing of such motion, an order to show cause as

moved shall be issued forthwith, unless the Court, in its discretion, directs

otherwise, which order shall be returnable at the call of the case from the

trial calendar.

AX CT. R. 31(b)(5) (Dec. 28, 1962 ed.).

465

Turner, Sept. 28, 1962, supra note 389, at 9.

466

Id.

467

Id. at 10.

468

Id.

469

Id.

470

Id.

471

Id.

Pretrial Procedure 611

an order to show cause, unless he had confidence in his ability to

demonstrate why the order should not be made absolute.

472

Second, and

probably most important, was the court’s apprehension of getting involved

in “formally refereeing the settlement of cases never intended for

submission in the first place.”

473

In the words of Judge Turner, the return

date at calendar call was “the earliest date which [would] prevent our being

roped in as referee in the ‘horse trading’ leading to settlement.”

474

These reasons were found unpersuasive by the tax bar which, within one

month of the adoption of the revision, made a “demand that [the] [r]ule . . .

be further amended to provide for effective admission of facts prior to

calendar call . . . .”

475

The “demand,” which was not entirely unexpected,

476

was in no uncertain terms.

477

The major criticism of the revision was that it hindered counsel in their

preparation for trial. The parties were anxious to know the results of the

show cause order prior to the date of trial, so they could ascertain which

facts would have to be proved;

478

the 1962 revision left the parties uncertain

because it merely provided for a determination at trial. This uncertainty

forced the parties to remain completely prepared to prove their case since

they could not otherwise be assured of meeting their burden of proof.

Usually the taxpayer was most inconvenienced, as the taxpayer generally

had the burden of proof.

The controversy became so intense that the court decided to revise the

stipulation procedure in June, 1963, a mere six months after the 1962

change. Although the court refused to provide every movant with a

mandatory hearing on the order to show cause prior to the scheduled trial

date, the new rule assured the parties of advance notice of the controversial

material contained in the proposed stipulation.

479

This result was

accomplished by requiring a response to the order prior to the trial date.

The earliest day at which a party might move for an order to show cause

was moved back to the 15th day before calendar call rather than the 30th,

472

Id. at 8.

473

Id.

474

Id. at 10.

475

Memorandum from Judge Raum to the Judges of the Tax Court, Dec. 28,

1962, at 1, filed at the U.S. Tax Court in “Stipulations: Memoranda &

Correspondence” [hereinafter cited as Raum, Dec. 28, 1962].

476

“It is, of course, impossible to know with certainty just how a rule will work

out in practice, and in certain respects, most everyone on the Rules Committee

[had] his fingers crossed, so to speak, as to the results.” Turner, Mar. 5, 1962, supra

note 446, at 3.

477

Raum, Dec. 28, 1962, supra note 475, at 2.

478

Id. at 1–2.

479

TAX CT. R. 31(b)(5) (Jan. 1, 1964, ed.).

612 The United States Tax Court – An Historical Analysis

with no further motions after the 35th day before trial, and a response

thereto had to be filed within 25 days of receipt of the order; thus, if each

party acted on the last possible day, all information would be exchanged at

least 10 days before the call of the calendar. Generally, the hearing on the

order was to be held at calendar call, but in a proper case, it could be held

“at such earlier time and at such place as the Chief Judge in his discretion

may fix.”

480

The court instituted further changes in the 1963 revision to

ensure that the procedure accomplished the maximum amount of

agreement on facts. The party responding to a show cause order was

required to list the matters which were not disputed. As to the partially

disputed material, the party had to indicate that which was disputed and

that which was not. Matters not disputed were deemed admitted.

481

Prior to recommending the 1963 revision, the Tax Court rules

committee solicited opinions from the Chief Counsel’s office and the

American Bar Association. Both supported the amendment.

482

However,

the ABA endorsement proved to be short lived. In 1964, a special

committee on the stipulation rule released a report criticizing the tendency

of the rule to operate to the advantage of the Government.

483

Statistics

indicated that in the two years of operation under the 1962 and 1963

revisions, 37 motions for an order to show cause had been filed, most of

them by the Government in cases involving civil fraud penalties or

complicated factual issues, and many of them in cases in which the taxpayer

was appearing pro se.

484

The paucity of use by taxpayers’ counsel could

partially be explained by their unfamiliarity with the rule and its potential,

but more troublesome reasons were perceived by the bar group. They

suggested that taxpayers were reluctant to make a motion for fear of either

alienating the Chief Counsel’s office or triggering a motion from the Chief

Counsel in response.

485

Moreover, the bar committee concluded that

extensive use of the procedure by the Government indicated that the rule in

operation “created an unintended imbalance in procedure and [gave] the

Internal Revenue Service a tactical weapon to force acceptance of Regional

480

Id.

481

Id.

482

Letter from C. Hauser, Chief Counsel, to Judge Raum, Rules Comm.

Chairman, Apr. 2, 1963, filed at the U.S. Tax Court in “Stipulations: Memoranda &

Correspondence;” Letter from Randolph Thrower, Chairman, A.B.A. Section of

Taxation, to Judge Raum, Rules Comm. Chairman, Mar. 27, 1963, filed at the U.S.

Tax Court in “Stipulations: Memoranda & Correspondence.”

483

Report of the Special Subcomm. on TAX CT. R. 31(b)(5) of the Comm. on

Court Procedure, ABA T

AXATION SECTION, Nov. 4, 1964, filed at the U.S. Tax

Court in “Stipulations: Memoranda & Correspondence.”

484

Id. at 2–8.

485

Id. at 3.

Pretrial Procedure 613

Counsel’s proposed stipulations of fact.”

486

This was particularly so in pro

se cases in which the taxpayer’s inability to handle the procedural details

might force him to accept the Government’s proposed stipulation unless

the court intervened on his behalf.

487

Not all agreed that the ABA criticisms were well founded. In the first

place, it was suggested that the statistics were inconclusive because two

years was too short a test period to determine the rule’s merits.

488

Furthermore, some considered the lack of use of the show cause order

simply an indication of the parties’ good faith in stipulating.

489

Additionally,

whether the Government was unfairly employing the stipulation procedure

at the expense of the pro se taxpayer was not susceptible of accurate

measurement, as it involved a subjective analysis of complicated issues.

The court took exception to the implication that it would condone abuse of

the procedure.

I’m sure it is not the intention of any member of the Court to permit

the respondent to . . . take advantage of the pro se taxpayer . . . and I

don’t believe this is the policy of the Chief Counsel’s office either.

Whether it is the best thing to do or not I believe all of our judges

tend to “protect” the pro se taxpayer; and I believe all of us would

attempt to limit any order admitting facts to only such evidentiary

facts about which there is no real dispute, eliminating conclusions,

legal arguments, and ultimate facts, particularly in a pro se fraud

case.

490

Although the criticisms of the stipulation procedure were not universally

accepted as correct, the ABA report did serve to strengthen the position of

those favoring adoption of the pretrial discovery methods of the Federal

Rules of Civil Procedure.

491

Nevertheless, the court persisted for another

decade in its steadfast belief that the stipulation rule was better adapted to

the special needs of tax litigation.

492

486

Id. at 4.

487

Id. at 12.

488

Letter from Professor Polasky, University of Michigan, to Luther J. Avery,

Chairman Special Subcomm., ABA Section of Taxation, July 17, 1964, filed at the

U.S. Tax Court in “Stipulations: Memoranda & Correspondence.”

489

Id.

490

Letter from Judge Forrester to L.J. Avery, Chairman Special Subcomm. on

AX CT. R. 31(b)(5), July 20, 1964, filed at the U.S. Tax Court in “Stipulations:

Memoranda & Correspondence.”

491

Caldwell, 1969, supra note 393, at 1443; Jules Ritholz, Diverse Views on

Discovery in the Tax Court, 21 T

AX LAW. 639 (1968).

492

See supra note 491.

614 The United States Tax Court – An Historical Analysis

5. 1974: Rule 31(b) Becomes Rule 91

When, in 1974, the court finally changed its stand against pretrial

discovery, it did so as part of the first complete revision of its rules of

practice and procedure. In connection with this endeavor, the court made

several changes to the stipulation procedure, which, according to the Tax

Court rules committee, were intended to result in stipulations being more

“comprehensive, supported by affirmative action of the Court, and

mandatory in all cases.”

493

The most important change requires parties to stipulate to more than

just the “facts and evidence” required by the previous rule. Stipulations

must now include “all matters not privileged which are relevant to the

pending case . . . .”

494

Since the court’s intent is to require stipulation of all

undisputed matters having a bearing on the case, a stipulation is no longer

objectionable because it contains opinions, contentions, or legal

conclusions which require the application of law to fact.

495

The rule

therefore reverses the court’s traditional position that conclusions of law

may not be stipulated. However, stipulations may not contain legal

conclusions unrelated to the facts in issue,

496

and the 1974 rule revision did

not change the principle prohibiting stipulations in contravention of

statute.

497

In addition to the broadened scope, certain other changes were made.

Prior to 1974, the initiative for the commencement of the stipulation

process was on the party desiring to introduce the facts sought to be

stipulated.

498

Because the taxpayer generally had the burden of proof, the

taxpayer usually was required to begin the stipulation procedure. The 1974

rule, however, placed the burden of stipulating evenly on both parties,

commanding them to stipulate “without regard to where the burden of

proof may be with respect to the matters involved.”

499

Another change was made in the perennially troublesome area of time

limitations. Pursuant to the revised rule, parties could move for an order to

show cause between 75 and 50 days before trial, and the response had to be

served on the court and opposing counsel within 20 days of receipt; thus,

the latest response date was 30 days before call of the case from the

calendar.

500

In 1979, the court liberalized the time restrictions on the filing

493

Rules Comm. Note, TAX CT. R. 91(a)(1) (Jan. 1, 1974 ed.).

494

Id.; TAX CT. R. 91(a)(1) (Jan. 1, 1974 ed.).

495

Rules Comm. Note, TAX CT. R. 70(b), 91(a) (Jan. 1, 1974 ed.).

496

Rule Comm. Note, TAX CT. R. 70(b) (Jan. 1, 1974 ed.).

497

See supra note 404 and accompanying text.

498

See supra notes 424–427 and accompanying text.

499

TAX CT. R. 91(a)(1) (Jan. 1, 1974 ed.).

500

TAX CT. R. 91(f)(2) (Jan. 1, 1974 ed.).

Pretrial Procedure 615

of a motion to show cause in this setting. In particular, the court eliminated

the reference to the 75-day period prior to trial as the earliest point at which

a motion to show cause could be made.

501

Accordingly, such a motion now

may be made at any point after the issuance of a trial notice.

502

Additionally, the court introduced a slight extension of the period by which

the motion had to be made, moving such date back from 50 to 45 days

prior to the call of the case from the trial calendar.

503

With respect to the location and time of the hearing on the order to

show cause, the 1974 revised rule proved more indefinite than its

predecessor, which had provided that the hearing would generally be held at

the call of the case from the trial calendar.

504

The 1974 rule, intended to

afford greater flexibility,

505

provides that the hearing will be held at a time

determined by the court.

506

The 1974 rule contains more extensive and specific criteria covering the

form and content of the motion for,

507

and response to,

508

a show cause

order. Apparently, the intent here is to narrow as much as possible the

areas of disagreement between the parties. A new provision, “intended to

501

TAX CT. R. 91(f)(1), 71 T.C. 1199.

502

See Rules Comm. Note, TAX CT. R. 91(f)(1), 71 T.C. 1200.

503

TAX CT. R. 91(f)(1), 71 T.C. 1199.

504

TAX CT. R. 31(b)(5) (Jan. 1, 1971 ed.).

505

Rules Comm. Note, TAX CT. R. 91(f)(2) (Jan. 1, 1974 ed.).

506

TAX CT. R. 91(f)(2) (Jan. 1, 1974 ed.).

507

TAX CT. R. 91(f)(1) (Jan. 1, 1974 ed.). Instead of setting out just the facts

and evidence covered by the motion and the sources and their location, the 1974

rule revision required a moving party to

(i) show with particularity and by separately numbered paragraphs each

matter which is claimed for stipulation; (ii) set forth in express language the

specific stipulation which the moving party proposes with respect to each

such matter and annex thereto or make available to the Court and the other

parties each document or other paper as to which the moving party desires

a stipulation; (iii) set forth the sources, reasons, and basis for claiming, with

respect to each such matter, that it should be stipulated; (iv) show that

opposing counsel or the other parties have had reasonable access to those

sources or basis for stipulation and have been informed of the reasons for

stipulation; and (v) show proof of service of a copy of the motion on

opposing counsel or the other parties.

Id.

508

TAX CT. R. 91(f)(2) (Jan. 1, 1974 ed.). An answering party is now required

to set forth the partial admissions he is willing to make and to submit variant

wording or qualifications for stipulations he disputes. In this regard, the 1974 rule

does not refer to “admissions and denials” but to “the part admitted and the part

disputed,” and thus by its very wording, encourages the attitude that the answer to

the show cause order does not end the stipulation process. Id.

616 The United States Tax Court – An Historical Analysis

articulate present practice,”

509

deals with the failure to respond to a show

cause order. If a party does not respond, in whole or in part, to a proposed

stipulation, or the response is evasive, the rule deems that portion of the

stipulation to be admitted.

510

On the other hand, the rule makes clear that

no stipulation will be ordered with respect to a matter which, in the opinion

of the court, is genuinely disputed.

511

In determining whether an issue is

disputed, the court will not weigh opposing versions of the evidence unless

one such version is patently incredible.

512

The most significant change effected in the 1974 rule revision was the

court’s adoption of pretrial discovery by interrogatories and the production

and inspection of papers and other things.

513

An influential factor in the

court’s decision to adopt discovery was the criticism evoked by the failure

of the stipulation procedure, even after the 1963 revision, to provide the

parties with a mechanism that guaranteed resolution of disputed

stipulations prior to trial.

514

The opportunity for discovery at least makes

available evidence concerning those matters that might have to be proved at

trial in the absence of a stipulation. In this regard, it could be argued that

pre-1974 Tax Court practice suffered doubly in comparison to the pretrial

procedures applicable in district courts. Not only has liberal pretrial

discovery long been available under the Federal Rules of Civil Procedure,

515

but those rules have also made stipulations available prior to trial under

court supervised pretrial conferences at which the parties appear by court

direction.

516

The adoption of pretrial discovery, however, did not signal the court’s

abandonment of its historical reliance on the stipulation procedure. Of

particular importance is the court’s unique conception of the role of pretrial

discovery. Whereas the federal rules emphasize discovery, the Tax Court

continues to regard stipulations as being of paramount importance with

discovery to be used only to supplement the stipulation procedure; the

court has stated that discovery “should be regarded as [an aid] to

stipulation,”

517

not an alternative. This position was illustrated when the

court granted a motion by the Commissioner for a protective order to

postpone his response to interrogatories until the parties had attempted to

509

Rules Comm. Note, TAX CT. R. 91(f)(3) (Jan. 1, 1974 ed.).

510

TAX CT. R. 91(f)(3) (Jan. 1, 1974 ed.).

511

TAX CT. R. 91(f)(4) (Jan. 1, 1974 ed.).

512

Id.

513

TAX CT. R. 70–73 (Jan. 1, 1974 ed.).

514

See supra note 482 and accompanying text.

515

FED. R. CIV. P. 26–37.

516

FED. R. CIV. P. 16.

517

See supra note 395.

Pretrial Procedure 617

stipulate. In its view, reliance on the pretrial discovery procedure prior to

efforts to stipulate was an abuse of the discovery procedure.

518

F. Pretrial Conferences

A pretrial conference is a meeting between the parties that is supervised

by the court.

519

The procedure had its origins in necessity. Due to a

tremendous backlog of cases prior to 1930 in the local courts in Detroit, the

local judges decided to conduct conferences with the parties to determine

which cases could be resolved without a trial.

520

From this beginning, the

procedure was adopted as part of the Federal Rules of Civil Procedure in

1938

521

and subsequently became an important part of the pretrial

procedure in Federal district courts.

522

Shortly after the federal rules were adopted, the Board of Tax Appeals

considered whether pretrial conferences would be compatible with its

concept of pretrial procedure.

523

The Board’s failure to adopt such a

procedure indicates that it had concluded that pretrial conferences would

not materially expedite the orderly disposition of tax controversies.

524

However, the apparent success of the new procedure

525

soon led to

518

Branerton Corp. v. Commissioner, 61 T.C. 691 (1974).

519

See generally Alexander Holtzoff, Pretrial Procedure in the District of Columbia, 3

ATH. U. L. REV. 1 (1953) [hereinafter cited as Holtzoff]; Clarence L. Kincaid, A

Judges Handbook of Pre-Trial Procedure, 17 F.R.D. 437 (1955) [hereinafter cited as

Kincaid]; Report of the Committee on Pretrial Procedure to the Judicial

Conference for the District of Columbia, May 24, 1941, filed at the U.S. Tax Court

in “Pretrial Conference: Memoranda & Correspondence” [hereinafter cited as

Judicial Conference]; Unsigned Memorandum to Chairman Arundell, Jan. 30, 1941,

filed at the U.S. Tax Court in “Pretrial Conferences: Memoranda &

Correspondence” [hereinafter cited as Arundell]; Memorandum from Richard

Barker entitled “Pretrial Procedure in the Board of Tax Appeals,” c. 1939, filed at

the U.S. Tax Court in “Pretrial Conferences: Memoranda and Correspondence”

[hereinafter cited as Barker].

520

Holtzoff, supra note 519, at 1–2; Judicial Conference, supra note 519, at 1–2.

521

FED. R. CIV. P. 16, 86, 308 U.S. 653, 684, 766 (1939).

522

See generally Judicial Conference, supra note 519, at 1–3; Kincaid, supra note

519, at 440; Note, Developments in the Law–Discovery, 74 H

ARV. L. REV. 940, 971

(1961).

523

Arundell, supra note 519; Barker, supra note 519.

524

The Tax Court did not adopt a rule authorizing pretrial conferences until

1963. See T

AX CT. R. 28 (Jan. 1, 1964 ed.).

525

See generally supra note 522.

618 The United States Tax Court – An Historical Analysis

proposals for adoption of a pretrial conference procedure modeled after

Rule 16 of the Federal Rules of Civil Procedure.

526

In support of their proposals, the proponents of pretrial conferences,

including the American Bar Association,

527

argued that a court supervised

pretrial conference would enhance materially the prospects of a pretrial

settlement.

528

In their opinion, as the parties were forced to deal with the

issues during the course of these conferences, not only would the issues be

narrowed, but the strengths and weaknesses of their respective cases would

become more readily apparent.

529

As a result, the road to a compromise

settlement would become more clear. But even in those cases in which an

accord was not reached, the advocates of pretrial conferences urged that

such a procedure would be beneficial.

530

In their view, a pretrial conference

would enable the parties to get a better grasp on the issues while limiting

and defining the scope of the inquiry at trial.

531

This, in turn, would lead to

526

See Report of the Committee on Court Procedure, ABA TAXATION

SECTION 65, 67–68 (1958) [hereinafter cited as ABA 1958]; Report of the

Committee on Court Procedure, ABA T

AXATION SECTION, 114, 116 (1957)

[hereinafter cited as ABA 1957]; Report of the Committee on Tax Court

Procedure, ABA T

AXATION SECTION 128 (1954); Report of the Committee on Tax

Court Procedure, ABA T

AXATION SECTION 128 (1949) [hereinafter cited as ABA

1949]; Report of the Committee on Tax Court Procedure, ABA T

AXATION

SECTION 110 (1948) [hereinafter cited as ABA 1948]; Report of the Committee on

Tax Court Procedure, ABA T

AXATION SECTION 112 (1947) [hereinafter cited as

ABA 1947]; Adam Y. Bennion, Equivalents of Pre-Trial and Discovery Procedure in Tax

Court of United States, 11 U.S.C.

TAX INST. 405 (1959) [hereinafter cited as Bennion];

Report of the Committee on Relations with the Tax Court of the United States,

District of Columbia Bar Association, Mar. 31, 1948, at 8–9, filed at the U.S. Tax

Court in “Pretrial Conferences: Memoranda & Correspondence” [hereinafter cited

as D.C. Bar Report]; Judicial Conference, supra note 519. See generally J. Edgar

Murdock, Tax Court is Fulfilling its Function; No Fundamental Changes Needed, 8 J.

AX’N 106, 107 (1958) [hereinafter cited as Murdock]; Memorandum from

Clarence Opper to Chief Judge Murdock, May 2, 1958, filed at the U.S. Tax Court

in “Pretrial Conferences: Memoranda & Correspondence” [hereinafter cited as

Opper]; Letter from T. D. Taubeneck to Chief Judge Murdock, May 6, 1958, filed

at the U.S. Tax Court in “Pretrial Conferences: Memoranda & Correspondence.”

527

See ABA 1947, supra note 526.

528

ABA 1957, supra note 526; Bennion, supra note 526, at 407–08; Barker, supra

note 519; see also Arundell, supra note 519, at 1–2.

529

ABA 1957, supra note 526; ABA 1948, supra note 526; ABA 1947, supra note

526; Arundell, supra note 519, at 1–2; Barker, supra note 519; D.C. Bar Report, supra

note 526.

530

See, e.g., ABA 1948, supra note 526; ABA 1947, supra note 526; Arundell,

supra note 519; Barker, supra note 519; D.C. Bar Report, supra note 526.

531

Bennion, supra note 526, at 407–08; Arundell, supra note 519; D.C. Bar

Report, supra note 526, at 8–9.

Pretrial Procedure 619

a more orderly presentation of the issues to the court.

532

Moreover, the

likelihood of one party surprising his adversary would be diminished as

both parties would be forced to show their hands during the course of

negotiations.

533

This would be especially true if the court limited the scope

of the controversy to matters raised at the conference.

534

Finally, it was

argued that pretrial conferences would remedy defects in then existing

pretrial procedure.

535

They noted that the pleadings often failed to define

the issues and that the stipulation procedure was the only means available

to correct this situation.

536

They viewed pretrial conferences as a welcome

supplement to the then applicable pretrial procedure.

537

Nevertheless, the Tax Court was not persuaded. First, the court noted

that, on the average, 85 percent of docketed cases were settled by the

parties without any help from the court and that there was no evidence that

pretrial conferences would significantly enhance this settlement rate.

538

the contrary, the court was concerned that such a procedure could actually

decrease the settlement rate,

539

which would cause an intolerable increase in

its workload considering the large backlog of cases. But even assuming the

settlement rate would not be affected, the court was concerned that it

would become entangled in cases that ordinarily would have been settled

532

See supra note 531.

533

Bennion, supra note 526, at 407–08; Arundell, supra note 519.

534

ABA 1947, supra note 526.

535

See generally William H. Bowen, Discovery in The Tax Court: Why Not Follow the

Federal Rules?, 44 A.B.A. J. 129 (1958) [hereinafter cited as Bowen]; Barker, supra

note 519; D.C. Bar Report, supra note 526, at 8–9.

536

See generally Bowen, supra note 535; ABA 1958, supra note 526, at 67–68;

Barker, supra note 519; D.C. Bar Report, supra note 526, at 8–9; Murdock, supra

note 526.

537

ABA 1947, supra note 526; Barker, supra note 519; D.C. Bar Report, supra

note 526.

538

See Memorandum from Judge Raum, Rules Comm. Chairman, entitled

“Pretrial Procedure,” Feb. 11, 1960, at 1–3, filed at the U.S. Tax Court in

“Stipulations: Memoranda & Correspondence” [hereinafter cited as Raum, 1960];

Memorandum from Judge Raum, Rules Comm. Chairman, to the Chief Judge, Dec.

14, 1959, at 1–3, filed at the U.S. Tax Court in “Stipulations: Memoranda &

Correspondence” [hereinafter cited as Raum, 1959]; Memorandum from Judge

Turner to the Judges of the Tax Court, Apr. 8, 1963, at 1, 5, filed at the U.S. Tax

Court in “Stipulations: Memoranda & Correspondence” [hereinafter cited as

Turner]; Memorandum from Judge Turner to the Members of the Tax Court Rules

Comm., Jan. 16, 1963, at 3, filed at the U.S. Tax Court in “Stipulations: Memoranda

& Correspondence” [hereinafter cited as Turner, 1963]; Memorandum from Judge

Turner to Judge Dawson, Sept. 28, 1962, at 6–9, filed at the U.S. Tax Court in

“Stipulations: Memoranda & Correspondence” [hereinafter cited as Turner, 1962].

539

See generally note 538 supra.

620 The United States Tax Court – An Historical Analysis

without its intervention.

540

This attitude was premised on the belief that if

the court gave its stamp of approval to pretrial conferences, many attorneys

would indiscriminately use the procedure simply because it was available.

541

Second, the court doubted whether the procedure was feasible

administratively.

542

Although the Tax Court enjoyed national jurisdiction,

its only permanent location was its headquarters was in Washington, D.C.

Accordingly, it was not at all clear where a pretrial conference would be

held.

543

If the trial was scheduled for some place other than Washington,

D.C., then the parties, especially the taxpayer, would be inconvenienced if

they were required to come to Washington only for the purpose of

attending a conference.

544

On the other hand, if the judges were required to

travel around the country in advance of the date set for trial, then the judges

would suffer the inconvenience.

545

Finally, the court was not convinced there was a need for court

supervised pretrial conferences.

546

In the court’s view, the stipulation

procedure, which required the parties to meet on a continual, albeit

informal, basis until they had reached a stipulation of facts, already

sufficiently provided for pretrial conferences.

547

Accordingly, the court refused to adopt a rule permitting pretrial

conferences until 1963.

548

Its official position, which was announced in

1949 when the court rejected an ABA recommendation that it adopt

pretrial conferences,

549

however, did not foreclose completely the possibility

of pretrial conferences in individual cases.

550

Although the court expressly

refused to adopt a formal rule providing for its participation in these

conferences, it indicated that it would be amenable to holding a pretrial

540

Raum, 1960, supra note 538, at 1–2; Raum, 1959, supra note 538, at 1–2;

Turner, supra note 538; Turner, 1962, supra note 538, at 3.

541

Turner, supra note 538, at 3–4.

542

Letter from Chief Judge Murdock to District Court Judge Holtzoff, Feb. 14,

1957, filed at the U.S. Tax Court in “Pretrial Conferences: Memoranda &

Correspondence” [hereinafter cited as Murdock, 1957]. See generally Memorandum

from Chief Judge Tietjens to the Rules Comm., Feb. 15, 1963, filed at the U.S. Tax

Court in “Pretrial Conferences: Memoranda & Correspondence” [hereinafter cited

as Tietjens]; Turner, 1963, supra note 538, at 8–9.

543

See generally Opper, supra note 526; Turner, 1963, supra note 538, at 8–9.

544

See generally Turner, 1963, supra note 538.

545

Turner, 1963, supra note 538.

546

E.g., Murdock, supra note 526; Murdock, 1957, supra note 542; Turner, supra

note 538, at 6–9; Turner, 1963, supra note 538.

547

Raum, 1960, supra note 538, at 2; Raum, 1959, supra note 538, at 2.

548

TAX CT. R. 28 (Jan. 1, 1964 ed.).

549

ABA 1949, supra note 526.

550

ABA 1958, supra note 526; ABA 1949, supra note 526; Murdock, supra note

526.

Pretrial Procedure 621

conference in complicated cases, upon motion by either party.

551

The court

reasoned that this halfway measure would allow it to avoid the risks it

associated with a formal procedure and at the same time leave open the

door to pretrial conferences in those cases in which the procedure might be

beneficial.

552

Furthermore, since the court was uncertain about the need for

a more formal procedure, the number of requests for pretrial conferences

under this informal procedure could be used as a yardstick to measure that

need.

553

Finally, although this compromise procedure provided far less than

what had been requested, presumably the court hoped to appease the ABA

and other proponents of pretrial conference to some extent by refraining

from an outright rejection of the proposal.

554

However, things did not work out as planned. The parties did not

resort to the informal procedure,

555

perhaps because they were not aware

that it was available, and the bar was not dissuaded from insisting upon a

formal rule authorizing pretrial conferences.

556

This persistence, when

combined with a total lack of opposition from the Government, provided

the catalyst for reconsideration.

557

Some judges were concerned that the

ABA might become impatient and seek the desired procedural changes

directly from Congress.

558

Others were of the opinion that if the tax bar

was convinced that pretrial conferences would expedite the disposition of

tax controversies and the Government had no objection to such a

procedure, then the court should seriously reconsider its position.

559

Nevertheless, there was a consensus among the judges, including those who

desired to accommodate the tax bar, that the role of pretrial conference in

the court’s pretrial procedure would have to be carefully constructed and

551

See note 550 supra.

552

See ABA 1958, supra note 526; Murdock, supra note 526.

553

See note 552 supra.

554

See generally ABA 1949, supra note 526; Murdock, supra note 526.

555

ABA 1958, supra note 526; Memorandum from Judge Raum, Rules Comm.

Chairman, to the Judges of the Tax Court, Mar. 8, 1963, filed at the U.S. Tax Court

in “Pretrial Conferences: Memoranda & Correspondence;” Murdock, supra note

526.

556

See ABA 1958, supra note 526, at 67–68; Murdock, supra note 526, at 107;

Raum, 1960, supra note 538; Raum, 1959, supra note 538.

557

See Memorandum from Judge Drennen to the Judges of the Tax Court,

Apr. 11, 1963, filed at the U.S. Tax Court in “Pretrial Conferences: Memoranda &

Correspondence” [hereinafter cited as Drennen]; Memorandum from Judge Raum,

Rules Comm. Chairman, to the Rules Comm., Dec. 28, 1962, filed at the U.S. Tax

Court in “Pretrial Conferences: Memoranda & Correspondence;” Raum, 1960,

supra note 538, at 1–3; Raum, 1959, supra note 538, at 1–3.

558

See Raum, 1959, supra note 538.

559

See Drennen, supra note 557.

622 The United States Tax Court – An Historical Analysis

narrowly circumscribed if the potential hazards of such a procedure were to

be avoided.

560

Eventually a majority of the court settled upon a compromise procedure

which ultimately was adopted as Rule 28 in 1963.

561

In very broad language,

Rule 28 authorized the court, upon its own or a parties’ motion, to hold

pretrial conferences in its discretion in appropriate cases.

562

However, the

court’s intent to relegate pretrial conferences to the narrow role of assisting

parties to reach a stipulation or settlement only in those cases in which the

informal conference required under the stipulation procedure proved

unproductive was unmistakable.

563

In addition to demanding that the

moving party demonstrate a good faith effort to comply with the

mandatory stipulation procedure as a condition precedent to obtaining a

pretrial conference,

564

the new rule warned the parties against treating

pretrial conferences as a substitute for the conferences required under the

stipulation procedure.

565

As introduced in 1964, Rule 28 apparently struck an appropriate balance

between competing considerations.

566

First, the rule silenced the court’s

critics. The ABA gave its “resounding endorsement”

567

to the rule and the

Government “heartily endorsed”

568

it. Additionally, the court managed to

strengthen the stipulation procedure by demanding that the parties resort to

the stipulation procedure prior to seeking a pretrial conference.

569

In this

connection, the prospect of a party explaining to the court why the informal

stipulation conferences had not worked out, as a condition precedent to

obtaining a pretrial conference, was an effective incentive to the adversary

to make a good faith effort during the course of the stipulation conferences.

Finally, and most importantly, the pretrial conference rule operated in such

a manner that the court successfully avoided all of the pitfalls it had

associated with pretrial conferences. The renewed emphasis on the

560

Tietjens, supra note 542.

561

TAX CT. R. 28 (Jan. 1, 1964 ed.).

562

TAX CT. R. 28(a) (Jan. 1, 1964 ed.).

563

Raum, 1960, supra note 538, at 3; Raum, 1959, supra note 538, at 3; Turner,

supra note 538, at 3–4; see T

AX CT. R. 28(d) (Jan. 1, 1964 ed.).

564

TAX CT. R. 28(d) (Jan. 1, 1964 ed.).

565

Id.

566

TAX CT. R. 28 (Jan. 1, 1964 ed.). As part of the 1974 revision to the Tax

Court’s Rules of Practice and Procedure, Rule 28 was renumbered as Rule 110.

However, this change did not alter the substance of the rule. See Rules Comm.

Note, T

AX CT. R. 110, 60 T.C. 1125–26 (1974).

567

Letter from Randolph Thrower, Chairman ABA Section of Taxation, to

Judge Raum, Rules Comm. Chairman, Mar. 27, 1963, filed at the U.S. Tax Court in

“Stipulations: Memoranda & Correspondence.”

568

Letter from Crane Hauser, Chief Counsel, to Judge Murdock, Apr. 11,

1963, filed at the U.S. Tax Court in “Stipulations: Memoranda & Correspondence.”

569

See TAX CT. R. 28(d) (Jan. 1, 1964 ed.).

Pretrial Procedure 623

informal stipulation conferences all but eliminated the need for a court

supervised pretrial conference.

570

Accordingly, formal pretrial conferences

have only been used sparingly

571

and, as a result, the court has not become

involved in cases that are otherwise susceptible to settlement without its

intervention.

G. Discovery

Pretrial discovery is the process by which the parties through a series of

procedural devices “discover” the bases of their opponents’ claims or

defenses.

572

Over the years, depositions upon oral examination,

573

depositions upon written interrogatories,

574

interrogatories to the parties,

575

production of documents and things,

576

and admissions

577

have emerged as

the primary discovery tools.

578

In 1974, the Tax Court finally incorporated

some of these discovery devices into its pretrial procedure.

579

Although

prior to 1974 pretrial discovery was not permitted, this result did not appear

to be required by Board/Tax Court rules.

580

Beginning with the Board’s

original rules in 1924, three rules were susceptible to a construction that

would have allowed pretrial discovery, and subsequent revisions of these

rules over the next 49 years added nothing to expressly preclude such a

construction.

581

Original Rule 40, which authorized the Board to issue a subpoena

requiring the production of documentary evidence, did not state whether it

could be used for discovery purposes.

582

Perhaps the failure to provide for

a pretrial return date of subpoenaed material precluded such a result;

583

570

See generally LESTER M. PONDER, UNITED STATES TAX COURT PRACTICE

AND

PROCEDURE 112 (1976); Lester M. Ponder, Tax Court, Court of Claims, and

District Court—A Practicing Lawyer’s View, 21 U.S.C. T

AX INST. 117, 127–28 (1969)

[hereinafter cited as Ponder].

571

See Turner, supra note 538, at 3.

572

See generally Note, Developments in the Law–Discovery, 74 HARV. L. REV. 940

(1960) [hereinafter cited as Developments].

573

Id. at 553–57; see also FED. R. CIV. P. 30.

574

Developments, supra note 572, at 958–59; see also FED. R. CIV. P. 31.

575

Developments, supra note 572, at 959–65; see also FED. R. CIV. P. 33.

576

Developments, supra note 572, at 965–68; see also FED. R. CIV. P. 34.

577

Developments, supra note 572, at 968–71; see also FED. R. CIV. P. 36.

578

See generally Developments, supra note 572, at 942–71.

579

See TAX CT. R. 70–73, 90, 100–04 (Jan. 1, 1974 ed.).

580

Developments, supra note 572, at 1064–66.

581

Compare B.T.A. RULES 40–42 (July, 1924 ed.), with TAX CT. R. 44–46 (Feb. 9,

1943 ed.), and T

AX CT. R. 44–46 (Jan. 25, 1971 ed.).

582

B.T.A. RULE 40 (July, 1924 ed.).

583

See id.; Developments, supra note 572, at 1064.

624 The United States Tax Court – An Historical Analysis

whatever the reason, the subpoena was not used for discovery purposes.

584

Similarly, original Rules 41 and 42, which provided for depositions upon

oral examination and written interrogatories respectively, did not provide

whether they could be used for discovery.

585

Nevertheless, depositions

were generally relegated to the role of perpetuating testimony of witnesses

who for good cause were unable to testify at the trial.

586

The absence of pretrial discovery in Board/Tax Court procedure

became an increasingly controversial issue.

587

The debate evolved through

three different phases and spanned a period of 50 years.

584

Developments, supra note 572, at 1064.

585

See B.T.A. RULES 41–42 (July, 1924 ed.); Developments, supra note 572, at

1064.

586

See Rules Comm. Note, TAX CT. R. 70(a) (Jan. 1, 1974 ed.); Babbitt and

Morris, supra note 385, at 627–28; Bowen, supra note 535, at 131; Harold Dubroff,

Federal Taxation, 1973–74 A

NN. SURVEY OF AMER. L. 265, 286 (1974) [hereinafter

cited as Dubroff]; Ponder, supra note 570, at 131–32; see also L

OYAL E. KEIR, THE

PREPARATION AND TRIAL OF CASES IN THE TAX COURT OF THE UNITED STATES

66 (1955). In the past, the Tax Court had permitted the use of depositions to

perpetuate testimony upon a showing of good cause before the petition was filed.

However, the Tax Court ceased this practice after the Sixth Circuit Court of

Appeals held in Louisville Builders Supply Co. v. Commissioner, 294 F.2d 333 (6th Cir.

1961), that the Tax Court did not have authority to allow depositions prior to the

filing of the petition. See Marx v. Commissioner, 40 T.C. 1 (1963).

To obtain pretrial discovery, it has been argued unsuccessfully that the Federal

Rules of Civil Procedure apply to the Tax Court, see Starr v. Commissioner, 226 F.2d

721 (7th Cir. 1955), that discovery procedures are constitutionally required as a

matter of due process, see id. at 722, and that the discovery procedures are rules of

evidence which must be followed by the Tax Court, see generally Kaminsky, supra

note 393.

587

See generally note 586 supra; Bennion, supra note 526; William H. Bowen, Tax

Litigation–The Choice of Forums, 9 T

AX EXEC. 273, 277 (1957) [hereinafter cited as

Bowen, 1957]; Caldwell, 1969, supra note 393, at 1443; Marvin J. Garbis & Robert

L. Frome, Selecting the Court for the Optimum Disposition of a Tax Controversy, 27 J.

AX’N 216, 217 (1967) [hereinafter cited as Garbis & Frome]; Laurence Goldfein &

Richard A. Levine, New Tax Court Rules of Practice and Procedure: How They Work:

Their Impact, 40 J. T

AX’N 2, 3–6 (1974) [hereinafter cited as Goldfein & Levine];

Laurence Goldfein & Richard A. Levine, Tax Court Proposes Far Reaching Changes in

its Rules of Practice and Procedure, 37 J. T

AX’N 66, 68–71 (1972) [hereinafter cited as

Goldfein & Levine, 1972]; Arthur Groman & Hilbert P. Zarky, Rules of Evidence in

Tax Court of United States, 10 U.S.C. T

AX INST. 603, 612–13 (1958) [hereinafter cited

as Groman & Zarky]; Converse Murdoch, Discovery Against the United States in Civil

Tax Proceedings, 13 V

ILL. L. REV. 58, 66–69 (1967) [hereinafter cited as Murdoch];

Proposed Rules of Practice and Procedure of the United States Tax Court—Report of Views of

Members of the Section of Taxation Special Subcommittee on Revision of Tax Court Rules, 26

AX LAW. 393, 394–96 (1973) [hereinafter cited as ABA Subcommittee]; Panel

Discussion, supra 395; Reiling, supra note 393; Jules Ritholz, Diverse Views on Discovery

Pretrial Procedure 625

The first phase of the debate commenced in 1924 and lasted until 1938.

During this period, the absence of pretrial discovery was neither unique nor

controversial. Many forums did not emphasize discovery in their pretrial

procedure

588

and, as a result, there was presumably no expectation that the

Board would or should allow discovery. However, by 1937, it was

becoming apparent that the United States Supreme Court might adopt

liberal pretrial discovery procedures as part of the proposed Federal Rules

of Civil Procedure.

589

This prospect provided the catalyst for the Board to

reevaluate its rules to determine if its pretrial procedure would be benefitted

by pretrial discovery.

590

After carefully weighing various proposals, the

Board elected to forego pretrial discovery, at least for the immediate

future.

591

Although there was some discussion about the Board’s authority

to enforce discovery procedures,

592

the principal reason for abandoning the

proposals was that “[n]o one experienced in the actual trial and preparation

of cases before the Board [had] suggested that the adoption of these

procedures would be desirable.”

593

Accordingly, the Board decided to wait

and see whether the Supreme Court adopted pretrial discovery before

reconsidering its position.

594

in the Tax Court, 21 TAX LAW. 639 (1968) [hereinafter cited as Ritholz]; George L.

Whitfield & Charles E. McCallum, Burden of Proof and Choice of Forum in Tax

Litigation, 20 V

AND. L. REV. 1179, 1180 (1967) [hereinafter cited as Whitfield &

McCallum]; Developments, supra note 572, at 1064–66.

588

See generally Developments, supra note 572, at 946–51.

589

Report of the Joint Committee of the Board of Tax Appeals and Office of

the Chief Counsel, Dec. 21, 1937, at 11–12, filed at the U.S. Tax Court in “Pretrial

Discovery: Memoranda & Correspondence” [hereinafter cited as Joint Committee

Report 1937]; Memorandum from S. Surrey to Member Arundell, Nov. 4, 1937, at

4, filed at the U.S. Tax Court in “Pretrial Discovery: Memoranda &

Correspondence;” Memorandum from the Board’s Rules Comm. to the Board, c.

1937, filed at the U.S. Tax Court in “Pretrial Discovery: Memoranda &

Correspondence” [hereinafter cited as Rules Comm. Memo.].

590

See supra note 589.

591

Joint Committee Report 1937, supra note 589, at 11–12; Rules Comm.

Memo., supra note 589. See generally memoranda from HTR to the Rules Comm.,

May 13, 14, 15, 1937, filed at the U.S. Tax Court in “Pretrial Discovery:

Memoranda & Correspondence;” Memorandum, entitled “Suggested Rules

Relating to Dispositions and Discovery Procedure,” to the Rules Comm., c. 1937,

filed at the U.S. Tax Court in “Pretrial Discovery: Memoranda & Correspondence,”

wherein various proposals are set forth.

592

See Joint Committee Report 1937, supra note 589, at 11–12; Rules Comm.

Memo., supra note 589.

593

Rules Comm. Memo., supra note 589, at 2.

594

Joint Committee Report 1937, supra note 589, at 11–12; Rules Comm.

Memo., supra note 589, at 2.

626 The United States Tax Court – An Historical Analysis

Shortly thereafter, in 1938, the Supreme Court adopted the Federal

Rules of Civil Procedure

595

which marked the beginning of the second stage

of the pretrial discovery debate which lasted until 1963. In view of the

pretrial discovery procedures incorporated into the new federal rules, the

Board apparently did reconsider whether such devices should be

incorporated into its pretrial procedure.

596

Nevertheless, it declined to do

so. However, the success that these procedures enjoyed in Federal district

courts and many state courts, which subsequently adopted similar

procedures, radically changed the complexion of the debate as pretrial

discovery was no longer considered an aberration.

597

Viewed superficially, the majority of the commentary during this period

seemed to favor the adoption by the Tax Court of at least some pretrial

discovery procedures.

598

However, a closer analysis revealed that much of

the sentiment favoring pretrial discovery, especially that advanced from the

late 1940s to the early 1960s, was not premised as much on the merits of

these procedures as it was based on a general dissatisfaction with the court’s

existing pretrial procedure.

599

Countless proposals were forthcoming which

advocated a myriad of changes covering the entire spectrum of pretrial

procedures. For example, some commentators looked to more informative

pleadings and deficiency notices for the solution to pretrial problems.

600

Others sought a mandatory stipulation procedure with a pretrial return date

for the order to show cause why a proposed stipulation should not be

deemed admitted.

601

Still others pressed for the adoption of a pretrial

conference procedure.

602

The plethora of recommendations to improve the

court’s pretrial procedure indicates that the debate over pretrial discovery

during this period had become intertwined with the larger controversy over

the entire pretrial procedure. It is not at all clear that those favoring pretrial

discovery in the context of an otherwise meager pretrial procedure would

also have advocated the adoption of pretrial discovery if the Tax Court had

a full complement of other pretrial procedures.

By 1963, however, the Tax Court had made three important changes in

its pretrial procedure that quelled the clamor for pretrial reform. First, in

1956, the Tax Court made it clear in Licavoli v. Commissioner

603

that the

595

FED. R. CIV. P. 86, 308 U.S. 645, 766 (1939).

596

See generally Arundell, supra note 519; Barker, supra note 519.

597

See generally Developments, supra note 572.

598

See generally Bennion, supra note 526; Bowen, supra note 535; Bowen, 1957,

supra note 587; Groman & Zarky, supra note 587; Kaminsky, supra note 393.

599

See, e.g., Bowen, supra note 535; Kaminsky, supra note 393; supra notes 526

and 582; supra notes 437–477 and accompanying text.

600

See supra notes 201–238 and accompanying text.

601

See supra notes 414–477 and accompanying text.

602

See supra notes 525–565 and accompanying text.

603

15 T.C.M. (CCH) 862 (1956), aff’d, 252 F.2d 268 (6th Cir. 1958).

Pretrial Procedure 627

motion for a further and better statement of a pleading or defense

604

would

be more readily available to cure flagrant abuses of the pleading rules.

Second, the court gradually acceded to pressure to make the stipulation

procedure more meaningful by making the procedure mandatory and

providing for a pretrial return date for the motion to show cause why a

proposed stipulation should not be deemed admitted.

605

Third, the Tax

Court agreed to hold pretrial conferences in those cases in which it

determined they would be beneficial.

606

As a result, much of the

controversy over pretrial reform subsided and the proponents of pretrial

discovery could no longer draw on indirect support from related problems.

Rather, they would have to convince the court of the need for pretrial

discovery based solely on the merits of these procedures.

The campaign from 1963 to 1974 to convince the court of the

desirability of adopting pretrial discovery formed the final stage of the

pretrial discovery debate.

607

During this period, the earlier consensus

favoring liberal pretrial discovery was dissipated, and a formidable minority

opinion opposing pretrial discovery had to be reckoned with and

overcome.

608

Those who favored the adoption of pretrial discovery enumerated

several advantages of such procedures. First, they contended that discovery

procedures would allow the parties to obtain evidence and leads for

evidence while the facts and circumstances were still fresh in the minds of

those involved.

609

In this way, it was argued, the parties would be able to

preserve evidence and use it later during settlement negotiations or the

actual trial, should the need arise.

610

Second, they urged that the process of

discovering all of the relevant facts and circumstances helps to limit the

scope of the controversy.

611

By the same token, obtaining this information

604

See TAX CT. R. 17(c) (Aug. 15, 1955 ed.).

605

See supra notes 414–477 and accompanying text.

606

See supra notes 525–565 and accompanying text.

607

See generally ABA Subcommittee, supra note 587; Caldwell, 1969, supra note

393; Murdoch, supra note 587; Panel Discussion, supra note 395; Ritholz, supra note

587.

608

Compare Bennion, supra note 526, at 405–08; Bowen, supra note 535;

Groman & Zarky, supra note 587; Kaminsky, supra note 393; Reiling, supra note 393;

Developments, supra note 572, at 1064–66; with Goldfein & Levine, supra note 587;

Goldfein & Levine, 1972, supra note 587; Ponder, supra note 570.

609

See Bowen, supra note 535, at 129; Developments, supra note 572, at 944–46,

1064–66.

610

See generally supra note 609.

611

See Bennion, supra note 526, at 407–08; Bowen, supra note 535, at 129–30,

132; Dubroff, supra note 586, at 286; Developments, supra note 572, at 944–46, 1064–

66.

628 The United States Tax Court – An Historical Analysis

would facilitate defining the issues within the scope as limited.

612

Third,

giving the parties access to all of the relevant factual information would

make surprise less of a factor in determining the outcome of the

controversy.

613

In this manner, decisions would more likely be consistent

with the equities of the controversies.

614

Finally, the advocates of pretrial

discovery argued that the inadequacy of the pleadings and the deficiency

notice in defining the issues necessitated discovery.

615

Although the

stipulation procedure and pretrial conferences provided some relief, they

urged that a full complement of pretrial procedures was essential if the

parties were to overcome the inadequacies of the pleadings.

616

Depending upon whether a proponent of discovery was representing

the position of the Government or the taxpayer, the need for and advantage

of discovery procedures were perceived differently.

617

On the one hand,

some argued that the Government and not the taxpayer needed pretrial

discovery.

618

Unlike the normal civil suit in which the parties generally had

prior dealings, the Government generally was not a party to the transactions

giving rise to the alleged tax liability.

619

Moreover, the Government’s access

to information through its administrative investigatory powers was not

deemed an adequate substitute for the more formal court authorized

pretrial discovery procedures.

620

The administrative investigations were not

conducted by trained trial attorneys who, theoretically, were better prepared

to handle such discovery proceedings.

621

On the other hand, those representing taxpayers contended that the

taxpayer and not the Government had the greater need for discovery

procedures and would also derive the greater benefit therefrom.

622

They

acknowledged that in many cases the taxpayer was in possession of most of

the relevant information.

623

However, they asserted that the existing

procedure was in effect a one-way street since the Government effectively

612

See supra note 611.

613

Bennion, supra note 526, at 407–08; Bowen, supra note 535, at 129–31;

Dubroff, supra note 586, at 286; Ritholz, supra note 587, at 643; Developments, supra

note 572, at 944–46, 1064–66.

614

Dubroff, supra note 586, at 286.

615

See Bowen, supra note 535, at 129–31; Kaminsky, supra note 393; Reiling,

supra note 393; Developments, supra note 572, at 1064–65.

616

See generally supra note 615; Bennion, supra note 526.

617

Ritholz, supra note 587, at 642.

618

Bowen, supra note 535, at 132; Reiling, supra note 393.

619

See supra note 618.

620

Id.; see also I.R.C. § 7602.

621

Bowen, supra note 535, at 132.

622

Kaminsky, supra note 393; Developments, supra note 572, at 1064–65.

623

Bowen, supra note 535, at 132; Dubroff, supra note 586, at 287; Developments,

supra note 572, at 1064–65.

Pretrial Procedure 629

had access to discovery proceedings through its administrative investigatory

powers.

624

In their opinion, the addition of pretrial discovery to Tax Court

procedure would provide a more balanced procedure.

625

Both parties

would have similar access to pretrial discovery, but because the

Government already had access to such proceedings through its

administrative power, they claimed that the litigating position of the

Government would not be enhanced materially.

626

Furthermore, they

argued there was a real need for pretrial discovery in cases in which the

Government relied on information obtained from sources other than the

taxpayer.

627

In cases dealing with fraud, transferee liability or divorce,

pretrial discovery was considered essential if the taxpayer was to have access

to information to the same extent as the Government.

628

All advocates of discovery rejected the criticism that such procedures

would materially increase the court’s workload.

629

They noted that the

discovery rules could easily be drafted to minimize the court’s participation

in these procedures.

630

More importantly, however, they urged that issue

formulation, the natural byproduct of discovery, not only would facilitate

the orderly presentation of a case, but also would increase the likelihood of

settlement as the parties would be forced to deal with the strengths and

weaknesses of their respective cases.

631

Opponents of discovery were not bereft of arguments to support their

view. Most of their arguments did not address the advantages of discovery

in terms of issue formulation; rather, they disputed that these advantages

were sufficient to offset what they regarded as the insurmountable

disadvantages of discovery proceedings to the parties and to the court.

First, they argued that the existing procedure provided a relatively

uncomplicated and inexpensive format for the orderly disposition of tax

controversies.

632

This format, they asserted, would be seriously disrupted

by the addition of pretrial discovery.

633

If the Tax Court provided pretrial

624

Bowen, 1957, supra note 587, at 277; Ritholz, supra note 587, at 643.

625

See supra note 624. See generally Bowen, supra note 535, at 129–32; Kaminsky,

supra note 393; Ritholz, supra note 587, at 643.

626

See generally Bowen, supra note 535, at 129–32; Bowen, 1957, supra note 587,

at 277; Ritholz, supra note 587, at 643.

627

Developments, supra note 572, at 1064–65.

628

Id.

629

Bennion, supra note 526, at 407–08; Bowen, supra note 535, at 131; Dubroff,

supra note 586, at 287.

630

See Bowen, supra note 535, at 131.

631

See id. at 132; Dubroff, supra note 586, at 286–87.

632

See Goldfein & Levine, supra note 587, at 3; Panel Discussion, supra note 395,

at 387–89; Ritholz, supra note 587, at 641.

633

See supra note 631.

630 The United States Tax Court – An Historical Analysis

discovery on any regular basis, both parties would, as a matter of course, be

obliged to pursue discovery,

634

which would unnecessarily prolong the

proceeding and invariably increase the cost of litigation.

635

Such a result

would be especially burdensome in cases in which a negligible tax was

involved or in the case of a pro se taxpayer.

636

Furthermore, critics were

concerned about the great potential for abuse of discovery procedures,

especially on the part of the Government which, in most cases, would not

bear the same economic and time constraints confronted by taxpayers.

637

Second, many commentators argued that pretrial discovery would

adversely affect the nature of tax litigation.

638

They feared that pretrial

discovery would foster laxity during the administrative process of auditing

because of the knowledge that any errors or oversights during the

administrative stage could be discovered and corrected during the litigating

phase of the proceeding.

639

Furthermore, they were convinced that the

existing compromise attitude engendered by the informal conferences

required by the stipulation procedure would be supplanted by an inflexible

combative attitude associated with formal discovery procedures.

640

Third, and most important, was the apprehension that pretrial discovery

would damage irrevocably the effectiveness of the stipulation procedure in

producing settlements.

641

The stipulation procedure was considered

primarily responsible for the 85 percent pretrial settlement rate of docketed

cases.

642

If pretrial discovery encroached upon that settlement rate, it would

place an intolerable burden on the Tax Court, which already faced a large

backlog of cases. Regardless of whether the settlement rate was affected,

the opponents of pretrial discovery were sure that these procedures would

increase the court’s workload.

643

In their view, the conclusion was

inescapable that pretrial discovery would at the minimum increase the

court’s motion practice thereby involving the court in controversies that

otherwise would have been settled without such intervention.

644

634

See Goldfein & Levine, supra note 587, at 4; Ritholz, supra note 587, at 641.

635

See Dubroff, supra note 586, at 287; Goldfein & Levine, supra note 587, at 3;

Panel Discussion, supra note 395, at 388; Ritholz, supra note 587, at 641.

636

Ritholz, supra note 587, at 641–42.

637

Goldfein & Levine, supra note 587, at 3–4; Goldfein & Levine, 1972, supra

note 587, at 68; Ritholz, supra note 587, at 640.

638

See Dubroff, supra note 586, at 287; Goldfein & Levine, supra note 587, at 3–

4; Panel Discussion, supra note 395, at 388–89; Ritholz, supra note 587, at 640–42.

639

Goldfein & Levine, 1972, supra note 587, at 68.

640

See note 637 supra.

641

Goldfein & Levine, supra note 587, at 3–4.

642

Dubroff, supra note 586, at 287; Panel Discussion, supra note 395, at 389.

643

See Goldfein & Levine, 1972, supra note 587, at 68.

644

See Dubroff, supra note 586, at 287; Panel Discussion, supra note 395, at 390.

Pretrial Procedure 631

Finally, they rejected the proposition that the parties’ need for pretrial

discovery was a sufficient justification for incurring the disruptive effects of

discovery procedures. They observed that in most cases the Government

had access to all of the necessary information through its administrative

investigatory powers and that the taxpayers usually had all of the

information in their possession from the outset.

645

Moreover, they asserted

that to the extent the pleadings did not define the issues, the mythical gap in

the Tax Court’s pretrial procedure due to lack of pretrial discovery was

more than filled by the administrative processes generally initiated prior to

issuance of a deficiency notice, and the stipulation and pretrial conference

procedures initiated, pursuant to Tax Court rules, subsequent to the filing

of a Tax Court petition.

646

1. Adoption of Discovery Procedures

Presumably because of the controversial nature of pretrial discovery, the

Tax Court was reluctant to adopt such procedures. However, largely as a

result of the Tax Reform Act of 1969, which settled its status as an article I

court, the Tax Court embarked on a comprehensive reevaluation of its

procedural rules.

647

This effort lasted nearly four years and culminated in

adoption of a pretrial discovery procedure in 1974.

648

The initial discovery rules adopted by the court were more limited than

the Federal Rules. First, discovery was strictly limited in terms of who

645

See Garbis & Frome, supra note 587, at 217; Ponder, supra note 570, at 132;

Whitfield & McCallum, supra note 587, at 1180.

646

Babbitt and Morris, supra note 385, at 627–28; Bennion, supra note 526, at

405–12; Goldfein & Levine, supra note 587, at 3–4; Goldfein & Levine, 1972, supra

note 587, at 68; Groman & Zarky, supra note 587, at 612–14.

647

Panel Discussion, supra note 395, at 378. There is also some evidence that the

Tax Court reevaluated the rules of procedure in 1967 as a result of certain

proposed legislation aimed at making the Federal Rules of Civil Procedure

applicable to the Tax Court as nearly as possible. See S. 2041, 90th Cong., 1st Sess.

(1967); H.R. 10100, 90th Cong., 1st Sess. (1967); Joint Comm. Report from Judge

Raum, Rules Comm. Chairman, to the Chief Judge, Sept. 8, 1967, filed at the U.S.

Tax Court in “Pretrial Discovery: Memoranda & Correspondence;” Joint Comm.

Report from Edward Radue to Judge Raum, Rules Comm. Chairman, Sept. 6, 1967,

filed at the U.S. Tax Court in “Pretrial Discovery: Memoranda & Correspondence.”

648

TAX CT. R. 70–73, 90 (Jan. 1, 1974 ed.). For a contemporaneous discussion

of these discovery rules, see generally L

ESTER M. PONDER, UNITED STATES TAX

COURT PRACTICE AND PROCEDURES 104–12 (1976); Michael D. Annis, The New

Tax Court Rules, 32 N.Y.U. I

NST. ON FED. TAX’N 1341 (1974); Dubroff, supra note

586, at 285–95; Robert J. Murray, Tax Court Discovery: The Need for Restraint, 53

AXES 327 (1975) [hereinafter cited as Murray].

632 The United States Tax Court – An Historical Analysis

could be subject to the procedure.

649

Unlike the Federal Rules of Civil

Procedure, the Tax Court did not allow discovery from nonparty third

persons, except in the case of transferee liability.

650

Second, in an effort to preserve the stipulation process as the mainstay

of its pretrial procedure, the court’s discovery rules required the parties to

fully use their opportunities for informal consultation before resorting to

formal discovery procedures.

651

In Branerton Corp. v. Commissioner,

652

the

court refused to require the Service to answer petitioners’ interrogatories

since they had not first sought to obtain the information through informal

consultation, even though the Service’s counsel stated he was available for

discussions.

653

Rule 70(a)(1), wrote Chief Judge Dawson, “means exactly

what it says”: discovery procedures should only be used after attempts have

been made to obtain needed information through informal procedures and

voluntary efforts.

654

The court has persistently enforced the informal

consultation requirement since its adoption of pretrial discovery,

655

although, for a brief period, the admissions procedure

656

was held to be

available without prior resort to any other procedure.

657

Third, the court’s approach provided only three discovery devices:

admissions,

658

interrogatories, and production of documents and things.

659

649

Id. at 384; TAX CT. R. 71–72, 90 (Jan. 1, 1974 ed.).

650

Compare TAX CT. R. 70–73 (Jan. 1, 1974 ed.), with FED. R. CIV. P. 30–31, 34.

651

TAX CT. R. 70(a), 60 T.C. 1097 (1973); see W. M. Drennen, New Rules of

Practice and Procedure of the United States Tax Court: How Are They Working?, 27 U. F

LA.

L. Rev. 897, 905 (1975).

652

61 T.C. 691 (1974).

653

Id. at 692.

654

Id.

655

See, e.g., Odend’hal v. Commissioner, 75 T.C. 400, 404 (1980); International

Air Conditioning Corp. v. Commissioner, 67 T.C. 89, 92–94 (1976).

656

TAX CT. R. 90, 60 T.C. 1114–17 (1973). Any party may, without leave of

court, serve on any other party a request for admission of the truth of relevant,

nonprivileged matters or for the authenticity of a document. Failure to deny the

request for admission or object thereto within 30 days of service results in an

automatic admission. Id.

657

In Pearsall v. Commissioner, 62 T.C. 94 (1974), the court held that the

petitioner was not required to seek information informally before serving requests

for admissions. A subsequent revision of the Tax Court rules made clear that the

requirement of prior informal consultation applies to admissions requests, as well

as to other discovery procedures. See T

AX CT. R. 90(a), 71 T.C. 1198–99 (1978); see

also Odend’hal, 75 T.C. at 404 (holding that Pearsall was no longer to be followed).

658

TAX CT. R. 90, 60 T.C. 1114–17 (1973). “Technically, admissions are not

considered a discovery device. . . . (Admissions were] put . . . in the Title with

stipulations because a matter admitted may become a part of the record [in a case],

whereas a matter discovered will not. However, . . . admissions are [often] used for

purposes of discovery.” Letter from Judge Simpson to Professor Harold Dubroff

Pretrial Procedure 633

Depositions, thought by some to be the most important of discovery

devices,

660

were not allowed for the purpose of discovery.

661

2. Expanding Discovery Techniques

Depositions were not included in the discovery procedures initially

adopted by the Tax Court for fear that they would prove more burdensome

than beneficial.

662

Specifically, the court was concerned that the costs of

Tax Court litigation could rise dramatically if liberal use of depositions was

allowed.

663

Additionally, the court, apprehensive that discovery might

undermine and replace stipulation procedures and thus interfere with the

efficient operation of the court,

664

concluded that allowing depositions in its

initial adoption of pretrial discovery would be “too drastic a departure from

present Tax Court practice.”

665

Those in favor of expanding discovery procedures in the Tax Court,

however, considered the absence of depositions and other provisions for

third-party discovery to be one of the most serious defects in Tax Court

pretrial procedure.

666

It was argued that the use of depositions would aid in

1, Nov. 4, 1986, filed at U.S. Tax Court in “Rules Committee: Discovery”

(commenting on Professor Dubroff’s proposed chapter on the amendments of the

Tax Court rules); see Drennen, supra note 651, at 899; see also T

AX CT. R. 70(a)(1), 60

T.C. 1097 (1973) (failing to list admissions as a method of discovery).

659

TAX CT. R. 70–73, 60 T.C. 1097–1103 (1973).

660

William H. Newton III, The United States Tax Court: Should Discovery be

Expanded?, 33 U. M

IAMI L. REV. 611, 616 (1979).

661

See Rules Comm. Note, TAX CT. R. 80, 60 T.C. 1104 (1973). A deposition

could be used for the limited purpose of preserving the testimony of a witness

unable to appear. The Rules of Practice initially promulgated by the Board of Tax

Appeals in 1925 allowed depositions for these purposes. B.T.A.

RULES 41, 42, 1

B.T.A. 1293–94 (1925); see also T

AX CT. R. 80–85, 60 T.C. 1103–14 (1973) (rules

governing depositions). In Estate of Haber v. Commissioner, 91 T.C. 236 (1988), the

court refused to authorize a deposition to preserve the testimony of a 38-year old

accountant because he regularly engaged in risky sporting activities such as

skydiving and motorcycle racing. See Masek v. Commissioner, 91 T.C. 1096 (1988);

Reed v. Commissioner, 90 T.C. 698 (1988) (both cases evincing reluctance to order

depositions for purposes of preserving testimony).

662

TAX CT. R. 70(a) note, 60 T.C. 1097 (1973); Drennen, supra note 651, at

899. Depositions were long allowed for the purpose of preserving testimony of a

witness unable to appear. See supra note 661.

663

See Letter from Judge Simpson to Professor Harold Dubroff, supra note

658, at 1.

664

Drennen, supra note 651, at 899.

665

Rules Comm. Note, TAX CT. R. 70(a), 60 T.C. 1097 (1973).

666

See, e.g., Newton, supra note 660, at 632–36.

634 The United States Tax Court – An Historical Analysis

the fact-finding process and would lead to an increase in settlements rather

than an erosion of the stipulation process.

667

Furthermore, after a few years

in operation, it was contended that pretrial discovery in the Tax Court did

not appear to have the ill effects on court practice that its opponents had

envisioned.

668

a. The Adoption of Rule 74: Consensual Depositions of Parties

and Non-Parties

In 1979, proponents of more liberal Tax Court discovery met with some

success when the court adopted Rule 74.

669

Rule 74 allows the taking of a

deposition for the purpose of discovery from either a party or a non-party

witness if “all the parties to a case” consent.

670

The reluctance of the court

to expand its discovery provisions to include pretrial depositions was based

primarily on the concern for the burden and cost imposed on litigants by

deposition discovery. The court concluded that it had no reason to object

if the parties themselves agreed that the deposition should be taken.

671

Under Rule 74, the consent of the parties to a deposition must be filed

in duplicate with the court.

672

Depositions are subject to the same time

limits as the other discovery procedures and may not be commenced until

30 days after joinder of issue and must be completed 45 days prior to the

date set for the call of the case from a trial calendar.

673

If a party wishes to

depose a non-party witness, notice must be served upon that witness, and if

the deposition is in the form of written questions,

674

a copy of the questions

667

Id. at 623.

668

Id. at 633–34.

669

71 T.C. 1194–95 (1979).

670

TAX CT. R. 74(a), 71 T.C. 1194 (1979) (now reflected in TAX CT. R. 74(b)

(July 6, 2012 ed.)).

671

See Letter from James B. Lewis, Chairman of Committee on Court

Procedure, A.B.A. Section of Taxation, to Judge Simpson 1–2, July 1, 1985, filed at

U.S. Tax Court in “Rules Committee: Discovery” (expressing views of individual

members on proposed amendments to the rules of the Tax Court).

672

TAX CT. R. 74(a), 71 T.C. 1194 (1979) (now reflected in TAX CT. R. 74(b)

(July 6, 2012 ed.). The stipulation must include the names and addresses of the

deponents, the time and place of the deposition, the officer before whom the

deposition will be taken, and any provision desired with respect to expenses and

fees. Id.; T

AX CT. R. 81(d), 60 T.C. 1106 (1973).

673

TAX CT. R. 70(a)(2), 71 T.C. 1191 (1979). Prior to the 1979 amendments,

the deadline for completion of discovery was 75 days prior to the date set for the

call of the case from a trial calendar. Former T

AX CT. R. 70(a)(2), 60 T.C. 1097

(1973).

674

Depositions upon written questions are “not favored, and . . . should not be

taken in . . . absence of a special reason.” T

AX CT. R. 74(e), 71 T.C. 1194–95

(1979) (now reflected in T

AX CT. R. 74(e)(2) (July 6, 2012 ed.).

Pretrial Procedure 635

must be attached.

675

A non-party witness may object to the deposition

within 15 days after notice, and the burden is on the party seeking the

deposition to move for an order with respect to the objection.

676

transcript must be made of every deposition, but the transcript may not be

filed until ordered or permitted by the court.

677

b. The Adoption of Rule 75: Non-Consensual Depositions of Non-

Parties

Rule 74 fell short of removing what some viewed as a major defect in

Tax Court pretrial procedure—the inability of a party to obtain essential

information from third persons absent the consent of the opposing party.

678

Although a party could obtain documents and things of third persons from

another party so long as they were “in the possession, custody or control of

the party on whom the request [was] served,”

679

the Tax Court rules

contained no provision, absent the consent of the parties, for discovery

directly from third persons.

The Service believed that the information obtainable under the Tax

Court’s discovery rules was insufficient for the development of cases and

proposed that the court adopt a less restrictive rule that would allow

discovery depositions from third persons.

680

A rule of this kind could be

used to obtain information otherwise non-discoverable prior to trial and

could avoid undeveloped cases and “repeated requests for continuances.”

681

Depositions from non-parties could be particularly valuable to the Service

in cases involving partnerships in which the petitioner was a limited partner,

675

Id.

676

TAX CT. R. 74(c), 71 T.C. 1194 (1979) (now reflected in TAX CT. R. 74(b)(3)

(July 6, 2012 ed.).

677

TAX CT. R. 74(d), 71 T.C. 1194 (1979) (now reflected in TAX CT. R. 74(e)(1)

(July 6, 2012 ed.).

678

Newton, supra note 660, at 622.

679

TAX CT. R. 72(a)(1), 60 T.C. 1101 (1973).

680

Letter from Stuart E. Seigel, Chief Counsel for the Internal Revenue

Service, to Judge Raum 1–5, July 1, 1977, filed at U.S. Tax Court in “Rules

Committee: Discovery” (recommending major revisions in the Tax Court’s

discovery rules); see also Office of Chief Counsel for the Internal Revenue Service,

Statement of Background Facts Showing Possible Uses of Proposed Rule 75

(1982), filed at U.S. Tax Court in “Rules Committee: Discovery” (background

information on Rule 75 and its uses).

681

Office of the Chief Counsel for the Internal Revenue Service, supra note

680.

636 The United States Tax Court – An Historical Analysis

and a general partner, uninvolved in the litigation, was in possession of

documents that were crucial to the case.

682

The Service proposal generally was supported by the tax bar,

683

despite

some concern that third-party depositions could be used routinely by the

Service to substitute for audit-level investigations and could present a

further and unnecessary burden on the court.

684

Tax Court judges generally

agreed that some expansion of discovery procedures was needed.

685

Although records necessary to Tax Court litigation might be subpoenaed

from third parties, subpoenas not returnable until trial often gave the parties

inadequate time to examine the records and evaluate their positions.

686

Despite some judges’ concern that the broad use of discovery depositions

as allowed in other forums would result in protracted litigation, greater cost,

and an increase in the workload of the Tax Court, the prevalent sentiment

was that there existed sufficient need to warrant allowing third-party

depositions in limited situations.

687

Continuing its general expansion of discovery, the court in 1983 adopted

Rule 75, which directly addressed the concerns of those who felt the court’s

third-party procedures were too restrictive. [Pursuant to the Tax Court’s

consolidation of the provisions governing depositions in 2010,

688

Rule 75 is

currently designated as Rule 74(c).] From 1983 to 2010, Rule 75 provided

for depositions in certain cases from non-party witnesses without either the

consent of the deponent or of the other party or parties in the

proceeding.

689

A deposition under such conditions represents an

extraordinary method of discovery, and the procedure may be used only

682

Id. To a large extent, the “entity-level” audit and litigation provisions of the

Tax Equity and Fiscal Reform Act of 1982 eliminated this particular discovery

problem. See Part VII.C (discussing the development of partnership-level

proceedings).

683

Letter from Andrew W. Singer, Court Procedure Committee of the A.B.A.

Section of Taxation, to Judge Simpson 2, Oct. 5, 1982, filed at U.S. Tax Court in

“Rules Committee: Discovery” (informing the Tax Court of the favorable results of

a poll of members of the Tax Court Procedure Committee concerning proposed

discovery Rule 75).

684

Id. at 1.

685

Tax Court Rules Committee Minutes 1, Jan. 5, 1982, filed at U.S. Tax Court

in “Rules Committee: Discovery” (noting that “some expansion” of the court’s

discovery depositions rule was desirable).

686

Memorandum from Judge Simpson to Chief Judge Tannenwald 2, Oct. 29,

1982, filed at U.S. Tax Court in “Rules Committee: Discovery” (discussing reasons

why a broader discovery deposition rule was needed for the Tax Court).

687

See id. at 3.

688

See Section G.4 of this Part.

689

See TAX CT. R. 75, 79 T.C. 1140–41 (1982) (now reflected in TAX CT. R.

74(c) (July 6, 2012 ed.)). As described in text accompanying infra notes 773–776,

Rule 75 was substantially revised in 2010.

Pretrial Procedure 637

when a non-party witness can give testimony or possesses documents or

things that constitute discoverable material that are not otherwise

obtainable through informal consultations or alternate means of

discovery.

690

To eliminate unnecessary judicial intervention, a non-consensual

deposition may be taken without leave of the court.

691

The party desiring to

take a deposition must give notice to every other party and to the non-party

witness to be deposed.

692

Either a party or the non-party witness may

object to the deposition within 15 days after notice by serving objections on

the party seeking the deposition, and the burden is on the party desiring to

take the deposition to move for an order in regard to the objections.

693

The time span for taking a non-consensual deposition is more restrictive

than that of the other discovery procedures.

694

Depositions under this

provision may not be taken until “[a]fter a notice of trial has been issued or

after a case has been assigned to a Judge or Special Trial Judge.”

695

Both

the Service and the bar expressed the concern that this restriction could

curtail a party’s ability to use the rule effectively.

696

Additionally, the Service

contended that applying the same time frames to non-consensual

690

TAX CT. R. 75(b), 79 T.C. 1140 (1982) (now reflected in TAX CT. R. 74(c)(1)

(July 6, 2012 ed.)).

691

TAX CT. R. 75(a), 79 T.C. 1140 (1982) (now reflected in TAX CT. R. 74(c)(1)

(July 6, 2012 ed.)); see Memorandum from Judge Simpson to Rules Committee, Jan.

11, 1982, filed at U.S. Tax Court in “Rules Committee: Discovery.”

692

TAX CT. R. 75(c), 79 T.C. 1140 (1982) (now reflected in TAX CT. R.

74(c)(2)(A) (July 6, 2012 ed.)).

693

TAX CT. R. 75(d), 79 T.C. 1140 (1982) (now reflected in TAX CT. R.

74(c)(2)(B) (July 6, 2012 ed.)).

694

“Discovery [under other discovery rules] shall not be commenced, without

leave of Court, before the expiration of 30 days after joinder of issue . . . and shall

be completed . . . no later than 45 days prior to the date set for call of the case from

a trial calendar.” T

AX CT. R. 70(a)(2), 71 T.C. 1191 (1979).

695

TAX CT. R. 75(a), 79 T.C. 1140 (1982) (now reflected in TAX CT. R. 74(c)(1)

(July 6, 2012 ed.)).

696

Letter from Kenneth W. Gideon, Chief Counsel of the Internal Revenue

Service, to Judge Simpson 1–2, Mar. 4, 1982, filed at U.S. Tax Court in “Rules

Committee: Discovery” (opining that the time frame for the use of Rule 75 was

unrealistic and offering revisions to remedy the defects); Letter from John B. Jones,

Jr., Vice Chairman of Government Relations, A.B.A. Section of Taxation, to Judge

Simpson 1, Mar. 10, 1982, filed at U.S. Tax Court in “Rules Committee: Discovery”

(pointing out that the members of the taxation section of the A.B.A. expressing

views on the proposed deposition rule thought that the Service would gain most

from the new rule).

638 The United States Tax Court – An Historical Analysis

depositions as applied to other discovery procedures would expedite

discovery, as well as the settlement process.

697

Nevertheless, the Tax Court concluded that a restricted time frame

would enable the court to limit use of non-consensual depositions to the

rare situations for which they were intended.

698

Since the identity of the

judge who will conduct a trial session in the Tax Court is known at the time

the notice of the trial session is issued, the trial judge’s identity will be

known in every case in which a witness is deposed under his procedure.

The Tax Court, in this manner, intended to limit the use of non-consensual

depositions to situations in which the trial judge could decide whether to

compel a deposition to which a party had objected.

699

In adopting Rule 75, the Tax Court emphasized that invocation of the

rule would be appropriate only in those “extraordinary” situations in which

all other formal and informal discovery procedures have been exhausted.

700

Adhering to this view, the court has held that a summary judgment motion

could not be opposed on the ground that discovery was incomplete because

a non-consensual deposition had not been taken.

701

The court granted the

summary judgment motion because petitioners did not have a “pertinent

discovery request . . . outstanding.”

702

Although petitioners maintained that

they should have been allowed to take Rule 75 depositions from certain

witnesses, the court held that the petitioners should have subpoenaed the

individuals they wanted to depose so that they could have appeared at the

hearing on the motion for summary judgment; having failed to avail

themselves of this “preferable alternative,” and having failed to appear

697

Letter from Kenneth W. Gideon, Chief Counsel of the Internal Revenue

Service, to Judge Simpson, supra note 696, at 2.

698

See Tax Court Rules Committee Minutes, supra note 685, at 1–2.

699

See Letter from Judge Simpson to Professor Harold Dubroff, supra note

658.

700

The note accompanying Rule 75 provided as follows:

Under the Rule, a discovery deposition may be taken only of a witness who

is not a party to the case; the deposition of a party may be taken only upon

consent of all parties under Rule 74. The new Rule 75 provides an

extraordinary method of discovery which may be used only where the

information sought cannot be obtained by informal consultation or by other

discovery methods. For example, if the other requirements of the Rule are

satisfied, a deposition might be taken under the Rule in a case involving the

tax liability of a limited partner who does not have access to the books and

records of the partnership, or where a bank or other person possesses

records which are relevant to the tax liability of a party and are otherwise

unavailable.

Rules Comm. Note, T

AX CT. R. 75, 79 T.C. 1141–42 (1982).

701

Brunwasser v. Commissioner, T.C. Memo. 1986-196, 51 T.C.M. (CCH)

1011, 1013, aff’d without published opinion, 833 F.2d 303 (3d Cir. 1987).

702

Id. at 1013.

Pretrial Procedure 639

themselves at the hearing, petitioners were not entitled to a Rule 75

deposition.

703

Rule 75 was not established for the routine deposing of key witnesses,

and any party seeking to compel a deposition pursuant to the provision

must convince the court of its necessity. A key element in this regard is

whether the information sought could not be obtained through informal

consultation.

704

Other factors may be whether the opposing party has

refused to consent to a Rule 74 deposition and whether the subjects of the

deposition possess critical information.

705

In DeLucia v. Commissioner,

706

the Service had determined deficiencies and

additions to tax for fraud

707

against a husband and wife who failed to

indicate on their joint return income the husband derived from operating

massage parlors and related activities. The Tax Court previously granted

the Service’s motion for summary judgment in regard to the husband’s

liability, but left open the substantive issue of whether the wife was entitled

to the “innocent spouse” protection of what was then § 6013(e) of the

Code.

708

The Service contended that the husband was “no longer a party to this

case, inasmuch as all issues concerning him ha[d] been concluded,”

709

and

moved for the compulsory deposition of the husband as a non-party

witness under Rule 75. The Service argued that in view of the fact that

informal consultations with the petitioner-wife had proved “unfruitful” and

that because the husband was “the only source of information available

which could shed light on the matter concerning the innocent spouse

status” of the wife, compulsory deposition of the husband was justified

under Rule 75.

710

The petitioners responded that the husband was still a

party to the case and thus would not qualify as a Rule 75 deponent.

711

703

Id. Cf. Durkin v. Commissioner, 87 T.C. 1329, 1401–03 (1986) (subpoena

duces tecum returnable one week before trial after two years had passed since

issuance of notice of deficiency was quashed due to its overly burdensome nature).

704

Ripley v. Commissioner, T.C. Memo. 1985-555, 50 T.C.M. (CCH) 1391,

1395.

705

Id.

706

DeLucia, 87 T.C. 804 (1986).

707

Section 6653(b) provides for the imposition of additions to tax for tax

underpayments attributable to fraud.

708

DeLucia, 87 T.C. at 808. Under former § 6013(e), an “innocent spouse”

signing a joint return was relieved from liability for tax underpayments attributable

to the “grossly erroneous items” of the other spouse, if the innocent spouse “did

not know and had no reason to know” of the understatement. I.R.C. § 6013(e)(1)

(1986). This provision, as slightly revised, is now contained in § 6015(b).

709

87 T.C. at 810.

710

Id. at 809.

711

Id. at 811.

640 The United States Tax Court – An Historical Analysis

The Tax Court agreed with the petitioners.

712

The summary judgment

order was interlocutory and unappealable

713

and no decision had yet been

entered against the husband. The court stated that its jurisdiction over the

husband continued until the entry of a final decision.

714

Moreover, the court expressed reservations over whether Rule 75

discovery would be appropriate even if a final decision as to the husband

had been entered by the Tax Court because “a party maintains his or her

status as a party for other Internal Revenue Code provisions.”

715

For

example, the entry of a decision “triggers” the availability of Rule 162,

under which a party may move to revise or vacate the court’s opinion.

716

The entry of decision also initiates the 90-day period for appeal under §

7483.

717

The court held that if it were to ignore the restrictions of Rule 75,

which only permits the depositions of non-party witnesses, it “would

merely be assisting respondent [Commissioner] in circumventing both the

literal language and the carefully limited objectives of our discovery

rules.”

718

It is clear that the Tax Court will not allow non-consensual depositions

to be used to avoid the restrictions of other rules of discovery.

719

One

seeking to use this extraordinary method of discovery must first “pass the

threshold requirement that the information it seeks to discover is

712

Id. The only alternative, the court noted, would be for all parties to consent

to the deposition of the husband. Id. at 813.

713

Id. at 811. The Tax Reform Act of 1986 added § 7482(a)(2)(A) of the

Internal Revenue Code, which provides that “Courts of Appeals . . . [may], in their

discretion, permit an appeal to be taken from [certain interlocutory orders of the

Tax Court].” Tax Reform Act of 1986, Pub. L. No. 99-514, § 1558(a), 100 Stat.

2085, 2757–58, overruling Shapiro v. Commissioner, 632 F.2d 170 (2d Cir. 1980). See

Rules Comm. Note, T

AX CT. R. 193, 87 T.C. 1560 (1986).

714

DeLucia, 87 T.C. at 812.

715

Id. at 813.

716

Id.

717

Id.; I.R.C. § 7483.

718

DeLucia, 87 T.C. at 813–14.

719

See Estate of Van Loben Sels v. Commissioner, 82 T.C. 64, 68–69 (1984).

In Estate of Van Loben Sels, the petitioner sought compulsory deposition of the

Service’s expert witnesses under Rule 75. The court noted that while Rule 70(b)

did not specify the scope of discovery from opposing expert witnesses, Rule 71(d),

an interrogatory provision, clearly did so. Id. at 68–69. Because Rule 71(d) allowed

discovery of information regarding expert witnesses only from the opposing party,

not from the experts themselves, the Tax Court refused to read the “extraordinary”

Rule 75 to provide greater discovery than its more lenient counterparts. Id.; see also

Howe v. Commissioner, T.C. Memo. 1985-213, 49 T.C.M. (CCH) 1396

(compulsory deposition of Service’s expert witness disallowed under Rule 75 where

material was not discoverable under the more general Rules 70 and 71).

Pretrial Procedure 641

discoverable within the meaning of Rule 70(b).”

720

Thus, until the

provisions of Rule 75 were substantially modified in 2010,

721

a deposition

taken in the absence of the consent of all the parties was not available with

respect to matters adequately provided for in other rules.

722

3. Discovery of Expert Witnesses

The original discovery procedures adopted by the Tax Court were

limited with regard to expert witnesses. Rule 71(d)

723

provided that any

party could require any other party, through the use of interrogatories, to

identify any expert witness expected to be called to testify, giving such

expert’s name, address, occupation, and qualifications, and to provide a

statement describing the subject and substance of the expert’s anticipated

testimony.

724

Because of the significance of expert testimony in many Tax

Court cases, an argument could be made that discovery of experts should

be expanded.

725

In 1979, Rule 71(d) was amended to allow a party to furnish a copy of

an expert’s report in lieu of a statement presenting the subject and

substance of the expert’s report.

726

The amendment also added a

requirement that each party submit to every other party and the court, at

least 15 days prior to trial, a copy of all expert witness reports expected to

be used in conjunction with expert testimony.

727

Although the 1979 amendment marked an expansion of discovery

procedures concerning expert witnesses, Rule 71 continued to limit

discovery to information obtainable from the opposing party in the form of

responses to interrogatories and experts’ reports.

728

A compulsory

deposition of an opposing expert witness was not allowed because of the

limits already imposed by Rule 71.

729

Several Tax Court judges felt that the requirements of Rule 71(d)(2), as

amended in 1979, were unclear and therefore recommended that the rule be

revised and clarified.

730

Specifically, these judges were unsure whether a

720

Estate of Van Loben Sels, 82 T.C. at 68.

721

See Section G.4 of this Part.

722

Id. at 69.

723

TAX CT. R. 71(d), 60 T.C. 1100–01 (1973).

724

Id.

725

Newton, supra note 660, at 636.

726

TAX CT. R. 71(d)(1), 71 T.C. 1192 (1979).

727

TAX CT. R. 71(d)(2), 71 T.C. 1192–93 (1979).

728

Estate of Van Loben Sels v. Commissioner, 82 T.C. 64 (1984).

729

Id. at 69.

730

Memorandum from Judge Simpson to Chief Judge Sterrett 1, Sept. 11,

1985, filed at U.S. Tax Court in “Rules Committee: Discovery (discussing various

642 The United States Tax Court – An Historical Analysis

party should be required to submit an expert report to another party whose

expert had not prepared a written report, or whether to preclude the oral

testimony of an expert witness who had not done so.

731

A general

consensus existed that a more “clear cut” rule was needed and that the

provisions regarding expert reports should not be “‘buried’ in the rule

dealing with interrogatories.”

732

Dissatisfaction with Rule 71 was

undoubtedly influenced by the fact that the Federal Rules of Civil

Procedure contained extensive provisions with regard to discovery of

expert opinion.

733

proposed rule changes and their benefits to the Tax Court procedure). As

amended in 1979, Rule 71(d)(2) provided as follows:

If not furnished earlier, each party who expects to call an expert witness

shall furnish each other party and shall submit to the Court, not later than

15 days prior to the call of the trial calendar on which the case shall appear,

a copy of all reports intended to be used in conjunction with the testimony

of the witness at the trial of the case.

AX CT. R. 71(d)(2), 71 T.C. 1192–93 (1979). In 1986, the court deleted the

provisions of Rule 71(d)(2) pertaining to the preparation and exchange of expert

reports and moved them to Rule 143(f) (later to be redesignated Rule 143(g)). Rule

71(d)(2) therefore now simply provides a cross-reference to the appropriate

provision. See T

AX CT. R. 71(d)(2), 143(g)(1) (July 6, 2012 ed.).

731

See Memorandum from Judge Cohen to Judge Simpson 1, Nov. 8, 1984,

filed at U.S. Tax Court in “Rules Committee: Discovery” (expressing Judge

Cohen’s views on expert reports in Rule 71(d)(2)).

732

Id.; Tax Court Rules Committee Minutes, Jan. 24, 1985, filed at U.S. Tax

Court in “Rules Committee: Discovery.”

733

Prior to amendments in 1993, the Federal Rules of Civil Procedure

addressed the discovery of expert witness opinion through Rule 26(b)(4). Under

the then-existing regime, a party could, through interrogatories, require another

party to identify any expert expected to testify, and provide the subject and

substance of the expert’s opinion, as well as the grounds upon which it is based.

See F

ED. R. CIV. P. 26(b)(4)(A)(i) (prior to amendment in 1993). The court could,

upon motion, order discovery regarding experts by other means available under the

Federal Rules of Civil Procedure. See F

ED. R. CIV. P. 26(b)(4)(A)(ii) (prior to

amendment in 1993). If an expert had been retained in anticipation of litigation but

was not expected to be called at trial, an opposing party generally could discover

information regarding that expert’s opinion only “upon a showing of exceptional

circumstances” which make it impracticable to obtain the information by other

means. See F

ED. R. CIV. P. 26(b)(4)(B) (prior to amendment in 1993). The Federal

rules required a party seeking discovery of expert material to pay a reasonable fee to

the expert for the time spent in responding to a discovery request other than an

interrogatory, “unless manifest injustice would result.” Furthermore, a party

seeking the discovery of information regarding an expert not expected to be called

as a witness had to pay the other party a fair portion of the reasonable expenses

and fees incurred by the “party in obtaining facts and opinions from the expert.”

The purpose of these provisions was to prevent one party from obtaining the

Pretrial Procedure 643

Although Tax Court judges generally agreed that the provisions

regarding experts needed clarification, their views differed concerning the

appropriate changes.

734

Some judges insisted that detailed reports from

experts were necessary to educate the triers of fact; others contended that

the requirement of a written report would penalize an expert who did not

write well.

735

Most agreed that the judge should have the discretion to

waive the requirement of a written report in appropriate cases.

Additionally, although at least one judge expressed concern that the

requirement of written reports from expert witnesses might be used by the

Service to harass taxpayers by refusing to settle unless such reports were

produced, it was also suggested that such a rule might instead encourage

settlement.

736

The Tax Court Rules Committee responded to suggestions regarding

expert witness discovery by proposing, in 1985, an amendment to Rule

143.

737

Suggestions of the judges together with comments from the tax bar

and the Service were taken into consideration in formulating the

amendment.

738

Because the judges had “different views as to when a

written report should be required,” the amendment, although providing

guidance for situations in which a report should be received, basically

“enables each Judge to proceed as he sees fit.”

739

benefit, without cost, of expert work for which the other party paid. See FED. R.

CIV. P. 26(b)(4)(C) (prior to amendment in 1993).

In 1993, the Federal Rules of Civil Procedure shifted away from relying on

interrogatories as the primary vehicle for discovery of expert witness opinion,

finding that this approach “was frequently so sketchy and vague that it rarely

dispensed with the need to depose the expert and often was even of little help in

preparing for the deposition of the witness.” Adv. Comm. Note, F

ED. R. CIV. P.

26 (1993 Amendment). Rule 26 was therefore modified to require the preparation

and disclosure of a detailed report of the expert witness that is intended to set forth

the substance of the expert’s direct testimony. See F

ED. R. CIV. P. 26(a)(2)(B).

734

Tax Court Rules Committee Minutes, 2–4, Aug. 28, 1985, filed at U.S. Tax

Court in “Rules Committee: Discovery” (expressing differing views of judges

regarding expert reports and testimony).

735

Id. at 2–3.

736

Id. at 3.

737

See TAX CT. R. 143(f), 85 T.C. 1134–35 (1985).

738

Memorandum from Judge Simpson to Chief Judge Sterrett, supra note 730,

at 1; see also Tax Court Rules Committee Minutes, supra note 734, at 2–4 (expressing

various views of judges on the changes in Tax Court procedures).

739

Memorandum from Judge Simpson to Chief Judge Sterrett, supra note 730,

at 2.

644 The United States Tax Court – An Historical Analysis

a. Expert Reports

Rule 143(f) went into effect on July 1, 1986.

740

[As part of a restructuring

of Rule 143 in 2010, Rule 143(f) was redesignated as Rule 143(g).

741

] The

rule generally requires that expert witnesses prepare written reports for

submission to the court and other parties, unless the court permits

otherwise.

742

Expert testimony, without a written report, will ordinarily be

excluded if such testimony deals with “third-party contacts, comparable

sales, statistical data, or other detailed, technical information.”

743

On the

other hand, the court may dispense with the requirement of a written report

if the expert testimony is limited to industry practice or rebuttal of other

expert testimony.

744

As contemplated under Rule 143(g), an expert report must give the

qualifications of the expert as well as the expert’s opinion and the facts or

data on which it is based.

745

The report is required to set forth detailed

reasons for the expert’s conclusions and will be marked as an exhibit and

received into evidence as the expert’s direct testimony.

746

Additional direct

testimony may be allowed for clarification of the report, to cover matters

arising after the report’s preparation, or at the court’s discretion.

747

strategy based on submitting incomplete reports and then attempting to

“provid[e] substance of the expert’s testimony through oral testimony” is

unlikely to succeed.

748

The court may completely exclude the testimony of

an expert failing to comply with the requirements of the rule unless the

failure is for good cause and does not cause “undue prejudice” to the other

740

See Rules Comm. Note, TAX CT. R. 143(f), 85 T.C. 1136 (1986).

741

See Rules Comm. Note, TAX CT. R. 143, 134 T.C. 360–62 (2010).

742

Written reports from experts serve several important functions. “First, it

requires both the expert and the attorney to prepare well in advance of trial” thus

eliminating surprise and clarifying the actual need for discovery. George C. Pratt,

A Judicial Perspective On Opinion Evidence Under the Federal Rules, 39 W

ASH. & LEE L.

REV. 313, 322 (1982). Second, the submission of written reports from experts

results in a savings of cost, time, and effort. For example, written reports allow

opposing counsel, prior to trial, to focus on the weaknesses in an expert’s

testimony thus conserving judicial resources. Id. at 322–23.

743

TAX CT. R. 143(g)(3) (July 6, 2012 ed.) (introduced as TAX CT. R. 143(f)(2),

85 T.C. 1135 (1979)).

744

Id.

745

TAX CT. R. 143(g)(1) (July 6, 2012 ed.) (introduced as TAX CT. R. 143(f)(1),

85 T.C. 1134–35 (1979)).

746

Id.

747

Id.

748

Memorandum from Judge Simpson to Chief Judge Sterrett, supra note 730,

at 3.

Pretrial Procedure 645

party.

749

All reports prepared pursuant to the rule must be furnished to the

court and to the other parties not later than 30 days prior to the call of trial

calendar on which the case appears.

750

When Rule 143(g) was introduced, members of the tax bar criticized the

rule on various grounds.

751

Some were concerned that the comprehensive

reports required under the rule would require counsel and parties to

become more actively involved in the drafting of expert reports, thus

making the submission of expert testimony in the Tax Court more

“expensive and time consuming in comparison with other tax litigation

forums.”

752

Furthermore, it was suggested that at least some oral testimony

might be necessary to evaluate an expert, particularly in the case of experts

who do not routinely write detailed reports in the course of their

business.

753

It was also observed that discovery of experts was more liberal

in district court and Claims Court, neither of which required a written

report as a prerequisite to testimony at the time Rule 143(g) was

introduced.

754

Nonetheless, most practitioners who commented on Rule

143(g) supported it.

755

In 2012, the court modified Rule 143(g) to require that expert reports

contain the same information required under the corollary provision of

Federal Rule of Civil Procedure 26(b)(4). Accordingly, in addition to stating

the expert witness’s opinions and the basis and reasons for them, the report

also must state the qualifications of the witness (including a list of all

publications authored by the expert within the prior 10 years), a list of cases

749

TAX CT. R. 143(g)(2) (July 6, 2012 ed.) (introduced as TAX CT. R. 143(f)(1),

79 T.C. 1134–35 (1979)). The opposing party would be unduly prejudiced if his

ability to cross-examine the expert was “significantly impaired” or if the opposing

party was denied the “reasonable opportunity” to obtain rebuttal testimony. Id. In

1989, the court increased the number of days before the call of the trial calendar

that a party is required to submit an expert witness report to the court and other

parties from 15 to 30, finding that the prior 15-day period did not afford sufficient

time for thorough consideration of the report. See Rules Comm. Note, T

AX CT. R.

143(f)(1), 93 T.C. 954 (1989). The court anticipated that the additional time for

consideration of an expert report by the opposing party would occasion additional

settlements. Id.

750

TAX CT. R. 143(g)(2) (July 6, 2012 ed.) (introduced as TAX CT. R. 143(f)(1),

79 T.C. 1134–35 (1979)).

751

See Letter from James B. Lewis, Chairman of Committee on Court

Procedure, A.B.A. Section of Taxation, to Judge Simpson, July 1, 1985, filed at U.S.

Tax Court in “Rules Committee: Discovery” (expressing views of individual

members on proposed amendments to the rules of the Tax Court).

752

Id. at 10–11.

753

Id. at 13.

754

Id. at 8.

755

Id. at 11.

646 The United States Tax Court – An Historical Analysis

in which the witness has testified at deposition or at trial in the prior four

years, and a statement of the compensation to the witness.

756

The 2012

revisions also followed Federal Rule of Civil Procedure 26(b)(4) by

introducing Rule 70(c)(3), which protects from discovery drafts of expert

witness reports as well as communications between counsel and the expert

witness.

757

b. Depositions of Expert Witnesses

As previously noted, the Tax Court discovery procedures as originally

adopted and as amended in 1979 and 1986 afforded limited opportunity

insofar as concerned expert witnesses. With nonconsensual discovery and

compelled exchange of information circumscribed by the restrictions of

Rules 71(d) and 143, depositions of expert witnesses were potentially

available to litigants only upon consent through the vehicle of Rule 74.

758

In light of that situation, some members of the bar urged the Tax Court to

expand its discovery provisions to permit nonconsensual depositions of

expert witnesses.

759

Proponents argued that deposing an expert witness

could reveal weaknesses in some experts’ testimony and thus lead to more

settlements, while opponents emphasized their concern that increased costs

and burdens on the parties and the court would outweigh the small number

of increased settlements.

760

By 1989, the court’s experience suggested that the time had come to

permit depositions of expert witnesses, on both a consensual and a

nonconsensual basis.

761

To that end, the court adopted Rule 76 effective

July 1, 1990, stating in the accompanying note: “It is expected that such

depositions will not only enhance trial preparation and hence the

756

TAX CT. R. 143(g)(1) and accompanying Rules Comm. Note, 139 T.C. 552–

55 (2012).

757

TAX CT. R. 70(c)(4) and accompanying Rules Comm. Note, 139 T.C. 534–39

(2012).

758

See Estate of Van Loben v. Commissioner, 82 T.C. 64 (1984) (establishing

the inapplicability of Rule 75 as a basis for compulsory depositions of expert

witnesses); Howe v. Commissioner, T.C. Memo. 1985-213, 49 T.C.M. (CCH) 1396

(distinguishing Rules 74 and 75 in connection with depositions of expert witnesses).

759

See Letter from James B. Lewis, Chairman of Committee on Court

Procedure, A.B.A. Section of Taxation, to Judge Simpson, July 1, 1985, filed at

U.S. Tax Court in “Rules Committee: Discovery” (expressing views of individual

members on proposed amendments to rules of the Tax Court); Letter from Judge

Simpson to Professor Harold Dubroff, supra note 658 (commenting on Professor

Dubroff’s proposed chapter on amendments of the Tax Court rules).

760

See Letter from Judge Simpson to Professor Harold Dubroff, supra at 658;

Letter from James B. Lewis, Chairman of Committee on Court Procedure, A.B.A.

Section of Taxation, to Judge Simpson, supra at 759.

761

See Rules Comm. Note, TAX CT. R. 76, 93 T.C. 910–911 (1989).

Pretrial Procedure 647

presentation of the evidence at trial, but will also increase the number of

settlements in cases requiring the assistance of experts.”

762

Rule 76(a)(1)

made explicit that depositions of an expert witness upon consent of all

parties to a case were available and would be governed by Rule 74.

763

Rule

76(a)(2) then proceeded to authorize the deposition of an expert witness

without consent of all parties, but only pursuant to an order of the court as

“an extraordinary method of discovery.”

764

The balance of the rule set

forth the conditions to frame its use. The scope of depositions under the

rule is limited to the expert’s training and to matters pertaining to the

opinion being offered in his or her capacity as an expert.

765

Timing mirrors

the more restrictive provisions governing non-consensual depositions in

that depositions of expert witnesses may be taken only after a notice of trial

has been issued or after a case has been assigned to a judge or special trial

judge and within the time for completion of discovery under Rule

70(a)(2).

766

In general, the party desiring to depose an expert witness files a

detailed written motion with the court and serves a copy on the expert

witness and each other party.

767

Any objection or other response to the

motion must be filed with the court within 15 days of service of the

motion.

768

A disposition by order will follow, with or without hearing,

specifying the parameters for conduct of the deposition and directing the

witness to appear at the time, place, and date designated therein.

769

Alternatively, the court may take action sua sponte to order the taking of

the deposition of an expert witness, without the predicate of a motion by a

party.

770

The rule also addresses allocation of associated expenses, generally

placing the burden on the party taking the deposition absent stipulation to

the contrary.

771

The expense provision applies to expert depositions under

762

Rules Comm. Note, TAX CT. R. 76, 93 T.C. 911.

763

The provisions governing the consensual deposition of an expert witness

are now reflected in T

AX CT. R. 74(b) (July 6, 2012 ed.).

764

The provisions governing the non-consensual deposition of an expert

witness are now reflected in T

AX CT. R. 74(c)(1), (4) (July 6, 2012 ed.).

765

TAX CT. R. 76(b) and accompanying Rules Comm. Note, 93 T.C. 911

(1989) (now reflected in T

AX CT. R. 74(c)(4)(A) (July 6, 2012 ed.)).

766

TAX CT. R. 76(c) (now reflected in TAX CT. R. 74(c)(1) (July 6, 2012 ed.)).

767

TAX CT. R. 76(d)(1), (2) (now reflected in TAX CT. R. 74(c)(4)(B)(i) (July 6,

2012 ed.)).

768

TAX CT. R. 76(d)(3) (now reflected in TAX CT. R. 74(c)(4)(B)(ii) (July 6,

2012 ed.)).

769

TAX CT. R. 76(d)(3) (now reflected in TAX CT. R. 74(c)(4)(B)(ii) (July 6,

2012 ed.)).

770

TAX CT. R. 76(f) (now reflected in TAX CT. R. 74(c)(4)(C) (July 6, 2012 ed.)).

771

TAX CT. R. 76(g) (now reflected in TAX CT. R. 74(c)(4)(D) (July 6, 2012

ed.)).

648 The United States Tax Court – An Historical Analysis

both Rule 74 and 76, as does a further provision governing use of expert

depositions for purposes other than discovery.

772

4. Restructuring and Expansion of Deposition Procedures

The court significantly modified the procedures governing depositions

for discovery purposes by merging existing Rules 74, 75, and 76 into a

single new and expanded Rule 74. The revised Rule 74 became effective

January 1, 2010. As highlighted in the accompanying note of the Rules

Committee, the restructuring was undertaken “to improve clarity, eliminate

redundancies, and streamline the Court’s Rules. New Rule 74 contains

provisions governing all depositions that may be taken for discovery

purposes in Tax Court proceedings.”

773

As revised, Rule 74 is structured in

five principal paragraphs. Paragraph (a) outlines the general framework of

the rule, providing a roadmap for its use. Paragraph (b) then covers

depositions upon consent of the parties, essentially incorporating the

operative text of the prior version of Rule 74. Paragraph (c) governs

depositions without consent of the parties and is subdivided to address

nonconsensual depositions of nonparty witnesses, of party witnesses, and

of expert witnesses. The provisions directed to nonparty witnesses and to

expert witnesses parallel those of former Rules 75 and 76, respectively.

Paragraph (d) reprises the other potential uses of expert witness

depositions, another feature of the former Rule 76. The final two

paragraphs (e) and (f) set forth general and administrative provisions

broadly applicable to all discovery depositions.

From a substantive perspective, the revised Rule 74 amended the

existing authorization for discovery depositions to provide that a party

could move to take the deposition of another party to the proceeding

without that party’s consent.

774

Additionally, the court, in exercise of its

discretion, now may order the deposition of a party sua sponte.

775

other forms of nonconsensual depositions, the authorization to depose a

party to the proceeding absent consent was characterized as an

“extraordinary method of discovery,” available only where information

discoverable under Rule 70(b) cannot be obtained through informal

communications or other means of discovery.

776

772

TAX CT. R. 76(e), (g); see also Rules Comm. Note, TAX CT. R. 76, 93 T.C.

910–913.

773

Rules Comm. Note, TAX CT. R. 74, 134 T.C. 337 (2010).

774

See Tax Ct. R. 74(c)(3) (July 6, 2012 ed.); Rules Comm. Note, TAX CT. R. 74,

134 T.C. 337 (2010).

775

Id.

776

Rules Comm. Note, TAX CT. R. 74, 134 T.C. 337 (2010); see also TAX CT. R.

74(c)(1)(B) (July 6, 2012 ed.).

Pretrial Procedure 649

5. Limitations on the Use of Interrogatories

In 2009, in an effort to more closely align the Tax Court’s pretrial

discovery procedures with the Federal Rules of Civil Procedure, the court

revised Rule 71(a) to conform with Federal Rule 33(a).

777

Beginning in

2010, a party to a Tax Court proceeding generally is limited to serving on

another party 25 written interrogatories, including discrete subparts.

778

Interrogatories served on expert witnesses in accordance with Rule 71(d)

are exempt from this general limitation.

779

Prior to the adoption of this change, there existed no presumptive limit

on the number of written interrogatories a party could serve on another.

780

The court perceived that a limit on written interrogatories should (1)

encourage parties to exchange information without resorting to

interrogatories, (2) improve the efficiency of the interrogatory process, and

(3) permit the court to have greater discretion over the use of

interrogatories.

781

The limit is not intended to inhibit necessary discovery; therefore, the

limit may be exceeded either by agreement of the parties or judicial

intervention.

782

The court may grant a party’s motion for leave to serve

additional interrogatories provided that such grant does not run afoul of

Rule 70(b)(2). The court will consider whether (1) the request is

unreasonably cumulative or duplicative, or the information sought is

obtainable from another source that is more convenient, less burdensome,

or less expensive, (2) the party seeking additional interrogatories has had

ample opportunity by discovery to obtain the information sought, and (3)

the interrogatories are unduly burdensome or expensive, taking into

account the needs of the case, the amount in controversy, limitations on the

parties’ resources, and the importance of the issues at stake.

783

6. Sanctions for Discovery Abuse

The Tax Court has generally insisted on compliance with its Rules of

Practice and Procedure and has rendered decisions and orders against

777

Rules Comm. Note, TAX CT. R. 71, 134 T.C. 324 (2010).

778

Id. at 325. The rule does not define a “discrete subpart.” The Advisory

Committee Notes to Federal Rule of Civil Procedure 33(a) provide guidance on

how interrogatories are to be counted.

779

TAX CT. R. 71(a), (d) (July 6, 2012 ed.).

780

Rules Comm. Note, TAX CT. R. 71, 134 T.C. 324 (2010).

781

Id.

782

Id.

783

Id. at 325.

650 The United States Tax Court – An Historical Analysis

noncomplying parties in numerous cases.

784

The Tax Court rules provide

various sanctions for failure to comply with the court’s discovery orders.

785

These rules are modeled on similar provisions in the Federal Rules of Civil

Procedure,

786

and when the Tax Court interprets its discovery rules, it

generally looks to federal court decisions interpreting the Federal Rules for

guidance.

787

a. Sanctions for Noncompliance with Court Order

After it has been determined that a party has failed to comply with a

discovery order of the court, sanctions under Rule 104(c) are appropriate.

788

Dismissal of the action is one of the most severe sanctions available under

784

See, e.g., Rosenfeld v. Commissioner, 82 T.C. 105, 111 (1984); Odend’hal v.

Commissioner, 75 T.C. 400, 404 (1980); International Air Conditioning Corp. v.

Commissioner, 67 T.C. 89, 92–93 (1976); Branerton Corp. v. Commissioner, 61

T.C. 691, 692 (1974).

785

The Tax Court Rules of Practice and Procedure provide sanctions against

parties who fail to obey a Tax Court discovery order. In such cases, the court may

(1) treat the matter to which the order relates as being established; (2) refuse to

allow the disobedient party to support designated claims or defenses or prevent

particular matters from being introduced into evidence; (3) strike a pleading, render

a judgment by default, or dismiss the case of the disobedient party; and/or (4) hold

the disobedient party in contempt and award fees and expenses. T

AX CT. R. 104(c)

(July 6, 2012 ed.). Rule 104(b) allows a party to make a motion to the court to

compel a party to answer, respond, or comply with a discovery request. T

AX CT. R.

104(b) (July 6, 2012 ed.). The Tax Court may also invoke Rule 123 to dismiss a

case against a petitioner who fails to prosecute, fails to comply with Tax Court rules

or an order of the court, “or for other cause which the Court deems sufficient.”

AX CT. R. 123(b) (July 6, 2012 ed.); see, e.g., Levy v. Commissioner, 87 T.C. 794

(1986) (dismissing case under Rule 123(b) for failure to prosecute when petitioners

never stipulated any facts or prepared for trial, despite the court’s warnings);

Freedson v. Commissioner, 67 T.C. 931 (1977), aff’d, 565 F.2d 954 (5th Cir. 1978)

(dismissing case under Rule 123(b) in light of petitioners’ bad faith and dilatory

tactics).

786

Tax Court Rule 104(a) is adapted from Federal Rule of Civil Procedure

37(d). See Rules Comm. Note, T

AX CT. R. 104(a), 60 T.C. 1124 (1973). Tax Court

Rule 104(c) is derived from Federal Rule 37(b)(2). See Rules Comm. Note,

TAX CT.

R. 104(c), 60 T.C. 1124 (1973).

787

See Dusha v. Commissioner, 82 T.C. 592 (1984); Rosenfeld v.

Commissioner, 82 T.C. 105, 116–17, 120 (1984); Owens-Illinois, Inc. v.

Commissioner, 76 T.C. 493, 495–99 (1981); Zaentz v. Commissioner, 73 T.C. 469,

473–74 (1979); Freedson v. Commissioner, 67 T.C. 931, 935–38 (1977), aff’d, 565

F.2d 954 (5th Cir. 1978).

788

TAX CT. R. 104(c), 79 T.C. 1144–45 (1982), amended by 85 T.C. 1132–33

(1985).

Pretrial Procedure 651

either the Tax Court rules or the Federal Rules of Civil Procedure.

789

construing Federal Rule 37(b)(2), the counterpart of Tax Court Rule

104(c)(3), the Supreme Court has held that dismissal is improper if the

party’s “failure to comply has been due to inability, and not to willfulness,

bad faith, or any fault of [the party].”

790

Prior to 1984, only one case, Fox v.

Commissioner,

791

applied this standard for dismissal of cases under Tax Court

Rule 104(c)(3).

792

In Fox, the Seventh Circuit Court of Appeals upheld the Tax Court’s

dismissal of the taxpayer’s petitions for failure to comply with the court’s

discovery order.

793

In so doing, the court interpreted Rule 104(c)(3) to

preclude dismissal as a discovery sanction unless the failure to comply was

(1) willful and in bad faith, and (2) there was a total failure to respond.

794

Some Tax Court judges saw these conditions for dismissal as “almost

impossible . . . to satisfy” in most cases, even those that obviously should

be dismissed.

795

The “total” failure to respond requirement was viewed by

those judges as particularly “unwarranted.”

796

They believed that, in some

cases, a party might answer several discovery requests but fail to respond to

the most significant requests that go to the “very heart of the case.”

797

For

example, a taxpayer who supplied “any requested information, such as his

taxpayer identification number,”

798

might avoid dismissal under so strict a

789

Dusha, 82 T.C. at 599, 605–06. The authority of the court to deem matters

admitted if not denied under Rule 90(c) can also be a severe sanction. See T

AX CT.

R. 90(c), 85 T.C. 1129–30 (1985). See, e.g., Krock v. Commissioner, T.C. Memo.

1986-580, 52 T.C.M. (CCH) 1146 (petitioner’s failure to answer admission requests

resulted in admission of facts sufficient to satisfy Service’s burden of proof on issue

of fraud).

790

Societe Internationale v. Rogers, 357 U.S. 197, 212 (1958).

791

718 F.2d 251 (7th Cir. 1983).

792

Id.

793

Id. at 256. In Fox, the Service sought an order compelling the petitioners to

answer its interrogatories and an order compelling the production of documents.

Id. at 253. The court granted the motion after a hearing at which neither

petitioners nor their counsel appeared. After the petitioners continued to refuse to

comply with the court’s order and with the Service’s discovery requests, the Service

moved for dismissal of the petitions, and after a hearing at which, again, neither the

petitioners nor their counsel appeared, the motion for dismissal was granted. Id.

794

Id. at 255.

795

Memorandum from Judge Raum to Judge Simpson 1, Nov. 22, 1983, filed

at U.S. Tax Court in “Rules Committee: Discovery” (discussing the desirability of

amending the Tax Court Rules to overcome the effect of the Fox decision).

796

Id.

797

Id.

798

Memorandum from Chief Judge Dawson, to Judges, Senior Judges, and

Special Trial Judges 1, Jan. 19, 1984, filed at U.S. Tax Court in “Rules Committee:

652 The United States Tax Court – An Historical Analysis

standard.

799

In these situations, most Tax Court judges probably would

agree that it should not be necessary to find a complete failure to respond

in order to dismiss.

800

In a memorandum to Tax Court judges circulated shortly after Fox,

Chief Judge Dawson suggested that the judges might wish to limit that

decision as precedent and rely on other cases interpreting the Federal Rules

analogous to Tax Court rules, which upheld the dismissal of a case, even if

there was not a total failure of compliance with a discovery order.

801

Although some judges recommended amending the Tax Court rules to

make it clear that a “deliberate” failure to respond or a “total” failure to

respond was not required before imposing sanctions under Rule l04(c)(3),

802

no such amendments were adopted; instead, the court employed the timely

opportunity provided by Dusha v. Commissioner

803

to limit the Fox decision as

precedent.

In Dusha, an opinion reviewed in conference, the court dismissed the

case of a petitioner who refused to comply with a discovery request and a

Tax Court discovery order on the grounds that the information sought by

the respondent was not in his “individual possession, custody, or control.”

804

The court explained that “[g]iven the nature of the information sought by

respondent—petitioner’s tax returns, bank accounts,” as well as the

petitioner’s employment and compensation—the petitioner’s refusal to

comply was willful and in bad faith.

805

Of no small significance was the

court’s previous consideration and rejection of the petitioner’s claims,

arguments he insisted on repeating despite the court’s warning that the

arguments were frivolous.

806

In dismissing Dusha,

807

the court discussed the Seventh Circuit’s decision

in Fox, earlier decisions in the Seventh Circuit, and decisions of other circuit

courts and concluded that Fox failed to distinguish between Tax Court

Discovery” (emphasis in original) (discussing the effect of Fox v. Commissioner,

718 F.2d 251 (7th Cir. 1983)).

799

Id.

800

See Memorandum from Judge Raum to Judge Simpson, supra note 795, at 2.

801

Memorandum from Chief Judge Dawson, to Judges, Senior Judges, and

Special Trial Judges, supra note 798, at 2–3.

802

See Memorandum from Judge Raum to Judge Simpson, supra note 795, at 1–

803

82 T.C. 592 (1984).

804

Id. at 596 (emphasis in original).

805

Id. at 607.

806

Id. at 608. The Tax Court may impose damages of up to $25,000 under

§ 6673 against taxpayers who assert frivolous arguments in defiance of Tax Court

orders. See Part X.D.

807

82 T.C. 592 (1984).

Pretrial Procedure 653

Rules 104(a) and 104(c).

808

Under Rule 104(a) and its counterpart, Federal

Rule 37(d), a complete failure to respond to a discovery request is necessary

before the imposition of any sanctions.

809

On the other hand, Federal

district courts had not permitted “minimal compliance”

810

to bar dismissal

under Federal Rule 37(b)(2); similarly, the Tax Court refused to allow partial

compliance to preclude dismissal of an action under Rule 104(c)(3).

811

The distinction drawn in Dusha was justified by the different situations

to which the rules were addressed. Tax Court Rule 104(c)(3) and Federal

Rule 37(b)(2) provide for the imposition of sanctions only if a party has

failed to comply with a discovery order issued by the court; in contrast, Tax

Court Rule 104(a) and Federal Rule 37(d) provide for the imposition of

sanctions in any case in which a party fails to attend a deposition, answer

interrogatories, or respond to requests for inspection, whether or not a

court order has been issued.

812

Although conceding its distinction might be nothing more than

“quibbling over a simple matter of semantics,”

813

the court in Dusha also

disagreed with the requirement established by the court in Fox that

noncompliance “be both willful and in bad faith.”

814

The standard

articulated by the Supreme Court and applied by the Tax Court in Dusha

requires only “willfulness, bad faith, or any fault.”

815

The court recognized

that “dismissal is a sanction of last resort, not to be used

indiscriminately,”

816

but explained that “here, as in other areas of the law,

the most severe in the spectrum of sanctions provided by statute or rule

must be available to the [trial] court in appropriate cases, not merely to

penalize those whose conduct may be deemed to warrant such a sanction,

but to deter those who might be tempted to such conduct in the absence of

808

Id. at 601; see Memorandum from Chief Judge Dawson, to Judges, Senior

Judges, and Special Trial Judges, supra note 798; Memorandum from Joanne

Hickcox to Judge Simpson 23, Dec. 6, 1983, filed at U.S. Tax Court in “Rules

Committee: Discovery” (analyzing the Fox decision and its relation to discovery

requests and court orders).

809

Dusha, 82 T.C. at 604. See Rules Comm. Note, TAX CT. R. 104, 60 T.C.

1124 (1973) (stating that paragraph (a) of Rule 104 is adapted from Rule 37(d) of

the Federal Rules of Civil Procedure).

810

Dusha, 82 T.C. at 604.

811

Id.

812

Id. at 602–04. Compare TAX CT. R. 104(a), 79 T.C. 1144 (1982), with FED. R.

CIV. P. 37(d); compare TAX CT. R. 104(c)(3), 79 T.C. 1145 (1982), with FED. R. CIV.

P. 37(b)(2)(C) (essential elements substantially identical).

813

82 T.C. at 605.

814

Id. (emphasis in original).

815

Id.

816

Id.

654 The United States Tax Court – An Historical Analysis

such a deterrent.”

817

The court has consistently adhered to the standard

enunciated in Dusha.

818

b. Expanded Procedures for Deterring Discovery Abuse

The Tax Court has proceeded cautiously in introducing and expanding

the use of pretrial discovery and has repeatedly emphasized that formal

pretrial discovery should not interfere with informal communication

between the parties which can lead to stipulations and settlements. In 1985,

the court strengthened its stance with rule amendments that permit it to

limit unreasonable discovery, as well as to impose sanctions upon counsel

who attempt to use discovery procedures for improper purposes.

Rule 70(b)(2), as amended in 1985, permits the court to limit discovery if

(1) it is “unreasonably cumulative or duplicative” or if the information is

readily obtainable from another source, (2) the party has already had “ample

opportunity . . . to obtain the information sought,” or (3) “the discovery is

unduly burdensome or expensive.”

819

This amendment followed a similar

revision in the Federal Rules of Civil Procedure,

820

which was intended to

“guard against discovery that is redundant or disproportionate to the

amount of money or the importance of the issues at stake.”

821

In limiting

817

Id. at 605–06 (quoting National Hockey League v. Metropolitan Hockey

Club, 427 U.S. 639, 643 (1976)). The court stated that “dismissal is inappropriate

where the litigant’s failure to comply with the Court’s order is based upon the

proper exercise of a recognized privilege, such as the Fifth Amendment privilege

against self-incrimination.” Id. at 606. The assertion of the Fifth Amendment,

however, must be based upon a possible danger of incrimination and not just used

as a “blanket refusal.” Id. Thus, the petitioner’s repetition of self-incrimination

arguments that were held to be frivolous at the hearing on the request for a

discovery order justified dismissal. Id. at 606, 608.

818

See, e.g., Delaney v. Commissioner, T.C. Memo. 1985-73, 49 T.C.M. (CCH)

777, 779; Kuhn v. Commissioner, T.C. Memo. 1984-638, 49 T.C.M. (CCH) 265,

267; Romano v. Commissioner, T.C. Memo. 1984-568, 48 T.C.M. (CCH) 1472,

1474; Figura v. Commissioner, T.C. Memo. 1984-567, 48 T.C.M. (CCH) 1469,

1471; Wedeking v. Commissioner, T.C. Memo. 1984-530, 48 T.C.M. (CCH) 1283,

1286. In addition to being subject to Rule 104 sanctions, parties failing to comply

with an order of the Tax Court may also be subject to damages of up to $25,000

under § 6673. See Part X.D (discussing development of the § 6673 penalty).

819

TAX CT. R. 70(b)(2), 85 T.C. 1127 (1985). Following a restructuring of Rule

70 in 2012, these provisions are now contained in T

AX CT. R. 70(c)(1) (July 6, 2012

ed.). See T

AX CT. R. 70 and accompanying Rules Comm. Note, 139 T.C. 534

(2012).

820

FED. R. CIV. P. 26(b).

821

Rules Comm. Note, TAX CT. R. 70, 85 T.C. 1128 (1985).

Pretrial Procedure 655

discovery under Rule 70(b)(2), the court may act on its own initiative or

pursuant to a motion under Rule 103.

822

The Rule 70(b)(2) amendment had the support of the tax bar,

823

but the

Service expressed concern as to how the court would interpret the rule’s

limitations on discovery.

824

The Service urged that the restrictions on

discovery be confined to the litigation stage, so that the court would not

deny otherwise reasonable discovery requests on the grounds that the

information sought might have been obtained “more conveniently or less

expensively” during the administrative process.

825

Perhaps in reaction to

the perception that the Service was using discovery as a substitute for

inadequate audits, the court declined to adopt the Service’s suggestion.

826

To further encourage parties to reduce discovery-related controversies,

Rules 70(e) and 90(d) were also amended in 1985 to require that every

discovery and admission request, response, or objection be signed by

counsel, or by the party, if unrepresented.

827

The court hoped that these

changes would deter both excessive discovery and resistance to reasonable

discovery requests.

828

The signature of counsel or the party certifies that the discovery request,

response, or objection is made in good faith and not for any improper

822

TAX CT. R. 70(b)(2), 85 T.C. 1127 (1985) (now reflected in TAX CT. R.

70(c)(1) (July 6, 2012 ed.)).

823

See Letter from James B. Lewis, Chairman of Committee on Court

Procedure, A.B.A. Section of Taxation, to Judge Simpson, supra note 759, at 5–6.

824

See Letter from Fred T. Goldberg, Jr., Chief Counsel for Internal Revenue

Service, to Judge Simpson 2, June 24, 1985, filed at U.S. Tax Court in “Rules

Committee: Discovery.”

825

Id.

826

See Durkin v. Commissioner, 87 T.C. 1329 (1986). In Durkin, the Tax

Court quashed portions of a subpoena duces tecum in which the Service sought

books and records of several non-parties who were only indirectly involved in the

transactions at issue. Id. at 1401–03. The court refused to support the Service’s

subpoena on the grounds that “the requests were overly burdensome compared to

their probative value.” Id. at 1401. The court noted the apparent inadequate trial

preparation by the Service and stated that “[t]he processes of this Court are simply

not designed to be used to conduct a thorough investigation of a complex tax

case.” Id. at 1403.

827

TAX CT. R. 70(e), 90(d), 85 T.C. 1127–28, 1130–31 (1985). Following a

restructuring of Rule 70 in 2012, Rule 70(e) is now designated as Rule 70(f). See

Rules Comm. Note, T

AX CT. R. 70, 139 T.C. 539 (2012).

828

Rules Comm. Note, TAX CT. R. 70, 85 T.C. 1128–29 (1985); Rules Comm.

Note, T

AX CT. R. 90, 85 T.C. 1132 (1985).

656 The United States Tax Court – An Historical Analysis

purpose, such as delay of the litigation.

829

If a certification is made in

violation of this requirement, the court, upon motion or sua sponte, has the

power to order a party or its counsel to pay resulting expenses as well as

reasonable counsel fees to the other party.

830

Similar provisions allowing

the court to levy costs and attorneys’ fees on a party who submits a

frivolous pleading or violates a court order were incorporated into Rules

33(b) and 104(c)(4).

831

One judge recognized that sanctions historically imposed by the Tax

Court such as “exclusion of evidence, deeming facts admitted, and dismissal

of actions, often penalize the party when the real culprit is the counsel.”

832

Thus, the court has altered its focus, placing the responsibility on counsel to

act in good faith and indicating that sanctions will be imposed on counsel

for violating this responsibility.

833

H. Case Management Procedures

1. Joint Motion for Assignment of a Judge

The Tax Court permits parties in complex cases to jointly move the

court to assign the case to a judge, before it is set for trial, if the parties

believe the case cannot be conveniently tried on a regularly scheduled trial

calendar.

834

The court expects that a joint motion for assignment of a case

will be filed as soon as feasible after the case is at issue (i.e., the pleadings

are closed) and should briefly set out the most significant issue(s), the

amount in controversy, the requested place of trial, and any other relevant

information the parties wish to bring to the court’s attention.

2. Motions Practice

The Tax Court’s Rules of Practice and Procedure provide that “an

application to the Court for an order shall be by motion in writing, which

shall state with particularity the grounds therefor and shall set forth the

829

TAX CT. R. 70(e), 90(d), 85 T.C. 1127–28, 1130–31 (1985). Following a

restructuring of Rule 70 in 2012, this aspect of Rule 70 is now designated as Rule

70(f)(1).

830

TAX CT. R. 70(e)(2), 90(d)(2), 85 T.C. 1128, 1131 (1985). Following a

restructuring of Rule 70 in 2012, this aspect of Rule 70 is now designated as Rule

70(f)(2).

831

TAX CT. R. 33(b), 104(c)(4), 85 T.C. 1125–26, 1132–33 (1985).

832

Memorandum from Judge Simpson to Chief Judge Sterrett, supra note 730,

at 4.

833

Id. at 4–5.

834

See Press Release, United States Tax Court, Oct. 19, 1990 (issued by Chief

Judge Arthur L. Nims, III).

Pretrial Procedure 657

relief or order sought.”

835

The court may in its discretion dispose of a

motion with or without directing that a written response be filed and with

or without a hearing.

836

If a hearing is set, the matter may be heard in Washington, D.C., or at

some other location (such as the requested place of trial) which serves the

convenience of the parties and the court.

837

Historically, motions generally

were heard in Washington, D.C. In more recent years, motions are set for

hearing at trial sessions in the city requested as the place of trial. In 2010,

the court confirmed this change in practice by amending Rule 50(b)(2) to

modify the phrase that hearings on motions “normally will be held in

Washington, D.C.” to read that hearings “may be held in Washington,

D.C.”

838

The Rule change was accompanied by a change in court practices

regarding Washington, D.C. motions sessions. Prior to 2010, motions on

cases in the general docket (i.e., cases not yet calendared for trial) generally

were calendared for hearing at a motions session in Washington, D.C.

Beginning in 2010, general docket motions are screened internally by

judges, set for hearing in the place of trial requested by the petitioner if

factual testimony appears to be needed, or decided based upon the written

submissions of the parties if factual testimony is not needed. Contrary to

the historic practice, general docket motions are rarely calendared for

hearing in Washington D.C.

If the motion is set for hearing, a party to the motion may, before or at

the time of the hearing, submit a written statement (commonly referred to

as “a Rule 50(c) statement”) explaining the party’s position together with

supporting documents, and such statement may be submitted in lieu of or

in addition to attendance at the hearing.

839

3. Calendaring Cases for Trial

The court normally sets a case for trial after the Commissioner files an

answer to the petition.

840

The court holds trial sessions in 74 cities, setting

numerous trial sessions each year in larger cities such as Los Angeles and

New York. The court schedules at least one trial session per year in smaller

cities.

835

TAX CT. R. 50(a) (July 6, 2012 ed.).

836

TAX CT. R. 50(b) (July 6, 2012 ed.).

837

TAX CT. R. 50(b)(2) (July 6, 2012 ed.).

838

Id. (emphasis added); see also Rules Comm. Note, 136 T.C. 612.

839

TAX CT. R. 50(c) (July 6, 2012 ed.).

840

A case normally is eligible to be set for trial after the answer is filed and any

motions have either been disposed of or are ripe for hearing at the trial session.

658 The United States Tax Court – An Historical Analysis

The court schedules one-week or two-week trial sessions depending on

the number of cases ready for trial in a particular city and other scheduling

restraints. Until 1984, cases were calendared for trial after the parties filed

status reports stating that they were ready for trial. Under this practice,

some cases were not set for trial for several years. In 1985, in response to a

dramatic increase in the number of case filings, the court began to expedite

the process by automatically calendaring all cases for trial after the answer

to the petition was filed.

Before 2008, the court calendared up to 75 regular cases and 100 small

tax cases per week of trial session. Beginning with the Spring 2009 term,

the maximum number of regular cases per week of session was increased to

100 and the number of small tax cases per week of session was increased to

125.

The court issues a Notice Setting Case For Trial (trial notice) to the

parties five months before the trial session is scheduled to begin.

841

The

five-month period is intended to give the parties ample opportunity to

engage in settlement discussions and to prepare for trial. The trial notice

includes the date and time for the calendar call and the courthouse address

and courtroom number for the trial session. Calendar calls normally begin

on Monday morning at 10:00 A.M. In addition to informing the parties

that they are expected to be present and prepared for trial at the time of the

calendar call, the trial notice is accompanied by a Standing Pretrial Order

for regular tax cases

842

and a Standing Pretrial Notice for small tax cases.

843

4. Standing Pretrial Order and Pretrial Memorandum

The Standing Pretrial Order has emerged as a central tool of case load

management, one that defines the contours of pretrial practice before the

Tax Court. The order is the culmination of the practice of many Tax Court

judges who had established a practice of causing to be included in the

“notice setting case for trial” (notice of trial) a memorandum from the court

clerk describing the matters that the judge assigned to the calendar wished

the parties to consider prior to trial.

844

As time progressed, some judges,

becoming convinced that a judge-signed order would be more effective

841

Before 2007, the notice setting small tax cases for trial was sent three

months before the trial session was scheduled to begin.

842

The contents of the Standing Pretrial Order are discussed in detail below in

Section H.4. of this Part.

843

The contents of the Standing Pretrial Notice are discussed in detail below in

Section H.5. of this Part. In small tax cases in which the taxpayer is not

represented by counsel, the court also sends a “stuffer” notice that provides

information about low-income taxpayer clinics operating in the city where the trial

will be held. The stuffer notice program is described in Part XIII.B.2.

844

Id.

Pretrial Procedure 659

than a memorandum from the clerk, began to substitute such orders for the

clerk’s memorandum.

845

Eventually, the Standing Pretrial Order evolved.

The Standing Pretrial Order is a device which seeks to encourage

settlement negotiations and enhance the efficient management of cases

which are ultimately tried.

846

This is accomplished by requiring the parties

to meet prior to trial to prepare a stipulation and to file a report before trial

that sets forth the parties, the issues, the witnesses, and a summary of the

facts and legal issues in the case.

847

Originally, not all Tax Court judges

were convinced of the utility of the Standing Pretrial Order.

848

In the past,

orders issued by the different judges followed no standard pattern.

849

Apparently, the Tax Court has been reluctant to interfere in the case

management styles of individual judges by incorporating a standard order

into the Rules of Practice and Procedure or otherwise requiring adoption of

a uniform order.

850

Nonetheless, some judges encouraged the court to adopt a uniform

Standing Pretrial Order.

851

Although the effect of the Standing Pretrial

Order was difficult to measure, the judges who used the order were

convinced that its benefits in providing for orderly case management

outweighed the additional burdens on the judges.

852

Moreover, some

believed that the increased burden placed on the parties by the Standing

Pretrial Order, particularly on the attorneys in the Office of the Chief

Counsel, would be eased if a standard order was used.

853

In response to these concerns, Judge Mary Ann Cohen chaired an ad

hoc committee investigating the practicality of the Tax Court’s adoption of

a standard Standing Pretrial Order.

854

Subsequently, on March 11, 1988, the

Tax Court adopted a uniform order to be used during regularly scheduled

trial sessions pending before regular and senior Tax Court judges.

855

845

Id.

846

See Sterrett, The U.S. Tax Court: Innovation and New Procedures Help in Managing

Over 70,000 Cases, 33 F

ED. B. NEWS & J. 120, 123 (1986).

847

Id. at 122–23.

848

Id. at 123.

849

Id.

850

See Meade Whitaker, Some Thoughts on Current Tax Practice, 7 VA. TAX REV.

421, 426 (1988).

851

See Memorandum from Robert Armen, Deputy Counsel to Chief Judge, to

Chief Judge Sterrett, Mar. 24, 1988, filed at U.S. Tax Court in “Rules Committee:

Tax Court Inventory.”

852

See Whitaker, supra note 850, at 426.

853

Id. at 423 n.7.

854

See Memorandum from Robert Armen, Deputy Counsel to Chief Judge, to

Chief Judge Sterrett, supra note 850.

855

See id. The Standing Pretrial Order is not incorporated in the Tax Court

Rules of Practice and Procedure, and individual judges who use it may adopt

660 The United States Tax Court – An Historical Analysis

1990, the Tax Court amended what is now Rule 131 to include a new

paragraph (b) to recognize the regular practice of including a pretrial order

with the notice of trial.

856

In describing the rule amendment, the court

noted that the pretrial order was designed “to facilitate the orderly and

efficient disposition of all cases on a trial calendar,” while warning that the

failure to comply with the directives in the order could subject a party or

party’s counsel to sanctions.

857

The Standing Pretrial Order is attached to the Notice of Trial and

informs parties of their responsibilities and of possible sanctions in the

event of noncompliance.

858

The Order requires the parties to “begin

discussing settlement and/or preparation of a stipulation of facts as soon as

practicable.”

859

The “soon as practicable” time specification is a departure

from prior orders adopted on an individual basis, which typically placed a

more certain limitation on the time within which parties should begin

discussions.

860

The more flexible time period incorporated into the

standard order may have been a concession to those judges who were

concerned that a rigid time period would lead to unnecessary judicial

involvement, because of motions for sanctions and the like.

The Standing Pretrial Order provides that “[v]aluation cases and

reasonable compensation cases are generally susceptible of settlement, and

the Court expects the parties to negotiate in good faith with this goal in

mind.”

861

The court encourages settlement of these cases because “a

settlement by the parties usually results in a better decision at a much earlier

date.”

862

The court also expects a settlement of all minor issues so that

judicial attention can be focused on issues worthy of the court’s scrutiny.

863

variations as they see fit. For example, some judges may request additional

information from the parties, such as that required by the Joint Case Status Report.

See Whitaker, supra note 850, at 424. The Status Report identifies whether a case

will probably or definitely go to trial, and estimates the length of the trial. See id. at

424 n.11.

The current Standing Pretrial Order adopted by the Tax Court appears in

Appendix E; see also Whitaker, supra note850, at 445 (providing an early sample

standing pretrial order).

856

TAX CT. R. 131(b) (July 6, 2012 ed.) (originally introduced as TAX CT. R.

132(b), 93 T.C. 946 (1990)); see also Rules Comm. Note, T

AX CT. R. 132, 93 T.C.

947 (1990).

857

Rules Comm. Note, TAX CT. R. 132, 93 T.C. 947 (1990).

858

See Whitaker, supra note 850, at 422–23.

859

See Appendix E (Standing Pretrial Order).

860

See id.; see also Whitaker, supra note 850, at 445–46 app. A (for a sample

Standing Pretrial Order requiring discussion to begin within 20 days).

861

See Appendix E (Standing Pretrial Order).

862

See Whitaker, supra note 850, at 435.

863

See Whitaker, supra note 850, at 445–46 app. A.

Pretrial Procedure 661

The parties are forewarned in the Standing Pretrial Order that

non-compliance can lead to sanctions, including dismissal of the case of the

non-complying party. Continuances will only be granted for good reason,

even those requested upon joint motion.

The standardized Order requires that the parties stipulate all facts to the

maximum extent possible. All documents and written evidence must be

marked and stipulated in accordance with Rule 91(b), unless such evidence

is to be used to impeach the credibility of a witness. Any non-stipulated

documents which a party expects to use at trial (for purposes other than

impeachment) must be identified in writing and exchanged by the parties no

later than 14 days prior to the first day of the scheduled trial session.

Failure to comply with the stipulation or the exchange requirement may

result in the court’s refusal to receive the documents into evidence.

A significant element of the Standing Pretrial Order is its requirement

that a Pretrial Memorandum be prepared by each party in all cases in which

a “basis of settlement” has not been reached.

864

The Pretrial Memorandum

must be submitted to the court and the opposing party no less than 14 days

before the first day of trial session.

865

The memorandum requires the

parties to identify any witnesses expected to testify and to include a brief

summary of their anticipated testimony. Witnesses not so identified will

not be allowed to testify at trial without leave of court. As previously

discussed, expert witnesses must prepare a written report that must be

submitted to the judge and served on the other parties at least 30 days prior

to the first day of trial session.

866

Failure to comply with this requirement

may result in the exclusion of the expert’s testimony.

867

The Pretrial Memorandum must also include a summary of the facts of

the case and a brief synopsis of applicable legal authorities, as well as any

evidentiary problems expected to be encountered. By forcing the parties to

focus on the issues, marshal the evidence, and articulate their arguments,

the Pretrial Memorandum seeks to increase the possibility of settlement and

to decrease the possibility that some significant aspect of the case may be

864

See Standing Pretrial Order, ¶ 3. The form Pretrial Memorandum adopted

by the U.S. Tax Court is attached to the Standard Pretrial Order.

865

On June 4, 2010, the court began requiring that the Pretrial Memorandum,

which previously had been submitted to the trial judge, instead be submitted to the

Clerk’s Office for filing in all cases. Previously filing was discretionary with the

judge. This change ensures retention of the Pretrial Memorandum conforms Tax

Court procedures with those of other federal courts..

866

See Standing Pretrial Order, ¶ 6. The Standing Pretrial Order, in this regard,

reflects the requirements of Rule 143(g), to which it refers.

867

See TAX CT. R. 143(g)(2) (July 6, 2012 ed.).

662 The United States Tax Court – An Historical Analysis

overlooked.

868

Even if the Standing Pretrial Order does not lead to the

settlement of a particular case, it may nonetheless result in the more

efficient use of trial time.

869

If the parties reach a basis for settlement prior to trial, the Standing

Pretrial Order requires that they submit a stipulated decision to the court

before the first day of the trial session.

870

Additional time for filing the

settled decision may be granted only if it is clear that a settlement has been

agreed to by the parties and only if the parties are prepared to stipulate for

the record the basis of the settlement and the reasons for the filing delay.

Presumably, this restriction is intended to prevent stipulations from falling

apart after the court grants additional time and to ensure that the request

for additional time to file a stipulated decision is not used as a guise by a

party in search of a continuance.

The Standing Pretrial Order should not be confused with the “pretrial

conference” provided by Rule 110. A pretrial conference among the parties

and the court may be requested by either party or by the court on its own

motion.

871

Pretrial conferences are undertaken “with a view to narrowing

issues, stipulating facts, simplifying the presentation of evidence, or

otherwise assisting in the preparation for trial or possible disposition of the

case in whole or in part without trial.”

872

Pretrial conferences are not

available if a party requesting the conference has not complied with the

mandatory stipulation conferences of Rule 91

873

or if the request is

frivolous or for the purpose of delay.

874

5. Standing Pretrial Notice

In cases tried under the small tax case procedures of § 7463 or § 7436(c),

the Tax Court provides a Standing Pretrial Notice in lieu of the Standing

Pretrial Order. The Standing Pretrial Notice represents a more user-

friendly version of the Order, in that it explains the meaning of key

concepts such as “settlement” and “stipulations” while also providing the

taxpayer with a check-list to prepare for trial.

875

In certain respects, the

Standing Pretrial Notice also is less demanding. Rather than directing the

parties to stipulate facts and documents that are not in dispute and to file a

Pretrial Memorandum, the Standing Pretrial Notice states that the parties

868

See Sterrett, supra note 846, at 123; 2 L. CASEY, FEDERAL TAX PRACTICE

§ 7.48(b) (1981).

869

See Sterrett, supra note 846, at 123.

870

See Appendix E (Standing Pretrial Order).

871

TAX CT. R. 110(b), (c) (July 6, 2012 ed.).

872

TAX CT. R. 110(a) (July 6, 2012 ed.).

873

See TAX CT. R. 110(d) (July 6, 2012 ed.).

874

Id.

875

See Appendix F (Standing Pretrial Notice).

Pretrial Procedure 663

“should” do so.

876

The softening of word choice reflected in the Standing

Pretrial Notice is undoubtedly designed to make the process less

intimidating for unrepresented taxpayers who frequently use the small tax

case procedures.

6. Final Status Report

To further streamline pretrial case management, the court implemented

the use of Final Status Reports in 2007. The Standing Pretrial Order directs

the parties to submit a Final Status Report only if the status of the case as

reported to the court in the Pretrial Memorandum has changed. For parties

that receive a Standing Pretrial Notice, the court recommends that they

submit a Final Status Report, if applicable.

The Final Status Report was developed as a simple means of informing

the court of a last-minute settlement, or a change in the anticipated

likelihood or length of trial.

877

The Report can be submitted either

electronically on the court’s website, by fax, or by mail. The court must

receive it no later than 3 p.m. eastern time on the last business day before

the case’s calendared trial session begins. The submitting party must also

send a copy of the Report to the opposing party and provide another copy

to the opposing party at the calendar call, if the opposing party is present.

I. Alternative Dispute Resolution

In 1990, the Tax Court adopted Rule 124 to expressly authorize parties

to resolve factual disputes by voluntary binding arbitration.

878

The court

intended the rule to reflect pre-existing practice, noting that it had

“consistently permitted” parties to resolve factual issues through binding

arbitration when presented with the request.

879

The court articulated two

purposes for adopting the Rule 124. First, the rule was intended to

encourage the use of this alternative dispute resolution technique by

informing parties of its availability.

880

Second, the rule provided for a basic

arbitration procedure while setting forth minimum requirements for an

order authorizing use of the procedure.

881

However, the court clarified that

the articulation of basic procedure for binding arbitration was not intended

to be exclusive: “[T]he Rule is not intended to be unduly restrictive or to

discourage innovative and imaginative approaches to arbitration, nor is it

876

See id.

877

See Press Release, United States Tax Court, Nov. 27, 2007.

878

TAX CT. R. 124, 93 T.C. 943–44 (1989).

879

Rules Comm. Note, TAX CT. R. 124, 93 T.C. 944 (1989).

880

Id.

881

Id.

664 The United States Tax Court – An Historical Analysis

intended to preclude voluntary non-binding arbitration.”

882

Additionally,

the court noted that the voluntary binding arbitration procedure was

particularly well suited to resolve valuation disputes, although the court was

careful to note that arbitration under Rule 124 applied without limitation to

any factual dispute.

883

Pursuant to the newly adopted Rule 124, the parties initiated the

arbitration procedure through the filing of a joint motion.

884

The motion

had to be accompanied by a joint stipulation that (1) identified the issues to

be resolved, (2) included a statement that the parties would be bound by the

arbitrator’s findings, (3) identified the arbitrator or the process to be used to

select one, (4) identified how the costs of the arbitration would be allocated,

and (5) included a prohibition on ex parte communication with the

arbitrator.

885

If the case had not already been assigned to a judge, the chief

judge would assign the motion to a judge or special trial judge for

disposition.

886

If the court granted the motion, the court would appoint the

arbitrator along with any instructions the appointing judge deemed

necessary or appropriate.

887

The arbitration process under Rule 124 was

concluded by the filing of a report by the parties which stated the findings

of the arbitrator and included any report or summary that the arbitrator

may have prepared.

888

Concerned that Rule 124 conveyed an air of exclusivity in favor of

binding arbitration, the court retroactively amended the rule in 1998 to

include a provision expressly stating that nothing in Rule 124 “shall be

construed to exclude use . . . of other forms of voluntary disposition of

cases, including mediation.”

889

The court went a significant step further to

remove arbitration as the focus of Rule 124 in 2011, when it changed the

title of the rule to “Alternative Dispute Resolution.”

890

In explaining the

title change, the court noted that few arbitrations had been conducted in

the 20 years since the adoption of Rule 124, compared to substantially more

mediations.

891

More substantively, the court expanded the rule to include a

section detailing the process for employing voluntary nonbinding

882

Id.

883

Id. at 944–45.

884

TAX CT. R. 124(a), 93 T.C. 943 (1989).

885

TAX CT. R. 124(b)(1)–(2), 93 T.C. at 943–44.

886

TAX CT. R. 124(a), 93 T.C. at 943.

887

TAX CT. R. 124(b)(3), 93 T.C. at 944.

888

TAX CT. R. 124(b)(4), 93 T.C. at 944.

889

TAX CT. R. 124(b)(5), 109 T.C. 612–13 (1998).

890

TAX CT. R. 124, 136 T.C. 630–31 (2011).

891

Rules Comm. Note, TAX CT. R. 124, 136 T.C. at 631.

Pretrial Procedure 665

mediation.

892

The court continued to leave the door open for use of other

dispute resolution methods.

893

Under Rule 124(b) as revised, either party may move the court for

permission to use voluntary binding mediation to resolve any issue in

controversy—not just factual disputes.

894

It may be either a joint or

unopposed motion that can be made any time after the case is at issue and

before the case is final.

895

If the court grants the motion for mediation, an

order granting the motion will set forth directions to the parties as the court

considers appropriate.

The mediation is conducted in confidence. Any document or

information exchanged pursuant to the mediation is not disclosed to

anyone outside of the mediation. Therefore, any document, exhibit, or

argument by the parties or counsel does not become part of the record in

the case. However, as prescribed in the mediation order, a judge may

determine that it is necessary to disclose certain information when a

manifest injustice would otherwise occur, disclosure would help establish

violation of a law, or the possible harm to the public health or safety

outweighs maintaining the integrity of the mediation proceedings.

The parties may request that a judge or special trial judge act as a

mediator, and the requested judge may so serve upon order of the chief

judge.

896

At the conclusion of the mediation, to the extent the parties reach

any agreement, the parties normally will formalize their agreement by filing

a stipulated decision or a stipulation of settled issues. As the mediation is

nonbinding, the mediator may not make rulings or impose a settlement

upon the parties. Rather, the primary role of the mediator is to facilitate a

settlement agreed to by the parties. When the parties reach a settlement

through mediation, a contract has been formed.

897

A valid settlement

therefore cannot be repudiated,

898

although the court can modify or set

aside a settlement for good cause.

899

If the parties are unable to reach a

settlement as a result of the mediation, the matter will be returned to the

docket for trial in due course. The mediator will not communicate with the

892

TAX CT. R. 124(b), 136 T.C. at 630–31. The provisions governing voluntary

binding arbitration were consolidated under Rule 124(a).

893

TAX CT. R. 124(c), 136 T.C. at 31.

894

See Rules Comm. Note, TAX CT. R. 124, 136 T.C. at 631 (clarifying that

issues susceptible of resolution through mediation “are not limited to factual

ones”).

895

Id.

896

TAX CT. R. 124(b)(2), 136 T.C. at 631.

897

See Dorchester Industries, Inc. v. Commissioner, 108 T.C. 320, 330 (1997);

Estate of Halder v. Commissioner, T.C. Memo. 2003-84, 85 T.C.M. (CCH) 1051.

898

Dorchester Industries, 108 T.C. at 330.

899

Id. at 334–35.

666 The United States Tax Court – An Historical Analysis

trial judge with respect to any of the matters that occurred during the

mediation.

Mediation has been used successfully by parties before the Tax Court.

For instance, in United Parcel Service of America, Inc. v. Commissioner,

900

the

parties severed a § 38 investment tax credit issue and mediated resolution.

On remand from the U.S. Court of Appeals for the Eleventh Circuit, the

parties further mediated complete resolution of the remaining issues over

multiple years.

900

T.C. Memo. 1999-268, 78 T.C.M. (CCH) 262, rev’d and rem’d, 254 F.3d 1014

(11th Cir. 2001).

Trial Procedure 667

ART X

TRIAL PROCEDURE

The principal organic legislation for the Board of Tax Appeals was

contained in the Revenue Act of 1924 and the Revenue Act of 1926. These

acts generally provided the Board with broad discretion to formulate its

rules of practice and procedure. This discretion, in respect of pretrial

procedures, was virtually unlimited. However, the extent of permissible

discretion in respect of trial and post-trial procedures was qualified by

congressional dictates. In fact, the trial and post-trial procedures were, and

continue to be, largely shaped by statutory directives. This difference in

approach probably was influenced by four considerations that reflected the

special problems associated with trial and post-trial procedures.

First, because of the unique opportunity for pre-assessment review, the

Board was viewed as potentially the principal trial body for tax

controversies. To make such a forum attractive to litigants, it would be

necessary to provide taxpayers with an adequate opportunity to be heard at

convenient locations throughout the country. Second, the complexity of

the legal and factual issues in tax controversies required that Board

proceedings be conducted in accordance with relatively liberal rules of

evidence. In this connection, it also was recognized that the triers of fact

and law in Board proceedings should be individuals with specialized

knowledge in tax law. Third, the nature of the tax system as a self-assessing

mechanism, in which the relevant facts in most controversies would be in

the possession of taxpayers, necessitated appropriate guidelines for

determining who would bear the burden of proof. In most situations, such

burden would be on the taxpayer, but the desirability for exceptions to this

rule was recognized in certain situations. Finally, Congress believed that a

principal value of the Board would be as a source of publicized precedents.

This role, it was hoped, would (1) reduce the haphazard and conflicting

quality of previous administrative and judicial interpretations, and (2)

provide a basis by which the Government and the taxpayer would be able

to agree to a settlement without the need of a judicial adjudication. The

need for such a body of precedents could only be fulfilled if Board

procedures assured well-reasoned and uniform decisions.

In response to these considerations, Congress established the Board of

Tax Appeals as a national trial body with headquarters in Washington, D.C.

The Chairman of the Board was directed to provide local hearings to

minimize taxpayer inconvenience and expense. The 1924 Act left to the

Board’s discretion the promulgation of rules governing both evidence and

burden of proof. The 1926 Act limited such discretion with respect to

evidence, and later legislation did the same for certain burden of proof

668 The United States Tax Court – An Historical Analysis

questions. In subsequent years, Board/Tax Court experience with such

procedures has led to both statutory changes and revisions of Board/Tax

Court rules. This Part will examine in detail the development and

application of the procedures that govern proceedings before the Tax

Court. Additionally, this Part will explore the Tax Court’s authority to

sanction parties and their counsel for, in general terms, failing to prosecute

their proceeding before the court in good faith.

A. Place of Trial

In establishing the Board of Tax Appeals in 1924, Congress believed

that pre-assessment review would only be effective if localized hearings

were available to aggrieved taxpayers.

Local hearings would provide the

taxpayer with the substantial convenience of having the Board come to the

taxpayer rather than the expensive and time consuming process of going to

Washington.

The availability of localized hearings would put the Board on

a level of accessibility comparable with the Federal district courts in which

most refund suits were instituted. Disagreement arose, however, over

whether the Board’s divisions were to be permanently located outside of

Washington or were to ride circuit and return to Washington for the

decision process.

The proponents of permanent, regional divisions outside

Washington believed that such a structure would ensure a more rapid

determination of tax appeals.

On the other hand, it was argued that the

Board’s function of establishing a uniform system of tax precedents would

be impeded by permanent field divisions.

Such divisions would not benefit

from other Board members’ experience and would make full Board review

of division decisions impracticable.

The arguments in favor of a central Washington forum with divisions

that would ride circuit prevailed, and the Revenue Act of 1924 authorized

the Board’s chairman to prescribe localized hearings “with a view to

See S. REP. NO. 68-398, at 9 (1924).

Press Release from the U.S. Board of Tax Appeals, Oct. 8, 1924, filed at the

U.S. Tax Court in “Field Divisions: Memoranda & Correspondence.”

E.g., 65 CONG. REC. 2621 (1924) (remarks of Mr. Young); see also Lyle T.

Alverson, Has the Board of Tax Appeals Failed?, 4 N

AT’L INC. TAX MAG. 337 (1926)

[hereinafter cited as Alverson].

65 CONG. REC. 2621 (1924) (remarks of Mr. Young).

Charles D. Hamel, The United States Board of Tax Appeals, 2 NAT’L INC. TAX

MAG. 293, 308 (1925) [hereinafter cited as Hamel]; see also Alverson, supra note 3, at

339.

Id.; see also Hamel, supra note 5, at 308; J.S.Y. Ivins, What Should Congress Do

With the Board of Tax Appeals?, 3 N

AT’L INC. TAX MAG. 391 (1925).

Trial Procedure 669

securing reasonable opportunity to taxpayers to appear before the Board . . .

with as little inconvenience and expense to taxpayers as is practicable.”

The Board initiated its circuit hearings in April, 1925, by sending a three-

member division to the northwest and the Pacific coast.

Early success of

the procedure was evidenced by an increased demand for such hearings

and, as a result, the Board announced plans to extend circuit hearings to the

eastern part of the country.

Nonetheless, the ability of the Board to send

more than one division into the field was severely limited. This difficulty

arose because the Board, composed of only 16 members, was required to

have three members hear each appeal, those three members constituting a

“division.”

In light of the limited manpower, a suggestion was made to

have testimony in the form of depositions taken outside of Washington by

the law assistants of the Board.

However, the basis for this proposal was

removed by the 1926 Revenue Act, which authorized segmenting the Board

into 16 separate one-member divisions; thus, more divisions were available

to meet the increased demand for localized hearings.

Although the additional field divisions somewhat reduced the waiting

period for a circuit hearing, a number of operational difficulties continued

to plague the Board. An early difficulty confronted by the Board was its

lack of an effective procedure to make prompt designation of cases to the

circuit calendars. In this connection, the Board had adopted a rule that

placed all cases upon the Washington calendar unless the parties requested a

circuit hearing.

Many times, however, requests for calendar changes

would not be received until after the Board had mailed a notice of a hearing

in Washington.

The Board informally adopted a practice that placed the

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 338 (now codified at I.R.C.

§ 7446).

Memorandum from Chairman Korner to members of the Board, Apr. 13,

1925, filed at the U.S. Tax Court in “Field Divisions: Memoranda &

Correspondence;” Office Order, Apr. 25, 1925, filed at the U.S. Tax Court in

“Field Divisions: Memoranda & Correspondence.”

See Letter from Chairman Korner to Secretary Mellon, May 24, 1926, at 8,

filed at the U.S. Tax Court in “Divisions: Memoranda & Correspondence”

[hereinafter cited as Korner Letter].

For a discussion of the division structure, see Part XI.B.

Korner Letter, supra note 9, at 8.

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 106, amending Revenue Act of

1924, ch. 234, § 900(c)–(f), 43 Stat. 337 (now codified at I.R.C. § 7444(c)). The

membership of the Board and Tax Court remained at 16 until 1980, when

Congress increased the number of Tax Court judges to 19. See Pub. L. No. 96-439,

§ 1(a), 94 Stat. 1878 (1980).

B.T.A. RULE 24 (Apr. 1, 1926 ed.).

See Preliminary Committee Report of the Joint Committee of Board and

Treasury Personnel, c. 1937, at 2, filed at the U.S. Tax Court in “Field Divisions:

670 The United States Tax Court – An Historical Analysis

cases of all taxpayers residing on the Pacific coast on the circuit calendar,

but this departure from the rule was insufficient to stem the delay in hearing

cases elsewhere.

Nevertheless, serious consideration was not given to the

problem until 1937,

when 75 percent or more of the cases initially set for

hearing in Washington were ultimately placed upon the circuit calendar for

hearing in the field.

Various suggestions were offered to remedy the delay and unnecessary

paperwork generated by the calendar practice. Some of the proposals were

directed at pending cases; others suggested changing procedures for appeals

filed in the future. As to pending cases, alternative suggestions were made

to have the Board (1) make specific inquiry of each taxpayer, (2) place all

cases on the field calendar and remove them to the Washington calendar

only upon motion, or (3) notify taxpayers that the hearing would be in

Washington unless the taxpayer notified the Board within set time limits.

The Board chose a compromise position and provided that all pending

cases would be placed upon the calendar that the pleadings indicated would

be most convenient for the parties, subject to change only if the parties

notified the Board promptly.

As to subsequent appeals, the Board

amended its rule in 1938 to require that the petition be accompanied by a

statement expressing the petitioner’s desire as to where the hearing should

be held—either in Washington or at a location where the Board customarily

held hearings.

The Bureau was also permitted, when filing its answer, to

request a specific location for trial. The Board would then make a decision

as to hearing location and notify the parties.

The Board typically observed

the wishes of the taxpayer with regard to hearing location.

The Board

Memoranda & Correspondence” [hereinafter cited as Preliminary Committee

Report].

Id.

The primary reason for the late date at which the Board dealt with this

problem reflected the fact that in the early years of the Board only a small

percentage of total cases heard by the Board were heard in the field. J. Gilmer

Korner, The United States Board of Tax Appeals, 11 A.B.A. J. 642 (1925). Initially, the

Board had indicated that cases heard in the field would not be heard as rapidly as

cases in Washington. See Tentative Plan for Hearing of Appeals Outside of Washington

Drafted, 2 N

AT’L INC. TAX MAG. 331 (1924).

Preliminary Committee Report, supra note 14, at 2.

Id. at 3.

Report of the Joint Committee of Board of Tax Appeals and Chief Counsel’s

Office, Dec. 17, 1937, at 5, filed at the U.S. Tax Court in “Field Divisions:

Memoranda & Correspondence” [hereinafter cited as Joint Committee Report].

B.T.A. RULES 25–26 (Jan. 1, 1938 ed.).

Id.

Statutory provisions mandated that preference be given the taxpayer in the

selection of trial location. Revenue Act of 1926, ch. 27, § 907(e), 44 Stat. 108

(1926).

Trial Procedure 671

would permit a subsequent change if good cause was shown, on motion of

either party, provided that the motion was made prior to mailing notice of

hearing date to the parties.

Thereafter, the procedure was further amended to limit the situations in

which the Commissioner could file an initial request for hearing location

with his answer.

With the exception of situations in which the petitioner

failed to indicate a preference, the Commissioner was barred in the first

instance from requesting a different location.

The provision for a

subsequent motion to change the designated place of hearing was left

unchanged.

However, in 1990, the Tax Court eliminated the hard

deadline on filing a motion to change the place of trial. Instead of treating

all motions made after the notice of time of trial had been issued as not

timely filed, the court warned that motions made after the designation of

the time of trial may be deemed dilatory and therefore denied unless the

basis for the motion arose during the later time period or good cause

existed for not making the motion sooner.

Another problem in connection with field sessions was the difficulty in

obtaining guaranteed courtroom space in which to hold hearings.

Prior to

B.T.A. RULE 26 (Jan. 1, 1938 ed.).

T AX CT. R. 26 (Feb. 9, 1943 ed.).

Id. The Tax Court deemed this change advisable because it believed that the

Government was not concerned over where the hearing was held.

Compare B.T.A. RULE 26 (Jan. 1, 1938 ed.) with TAX CT. R. 26 (Feb. 9, 1943

ed.).

T AX CT. R. 140(c) (July 1, 1990 ed.), 93 T.C. 948–89 (1990). The present rule

provides as follows:

RULE 140. PLACE OF TRIAL

(a) Requests for Place of Trial: The petitioner, at the time of filing

the petition, shall file a request for place of trial showing the place at which

petitioner would prefer the trial to be held. If the petitioner has not filed

such a request, then the Commissioner, at the time the answer is filed, shall

file a request showing the place of trial preferred by the Commissioner.

The Court will make reasonable efforts to conduct the trial at the location

most convenient to that requested where suitable facilities are available.

The parties shall be notified of the place at which the trial will be held.

(b) Form: Such request shall be set forth on a paper separate from the

petition or answer. See Form 5, Appendix I.

in the place of trial, then such party shall file a motion to that effect, stating

fully the reasons therefor. Such motions, made after the notice of the time

of trial has been issued, may be deemed dilatory and may be denied unless

the ground therefor arose during that period or there was good reason for

not making the motion sooner.

AX CT. R. 140 (July 6, 2012 ed.).

Joint Committee Report, supra note 19, at 19.

672 The United States Tax Court – An Historical Analysis

1937, the Board, with the exception of a brief period in New York City, had

never been able to secure regularly assigned courtroom space in any city

outside Washington.

This difficulty undoubtedly arose from both a lack

of federal office space and reluctance on the part of some courts to view

the Board as a judicial entity.

Thus, the Board was required to make

temporary arrangements in each city in which it held circuit hearings. Such

arrangements often proved time consuming and resulted in the Board

experiencing considerable difficulty in arranging its circuit calendars.

These difficulties reduced the number of circuit hearings that might

otherwise be desirable

and frequently precluded the Board from giving

taxpayers, their counsel, and the Bureau adequate advance notice of

hearings.

In 1937, a joint committee of Board and Treasury personnel suggested

that the Board direct efforts at securing additional courtroom space and

that Treasury assist in these efforts.

Furthermore, the committee

proposed that fixed schedules of periodic visits to certain cities be

established.

In combination, these reforms would both reduce the delays

in bringing cases to trial and provide counsel for both parties with sufficient

advance notice of the hearing to permit them to prepare adequately their

cases.

The Tax Court has been increasingly successful in procuring

courtroom space. In numerous cities, particularly those that are visited

frequently during the year, specific federal courtroom space has been

designated for the court.

The availability of this space has probably been

due to active procurement practices by the court, increased federal office

Id.

See id.

Id. at 20; see also Memorandum on Securing Accommodations, Nov. 10, 1937,

filed at the U.S. Tax Court in “Field Divisions: Memoranda & Correspondence.”

Joint Committee Report, supra note 19, at 20.

Id.

Id. at 21. The Joint Committee, composed of members of the Board,

Treasury, and Internal Revenue, was appointed to consider how contested

deficiencies might be more effectively handled. Id. at 1.

Preliminary Committee Report, supra note 14, at 5.

Id.; see also Joint Committee Report, supra note 19.

See, e.g., Tax Court Conference Minutes, May 15, 1970, and Feb. 12, 1971; see

also L

ESTER M. PONDER, UNITED STATES TAX COURT PRACTICE AND

PROCEDURES 132 (1976). But see Report of Comm. on Court Procedure, ABA

AXATION SECTION (1971), reprinted in 25 TAX LAW. 598–99 (1972); Report of

Comm. on Court Procedure, ABA T

AXATION SECTION 128–29 (1949). The

Committee on Court Procedure viewed the space problem as very acute in its 1971

report. In fact, the committee proposed that legislation be enacted that would

require the General Services Administration to acquire office space in every major

city for all travelling federal courts.

Trial Procedure 673

space, and legislative recognition of the court’s judicial status in 1969.

The Tax Court presently conducts trial sessions in 74 cities spread over 46

states and the District of Columbia.

The court has dedicated courtroom

space in 37 of these locations, and it borrows courtroom facilities in the

remaining cities. Hence, even though the bulk of the Tax Court’s work is

performed at its headquarters in Washington, D.C., the court has a broad

physical presence nationally to facilitate taxpayer access to its prepayment

forum.

B. Evidence

Although the statutory provisions governing the rules of evidence in the

Tax Court have been amended on several occasions,

there has been no

change in the court’s basic approach to admissibility problems. The court

consistently has adhered to a practice of liberal admission of evidence,

usually admitting evidence “not clearly inadmissible, and then decid[ing] its

relevancy and weight, if any, after reviewing the entire record.”

This

practice reflects the belief that the court should provide the parties with an

opportunity to develop the factual bases of their positions to the fullest

extent possible.

Tax Court Conference Minutes, May 15, 1970, and Feb. 12, 1971.

T AX CT. R. Appendix I, Form 5 (“Request for Place of Trial”). The current

available locations for Tax Court field hearings are reproduced in Appendix D.

Compare Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337 with Revenue

Act of 1926, ch. 27, § 907(a), 44 Stat. 106, Int. Rev. Code of 1939, ch. 5, § 1111, 53

Stat. 160, and I.R.C. § 7453.

Lester M. Ponder, Trial Court Litigation–Tax Court, Court of Claims and District

Court: A Practicing Lawyer’s View, 21 U.S.C. T

AX INST. 117, 134 (1969) [hereinafter

cited as Ponder]; see also Martin D. Cohen, Litigation Techniques That Increase Your

Chances for Success in the Tax Court, 35 J. T

AX’N 340, 343 (1971); Arthur Groman &

Hilbert P. Zarky, Rules of Evidence in Tax Court of United States, 10 U.S.C.

TAX INST.

603 (1958); Max J. Hamburger, Choice of Forum for Litigation: The United States Tax

Court, 32 N.Y.U. A

NN. INST. ON FED. TAX’N 1315, 1325–28 (1974) [hereinafter

cited as Hamburger]; Harry M. Harrington, Jr., What are the Rules of Evidence

Applicable in the Tax Court of the United States?, 46 T

AXES 471 (1968) [hereinafter cited

as Harrington]; J. Gilmer Korner, Procedure in the Appeal of Tax Cases Under the

Revenue Act of 1926, 4 N

AT’L INC. TAX MAG. 413, 414–15 (1926) [hereinafter cited

as Korner, 1926]; Albert Raum, Tax Court Litigation, 9 U.S.C. T

AX INST. 631, 647

(1957) [hereinafter cited as Raum]; Henry D. Stevens, Legal Evidence Before the Board

of Tax Appeals, 6 N

AT’L INC. TAX MAG. 459, 460 (1928) [hereinafter cited as

Stevens].

Hamburger, supra note 41, at 1327–28; Thomas V. Lefevre, The Trial of a Tax

Court Case, 27 N.Y.U. A

NN. INST. ON FED. TAX’N 1449, 1499–1500 (1969)

[hereinafter cited as Lefevre]; Ponder, supra note 41, at 133–34.

674 The United States Tax Court – An Historical Analysis

The earliest enactment dealing with the Board, the 1924 Revenue Act,

empowered the Board to prescribe its own rules of practice and evidence.

Pursuant to this authority, the Board promulgated rules of practice in July,

1924, but specifically provided for only one small aspect of evidence

admissibility, relating to ex parte affidavits.

Otherwise, the Board deemed

it inadvisable to adopt specific and technical rules of evidence. The

development of such rules would require time and effort better spent in

dealing with the caseload that had developed quickly; moreover, the

application of rigid evidentiary rules would interfere with the general,

informal atmosphere the Board desired in its hearings.

Despite the fact that no formal code of evidence was promulgated, the

Board was not free to ignore judicial evidentiary standards in the interest of

informality.

The 1924 Act required the Board’s findings of fact in a case

to be prima facie evidence in any subsequent proceeding in federal court.

It was therefore necessary to provide a record supported by adequate proof

that would be cognizable by judicial bodies.

In an attempt to effect a compromise between the desired informality

and the statutory responsibility to present a prima facie record, the Board,

in ruling on evidence admissibility, generally followed the evidentiary rules

applicable in equity proceedings.

Under such rules, the Board could

receive a wider spectrum of evidence than that admissible in proceedings at

law.

The standard thus adopted was reasonable because Board

proceedings, with their absence of jury trials, resembled equity more than

law.

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337 (now codified at I.R.C.

§ 7453).

See B.T.A. RULE 31 (July, 1924 ed.) (banning use of ex parte affidavits as

evidence unless opposing counsel consented to their introduction).

Letter from Chairman Hamel to H. Mitchell, Oct. 8, 1924, filed at the U.S.

Tax Court in “Evidence: Memoranda & Correspondence.”

See J. Gilmer Korner, Practice Before The United States Board of Tax Appeals, 3

AT’L INC. TAX MAG. 220, 221 (1925) [hereinafter cited as Korner, 1925].

Revenue Act of 1924, ch. 234, § 900(g)–(h), 43 Stat. 337, 338.

65 CONG. REC. 2684 (1924) (remarks of Mr. Chindblom); Hamel, supra note

5, at 295.

See Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and Means,

69th Cong., 1st Sess. 856–57 (1925); Memorandum from T.C. Lavery to R.H.

Jackson, General Counsel, Internal Revenue Service, c. Aug. 1935, filed at the U.S.

Tax Court in “Evidence: Memoranda & Correspondence” [hereinafter cited as

Jackson Memorandum]. But see Willis W. Ritter, Pitfalls in Practice Before the Board of

Tax Appeals, 3 N

AT’L INC. TAX MAG. 297, 298 (1925) [hereinafter cited as Ritter].

J.S.Y. Ivins, What Should Congress Do with the Board of Tax Appeals?, 3 NAT’L

INC. TAX MAG. 391, 392 (1925); Korner, 1925, supra note 46, at 221.

Korner, 1925, supra note 46, at 221.

Trial Procedure 675

Nonetheless, the incentive to enforce rigidly even the equitable

standards of evidence was hindered by the lack of direct appeal or review of

the Board’s decisions.

Subsequent action was de novo, and there was no

occasion for the parties to preserve rights on appeal by way of exceptions

to evidence and requests for findings.

The hearing before the Board was

“little more than a preliminary skirmish, a run for luck.”

Hence, strict use

of equity rules was never enforced by the Board, and evidence was usually

admitted for “what it was worth.”

The enactment of the Revenue Act of 1926 radically altered the existing

procedure for judicial review of the Board’s decisions.

No longer was the

Board a forum for preliminary skirmishes,

and a party aggrieved by a

decision of the Board could not bring a collateral action and have a trial de

novo on issues of fact and law. The Act limited his right to a direct review

of the Board’s decision in a court of appeals.

With this provision for an

appellate procedure, it became necessary that definite and consistent

standards governing the admissibility of evidence before the Board be

employed.

Several proposals were offered as to what standards should be

used. One suggestion was that the Board develop its own rules of evidence

in keeping with the provisions of the 1924 Revenue Act.

However, this

approach was considered unfeasible as it would have required the Board to

write a treatise on evidence.

Additionally, the prior two years had

demonstrated that the Board, left to its own devices, had failed to adopt a

consistent pattern of evidence admissibility.

Another proposal was for the

Board to adopt rules of evidence prevailing in the United States district

courts.

This proposal was objectionable since the district courts applied

the rules of evidence of the particular state in which they were located,

See Korner, 1926, supra note 41, at 414.

Revenue Act of 1924, ch. 234, §§ 274(a)–(b), 900(g), 43 Stat. 297, 337.

Blair v. Curran, 24 F.2d 390, 392 (1st Cir. 1928).

Jackson Memorandum, supra note 49, at 3; see also Hearings on Revenue Revision,

1925, Before the House Comm. on Ways and Means, 69th Cong., 1st Sess. 856–57 (1925);

J. Emmett Sebree, United States Board of Tax Appeals, 7 T

EMP. L.Q. 428, 432 (1933);

Stevens, supra note 41, at 460. But see Walter W. Hammond, The United States Board

of Tax Appeals, 11 M

ARQ. L. REV. 1, 9 (1925); Ritter, supra note 49, at 298.

Compare Revenue Act of 1926, ch. 27, §§ 1001, 1003(a), 44 Stat. 109, 110 with

Revenue Act of 1924, ch. 234, § 900(g)–(h), 43 Stat. 337, 338.

Bolon B. Turner, The Tax Court of the United States, Its Origin and Functions, in

HE HISTORY AND PHILOSOPHY OF TAXATION 31, 36 (1955).

Revenue Act of 1926, ch. 27, §§ 1001, 1003(a), 44 Stat. 109, 110.

67 CONG. REC. 1144 (1925) (remarks of Mr. Mills).

Id. at 1143 (remarks of Mr. Garrett).

Id. at 1144 (remarks of Mr. Mills).

Id.

Id. at 1137.

Id. at 1144.

676 The United States Tax Court – An Historical Analysis

and would therefore lead to inconsistent rules of evidence for the Board. A

party’s success in a case might depend upon the fortuitous location of

where the Board was sitting when the case was heard.

Additionally, such

a rule would be difficult for the Board to apply because it would require the

application of 48 systems of evidentiary rules. The Board had experienced

the difficulties with such a rule under the 1924 Act, pursuant to which

parties occasionally argued that questions of admissibility be determined by

the laws of evidence prevailing in the district where the hearing occurred.

The difficulties with the foregoing proposals led Congress to require

that the Board apply the rules of evidence of the courts of equity of the

District of Columbia.

The Board would now have a single source of

evidentiary precedents that was consistent with the general theory of

admissibility the Board had employed during its first two years.

Notwithstanding the expressed direction to follow the District of

Columbia equity rules, the attitude of certain Board members toward strict

application of evidentiary standards was not markedly changed, and

evidence continued to be accepted on a “for what it was worth” basis.

Several factors contributed to this reluctance to apply strictly the required

rules of evidence. The Board, in the view of certain members, was an

executive agency and not a judicial body.

Additionally, some Board

members believed it better to let everything in to prevent reversal and to

ensure an adequate record for the higher court, even if evidence of dubious

quality was admitted.

Unlike cases at law, improperly received evidence at

Id. at 1137; Korner, 1926, supra note 41, at 414.

Jackson Memorandum, supra note 49, at 4.

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 107, amending Revenue Act of

1924, ch. 234, § 900(h), 43 Stat. 338; 67 C

ONG. REC. 3530 (1925). At the time of

the 1926 revision, “the Equity Court in the District of Columbia . . . [was] the

Supreme Court of the District sitting in equity cases.” Stevens, supra note 41, at

460. Pursuant to section 61 of the then D.C. Code, “the Supreme Court of the

District [possessed] the same powers and [exercised] the same jurisdiction as the

Circuit and district courts of the United States.” Id. Section 1640 of the Code

provided that the sources of evidence applicable in equity cases were the common

law, principles of equity, and British statutes in force in Maryland on February 27,

1801, except insofar as they were inconsistent with, or replaced by some provision

of the Code. Id. Other sources of evidence were the provisions of the Code, rules

and decisions of the United States Supreme Court in reference to the District of

Columbia’s rules of evidence, rules and decisions of the court of appeals in the

district, and rules and decisions of the supreme court of the district. Id.

See generally Korner, 1926, supra note 41, at 414–15; Stevens, supra note 41, at

461.

Jackson Memorandum, supra note 49, at 3.

Id. at 29.

Id.

Trial Procedure 677

the trial level in equity cases was not a basis for reversal.

On the other

hand, the exclusion of proper evidence was reversible.

Finally, the Board

felt pressured to accept some forms of improper evidence because this was

frequently the only type of proof submitted by petitioners unfamiliar with

the Board, who mistakenly believed that the Board was an agency of the

Bureau of Internal Revenue and that its proceedings were therefore

administrative in nature.

In 1939, the statute governing the rules of evidence was amended for

the second time. The new provision required that the Board follow the

rules of evidence “applicable in courts of the District of Columbia in the

type of proceedings which prior to September 16, 1938, were within the

jurisdiction of the courts of equity of said District.”

This change was

necessitated by the promulgation of the Federal Rules of Civil Procedure in

1938, which provided for the merger of all law and equity cases into one

form of civil action.

The new statutory provision was designed to prevent

this merger from affecting the substantive rules of evidence before the

Board; it had no other purpose and did not effect any change in pre-existing

Board practice.

Fifteen years later, as part of the 1954 Code revision, the reference to

equity rules was dropped and the Tax Court (the Board had been renamed

the Tax Court of the United States by the Revenue Act of 1942

) was

required to follow the same evidentiary rules applicable in non-jury trials in

the United States District Court of the District of Columbia.

The Tax

Id. at 30.

Slayton v. Commissioner, 76 F.2d 497, 498 (1st Cir. 1935), aff’g 29 B.T.A. 931

(1934); R. Hoe & Co. v. Commissioner, 30 F.2d 630, 633–34 (2d Cir. 1929), aff’g 7

B.T.A. 1277 (1927); S.G. Sample Co. v. Commissioner, 23 F.2d 671, 672 (5th Cir.

1928), rev’g 5 B.T.A. 1034 (1927).

John E. McClure, Practice Before the United States Board of Tax Appeals, 6 NAT’L

INC. TAX MAG. 92 (1928).

Int. Rev. Code of 1939, ch. 5, § 1111, 53 Stat. 160 (now codified at I.R.C.

§ 7453). The Board amended its rules to reflect the statutory change in its April 1,

1941 edition. See B.T.A.

RULE 31(a) (Apr. 1, 1941 ed.).

F ED. R. CIV. P. 2.

But see Letter from J. Hanes, Under Secretary of the Treasury, to Chairman

Arundell, Mar. 15, 1939, filed at the U.S. Tax Court in “Evidence: Memoranda &

Correspondence,” and Letter from Chairman Arundell to J. Hanes, Mar. 29, 1939,

filed at the U.S. Tax Court in “Evidence: Memoranda & Correspondence,” wherein

a recommendation by the Under Secretary to amend § 1111 of the 1939 Internal

Revenue Code to provide that the proceedings of the Board be conducted in

accordance “with the rules of evidence applicable in the courts of the District of

Columbia” was endorsed by the Chairman.

Revenue Act of 1942, ch. 619, § 504, 56 Stat. 957.

I.R.C. § 7453. Subsequent to the statutory revision, the Tax Court revised

Rule 31(a) of its Rules of Practice to provide that “the proceedings of the Court

678 The United States Tax Court – An Historical Analysis

Court, which had proposed the change to Congress, noted that there had

been no separate courts of equity in the District of Columbia after

September 16, 1938, and that the 1939 provision was the source of

persistent concern among members of the tax bar.

The amendment, by

removing the reference to an obsolete type of proceeding, would clarify the

law and eliminate much of the confusion that then existed.

Since the United States District Court of the District of Columbia was

required to follow the guidelines specified in Rule 43(a) of the Federal Rules

of Civil Procedure for the admissibility of evidence,

the Tax Court was

also bound by this provision.

Prior to a significant revision that took

effect in 1975,

Rule 43(a)

represented a significant departure from

preexisting practice and resulted from dissatisfaction with the technical

rules of common law evidence. The adoption of the rule signaled more

expansive tests for the admissibility of evidence.

The rule provided that

evidence was admissible if it met any of three standards: (1) the provisions

and its divisions will be conducted in accordance with the rules of evidence

applicable in trials without a jury in a United States District Court for the District

of Columbia.” T

AX CT. R. 31(a) (Aug. 15, 1955 ed.).

Memorandum from Rules Committee to the Tax Court, Jan. 6, 1954, filed at

the U.S. Tax Court in “Evidence: Memoranda & Correspondence.”

Id.

Rule 1 of the Federal Rules of Civil Procedure provided that such rules

“govern the procedure in the United States district courts in all suits of a civil

nature whether cognizable as cases at law or in equity . . . .” F

ED. R. CIV. P. 1 (prior

to amendment in 2007 in connection with general restyling of the Federal Rules of

Civil Procedure).

T AX CT. R. 143 (Jan. 1, 1974 ed.); Harry Graham Balter, Rules of Evidence

Applicable in Proceedings Before the Tax Court of the United States: Burden of Proof and

Presumptions, M

ARQ. 7TH ANN. INST. ON TAX’N 1, 2 (1956) [hereinafter cited as

Balter]; Harrington, supra note 41, at 471–72; Ponder, supra note 41, at 134; Raum,

supra note 41, at 647; Memorandum from E. Radue to Chairman of the Rules

Committee, Sept. 6, 1967, filed at the U.S. Tax Court in “Evidence: Memoranda &

Correspondence;” Memorandum from R. Caldwell to Judge Raum, Chairman of

the Rules Committee, Sept. 1, 1967, filed at the U.S. Tax Court in “Evidence:

Memoranda & Correspondence.”

See FED. R. CIV. P. 43, Advisory Comm. Notes – 1972 Amendments. The

1982 amendments to Rule 43 became effective on August 1, 1975. See Pub. L. No.

93-595, § 3, 88 Stat. at 1926, 1949.

For a general discussion of the provisions of Rule 43(a) as then in effect, see

HARLES ALAN WRIGHT, LAW OF FEDERAL COURTS 456–58 (3d ed. 1976). Rule

43 was revised significantly in 1972 when its general provisions were superseded by

the detailed provisions of the then-new Federal Rules of Evidence.

See, e.g., Edwin Conrad, Let’s Weigh Rule 43(a), 38 VA. L. REV. 985, 987 (1952);

Leonard C. Thompson, Rule 43(a)—A Decadent Decade, 34 C

ORNELL L. Q. 238

(1948); Note, The Admissibility of Evidence in Federal Courts Under Rule 43(a), 46

OLUM. L. REV. 267 (1946).

Trial Procedure 679

of a federal statute providing for admissibility;

(2) the rules theretofore

applied in federal courts in suits in equity; or (3) the rules of evidence in the

courts of the state in which the federal court was sitting.

Since the

District of Columbia is not a state, its evidentiary rules are not affected by

state law.

Accordingly, the Tax Court had to base the admissibility of

evidence on the remaining two provisions of former Rule 43(a). Of these,

the standard of prior equity practice was by far the more important

provision, since few federal statutes on evidence were then in existence.

Courts declared the purpose of former Rule 43(a) to be in favor of

admissibility rather than exclusion,

and the provision regarding prior

equity practices was interpreted broadly.

As a result, broad latitude was

accorded to the trial judge in his rulings on admissibility.

In this

connection, federal courts did not view themselves as limited in the

application of the provision to only those instances in which the same or

substantially the same evidence was held to be admissible in pre-1938

decisions by federal equity courts.

Such prior courts considered other

sources of law for their evidentiary rulings, and courts operating under Rule

43(a) did likewise, further increasing the scope of admissibility.

These

E.g., 28 U.S.C. § 1732 (Supp. 1977) (business records statute).

While state rules of admissibility are controlling in the federal courts under

Rule 43(a), state exclusionary rules are not, and evidence admissible under either of

the first two tests will be received even though the state courts have held otherwise.

See, e.g., Monarch Ins. Co. of Ohio v. Spach, 281 F.2d 401, 410 n.20 (5th Cir. 1960);

Boerner v. United States, 117 F.2d 387, 391 (2d Cir. 1941).

Harrington v. Commissioner, 48 T.C. 939, 954 (1967), aff’d, 404 F.2d 237 (5th

Cir. 1968).

C HARLES ALAN WRIGHT, LAW OF FEDERAL COURTS 457 (3d ed. 1976).

See, e.g., Levitt v. H.J. Jeffries, Inc., 517 F.2d 523, 525 (7th Cir. 1975); Bair v.

American Motors Corp., 473 F.2d 740, 744 (3d Cir. 1973); Bailey v.

Kawasaki-Kisen K.K., 455 F.2d 392, 397 (5th Cir. 1972); Butler v. Southern Pac.

Co., 431 F.2d 77, 79 (5th Cir. 1970); Wright v. Wilson, 154 F.2d 616, 617 (3d Cir.

1946); Dellefield v. Blocdel Realty Co., 128 F.2d 85, 93 (2d Cir. 1942).

E.g., United States v. 60.14 Acres of Land, 362 F.2d 660, 666 (3d Cir. 1966),

wherein the court noted that:

[if the provision were] to be limited to specific equity precedents the

category would be of little significance for such precedents are few and

inadequate. Moreover, they would establish no independent principles, for

in evidence as elsewhere the maxim applies that equity follows the law. . . .

To prevent the creation of precedents merely because one did not already

exist would frustrate the liberal purpose of the Rule, and in light of equity’s

historic role in alleviating the rigidity of the common law, would render

ironic the reference to proceedings in courts of equity.

See Dallas County v. Commercial Union Assurance Co., 286 F.2d 388 (5th

Cir. 1961).

See Monarch Ins. Co. of Ohio v. Spach, 281 F.2d 401 (5th Cir. 1960).

In Monarch, the court stated that:

680 The United States Tax Court – An Historical Analysis

expansive views of the federal courts in interpreting the provisions of

former Rule 43(a) lent support to the Tax Court’s long established liberal

evidentiary policy and supplied adequate justification for its continuance.

Although the emphasis in former Rule 43(a) generally was conceded to

be on admissibility, the vagueness of the “equity” standard necessarily led to

varying interpretations.

Additionally, uncertainties developed with respect

to the extent to which federal courts could formulate essentially new rules

based on the equity standard.

As a result, an advisory committee was

created by the Judicial Conference of the United States in 1965 to codify a

system of federal rules of evidence.

Ten years later, Congress adopted the

recommendations of the advisory committee for the federal court system.

100

Since these rules are applicable to the District Court for the District of

Columbia,

101

they are applicable to the Tax Court as well, and the Tax

Court, in its 1974 rules revision, provided for the applicability of the new

rules in its proceedings.

102

Although the Tax Court has never before been subject to a

comprehensive code regulating the admissibility of evidence in its

in today’s litigation with its endless complexities many of which are an

outgrowth of our scientific age we would hardly think that a court instituted

with all of the power the organic constitution could invest in it would have

to stand helpless in the face of a new situation. Since it has vast duties and

powers . . . surely such [a] court has the capacity to deal judicially with the

manner of ascertaining the truth in a novel situation.

281 F.2d at 411.

See Hicks Co. v. Commissioner, 56 T.C. 982, 1014–15 (1971); see also

Hamburger, supra note 41, at 1327; Ponder, supra note 41, at 133–34.

Reyes v. Wyeth Laboratories, 498 F.2d 1264, 1286–87 (5th Cir. 1974).

See, e.g., United States v. 60.14 Acres of Land, 362 F.2d 660 (3d Cir. 1966).

For a discussion of the historical background leading to the creation of the

Advisory Committee, see K

ENNETH R. REDDEN & STEPHEN A. SALTZBURG,

FEDERAL RULES OF EVIDENCE 1–5 (1975); A Preliminary Report on the Advisability

and Feasibility of Developing Uniform Rules of Evidence for the United States District Courts,

30 F.R.D. 73 (1962). Early recognition of the effect that a uniform rules of

evidence scheme would have on the Tax Court is indicated in a letter from Chief

Judge Tietjens to W. Shafroth, Secretary, Committee on Rules of Practice and

Procedure, Mar. 18, 1963, filed at the U.S. Tax Court in “Evidence: Memoranda &

Correspondence,” in which the Chief Judge advised Mr. Shafroth of the Tax

Court’s interest in the Advisory Committee.

100

Pub. L. No. 93-595, 88 Stat. 1926 (effective Aug. 1, 1975).

101

The Federal Rules of Evidence are applicable to proceedings in all courts of

the United States. Fed. R. Evid. 101(a).

102

TAX CT. R. 143(a) (Jan. 1, 1974 ed.) provided that its rules “include the rules

of evidence in the Federal Rules of Civil Procedure and any rules of evidence

generally applicable in the Federal courts (including the United States District

Court for the District of Columbia).” This provision remains in the current version

of the rule.

Trial Procedure 681

proceedings, the federal evidentiary rules should have little practical effect

on the court’s traditional policy of liberal admission. Moreover, the Federal

Rules of Evidence, with their increased bias in favor of admissibility, will

narrow further any evidentiary distinctions that formerly existed between

the Tax Court and other federal tribunals.

103

The most recent change in the Tax Court’s evidentiary rules occurred in

2009, when the court revised Rule 143 of its Rules of Practice and

Procedure to prescribe testimony procedures that would more closely

follow current Rule 43 of the Federal Rules of Civil Procedure. Rule 143

generally requires a witness to testify in open court. However, beginning in

2010, that requirement may be satisfied by contemporaneous transmission

of testimony from a different location.

104

This alternate means of providing

testimony is not available as of right; rather, the court may permit its use

only where good cause in compelling circumstances is shown, and then only

with “appropriate safeguards.”

105

The rule does not specify the form of transmission. However, the

advisory committee notes to Rule 43 of the Federal Rules of Civil

Procedure acknowledge that video transmission should be used where the

cost is reasonable in relation to the matters in dispute, the means of the

parties, and the circumstances that justify transmission.

106

The notes of the

Rules Committee also recognize that audio transmission may be sufficient,

particularly where the testimony is of less significance to the matters in

dispute.

107

In adopting the revision to its Rule 143, the Tax Court recognized that

witnesses periodically are unable to attend a trial for a variety of unexpected

reasons (such as accident or illness) but remain able to testify from another

location.

108

Rescheduling the trial or hearing to accommodate such a

witness could cause substantial delays and significant costs.

109

In such

circumstances, the court recognizes that justice may be better served by

103

See Balter, supra note 83; Lefevre, supra note 42, at 1499. For a treatise-like

review of the Tax Court’s experience in applying the Federal Rules of Evidence, see

Joni Larson, Tax Evidence III: A Primer on the Federal Rules of Evidence as Applied by the

Tax Court, 62 T

AX LAW. 555 (2009).

104

TAX CT. R. 143(b) (July 6, 2012 ed.).

105

Id. Based on the explanatory note to Rule 43 of the Federal Rules of Civil

Procedure (on which the revisions to Tax Court Rule 143 were based),

“appropriate safeguards” entail measures that ensure accurate identification of the

witness and that protect the witness against influence by persons present at the

location where the testimony is being provided. F

ED. R. CIV. P. 43, Adv. Comm.

on Rules Notes–1996 Amendment.

106

Rules Comm. Note, TAX CT. R. 143 (July 6, 2012 ed.), 134 T.C. 361 (2010).

107

Id.

108

Id.

109

Id.

682 The United States Tax Court – An Historical Analysis

allowing the witness to testify by contemporaneous transmission. Such

accommodation could be particularly useful where a risk exists that other,

and perhaps more critical, witnesses may be unavailable at a later date. The

Tax Court therefore employs courtroom technology to facilitate the receipt

of remote testimony from a witness when necessary.

110

C. Burden of Proof

The allocation of the burden of proof in proceedings before the Board

of Tax Appeals and the Tax Court traditionally has been derived from

common law principles, superseded by statutory directive in narrow

instances only. However, Congress took a greater interest in burden of

proof allocations through the enactment of § 7491 as part of the Internal

Revenue Service Reform and Restructuring Act of 1998,

111

through which

Congress imposed more extensive deviations from the prevailing norms to

the benefit of the taxpayer. This Section first discusses the development of

the general principles governing the allocation of the burden of proof in

proceedings before the Board and the Tax Court and then details the

manner in which § 7491 alters the pre-existing landscape.

1. Development of General Rule

Since the inception of the Board in 1924, the burden of proof in its

proceedings has, as a general matter, been placed on the taxpayer.

112

Although little doubt about the propriety of placing this burden on the

taxpayer has been expressed,

113

the rule itself has been difficult to define

and apply.

114

Varying judicial interpretations have arisen as to the nature

110

Id. at 362.

111

Pub. L. No. 105-206, § 3001(a), 112 Stat. 685, 727.

112

Compare B.T.A. RULE 20 (July 1, 1924 ed.) with TAX CT. R. 142 (July 16,

2012 ed.).

113

Rockwell v. Commissioner, 512 F.2d 882 (9th Cir. 1975); Hearings on Revenue

Revision, 1925, Before the House Comm. on Ways and Means, 69th Cong., 1st Sess. 907

(1925) [hereinafter cited as 1925 House Hearings]; Randolph E. Paul, A Plea For

Better Tax Pleading, 18 C

ORNELL L.Q. 507, 517 (1933) [hereinafter cited as Paul].

114

See Balter, supra note 83, at 19; Lawrence F. Casey, A Case of Failure of Proof

in the Tax Court, 6 T

AX L. REV. 227 (1951) [hereinafter cited as Casey]; George

Craven, Pre-Trial and Post-Trial Tax Court Practice, 4 N.Y.U. A

NN. INST. ON FED.

TAX’N. 260, 263 (1946) [hereinafter cited as Craven]; Albert L. Hopkins, The United

States Board of Tax Appeals, 12 A.B.A. J. 466, 468 (1926) [hereinafter cited as

Hopkins]; Mark Marcossan, The Burden of Proof in Tax Cases, 29

TAXES 221 (1951);

William Schwerdtfeger, The Burden of Proof in the Tax Court, 42 K

Y. L.J. 147, 149

(1954).

Trial Procedure 683

and extent of the taxpayer’s burden of proof

115

and the relationship of the

presumption of correctness to the burden of proof.

116

Likewise, in cases in

which the burden of proof has been placed on the Commissioner, most

notably in the cases of allegations of fraud

117

and requests for affirmative

relief,

118

disagreement has arisen over the extent of the Commissioner’s

burden in proving the former

119

and in defining those situations that

constitute the latter.

120

The burden of proof on the taxpayer in Tax Court proceedings appears

to consist of two distinct evidentiary burdens: first, the burden of going

forward with sufficient evidence on an issue of fact to entitle the taxpayer

to have the issue decided by the court on the basis of the evidence

presented, and second, the burden of final persuasion that the evidence

introduced at trial meets the requisite level of proof necessary to sustain the

taxpayer’s litigating position.

121

An additional factor in the taxpayer’s

burden of proof is the presumption of correctness accorded the findings

contained in the deficiency notice.

122

Two divergent views on the

115

Compare, Cohen v. Commissioner, 266 F.2d 5, 11 (9th Cir. 1959) with

Commissioner v. Smith, 285 F.2d 91, 95 (5th Cir. 1960).

116

Compare Welch v. Helvering, 290 U.S. 111 (1933), aff’g 63 F.2d 976 (8th Cir.),

aff’g 25 B.T.A. 117 (1932) with Fairmount Cemetery Ass’n v. Helvering, 79 F.2d 163,

164–65 (D.C. Cir. 1935), rev’g and rem’g 30 B.T.A. 740 (1934), and Hemphill Schools,

Inc. v. Commissioner, 137 F.2d 961, 964 (9th Cir. 1943), vacating and rem’g 46 B.T.A.

1282 (1942).

117

By statute, the Commissioner bears the burden of proof in any proceeding

“involving the issue whether the petitioner has been guilty of fraud with intent to

evade tax.” I.R.C. § 7454(a); T

AX CT. R. 142(b) (July 6, 2012 ed.).

118

TAX CT. R. 142(a) (July 6, 2012 ed.).

119

Compare Arlette Coat Co. v. Commissioner, 14 T.C. 751 (1950) with Miller v.

Commissioner, 51 T.C. 915 (1969) and York v. Commissioner, 24 T.C. 742 (1955).

120

See Balter, supra note 83, at 19; Samuel Byer, Limitation of Issues in Tax

Litigation, 18 N.Y.U. A

NN. INST. ON FED. TAX’N 1035 (1960); Richard Forman, The

Burden of Proof, 39 T

AXES 737 (1961) [hereinafter cited as Forman]; George L.

Whitfield & Charles E. McCallum, Burden of Proof and Choice of Forum in Tax

Litigation, 20 V

AND. L. REV. 1179 (1967) [hereinafter cited as Whitfield &

McCallum].

121

See Balter, supra note 83, at 20–22; Herman H. Copelon, Practical Problems on

Burden of Proof in Civil Trials, 10 N.Y.U. A

NN. INST. ON FED. TAX’N 865, 868–70

(1951) [hereinafter cited as Copelon]; Bouldin S. Motherhead, The Burden of Proof in

Federal Tax Cases, 14 C

ERT. PUB. ACCT. 286, 287 (1934); Theodore Ness, The Role of

Statutory Presumptions in Determining Federal Tax Liability, 12 T

AX L. REV. 321, 329

(1957) [hereinafter cited as Ness].

122

Avery v. Commissioner, 22 F.2d 6 (5th Cir. 1927). “No reasonable taxpayer

will quarrel with this special endowment of correctness bestowed upon the

Commissioner’s letters. It is historically well-founded and it is necessary as an aid

to the collection of revenues . . . .” Paul, supra note 113, at 517. Note that the

presumption of correctness does not attach if the Commissioner’s determination is

684 The United States Tax Court – An Historical Analysis

presumption’s effect upon the burden of proof have developed. The

prevailing view is that the presumption is coextensive with the taxpayer’s

initial burden of going forward with the evidence.

123

Hence, the taxpayer

must appear and introduce competent and substantial evidence that could

support a finding in his favor,

124

or the court will dismiss the petition and

determine the deficiency as specified by the Commissioner.

125

Accordingly,

once the taxpayer has produced such evidence that could support a finding

to the contrary, the presumption vanishes and the case must be decided

upon the evidence presented.

126

The presumption is merely a procedural

device, not a substitute for evidence and cannot survive the introduction by

the taxpayer of countervailing evidence.

127

In this view, the presumption

simply requires a threshold showing that a reasonable man could reach a

conclusion favorable to the taxpayer.

128

On the other hand, some early Board decisions indicated disagreement

with this approach and instead viewed the presumption of correctness as

proven to be arbitrary or careless. See Estate of Mitchell v. Commissioner 250 F.3d

696, 702 (9th Cir. 2001) (citing Cohen v. Commissioner, 266 F.2d 5, 11 (1959)). In

such cases, not only does the presumption vanish, the burden rests on the

Commissioner to establish the correct amount of tax owed. Id.

123

Rockwell v. Commissioner, 512 F.2d 882, 885 (9th Cir. 1975); Potts, Davis

& Co. v. Commissioner, 431 F.2d 1222, 1225 (9th Cir. 1970), aff’g T.C. Memo.

1968-257; Barnes v. Commissioner, 408 F.2d 65, 68 (7th Cir. 1969); Gersten v.

Commissioner, 267 F.2d 195, 199 (9th Cir. 1959), aff’g in part and rem’g in part 28

T.C. 756 (1957); A & A Tool & Supply Co. v. Commissioner, 182 F.2d 300, 304

(l0th Cir. 1950), rev’g and rem’g 8 T.C.M. (CCH) 473 (1949); Crude Oil Corp. of

America v. Commissioner, 161 F.2d 809, 810 (10th Cir. 1947), rev’g and rem’g 6 T.C.

648 (1946); Hemphill Schools, Inc. v. Commissioner, 137 F.2d 961, 964 (9th Cir.

1943), vacating and rem’g 46 B.T.A. 1282 (1942); Starr v. Commissioner, T.C. Memo.

1976-289, 35 T.C.M. (CCH) 1291, 1293; Durovic v. Commissioner, 54 T.C. 1364,

1393 (1970), aff’d in part and rev’d in part, 487 F.2d 36 (7th Cir. 1973); Reiben v.

Commissioner, T.C. Memo. 1959-91, 18 T.C.M. (CCH) 416, 418.

124

E.g., Barnes v. Commissioner, 408 F.2d 65, 68 (7th Cir. 1969).

125

Section 7459 provides in pertinent part: “If a petition for a redetermination

of a deficiency has been filed by the taxpayer, a decision of the Tax Court

dismissing the proceeding shall be considered as its decision that the deficiency is

the amount determined by the Secretary.” I.R.C. § 7459(d); see also T

AX CT. R. 123

and 149(b) (July 6, 2012 ed.).

126

See Capital Blue Cross v. Commissioner, 431 F.3d 117, 128–29 (3d Cir.

2005); Barnes v. Commissioner, 408 F.2d 65, 68–69 (7th Cir. 1969); Federal Nat’l

Bank of Shawnee, Oklahoma v. Commissioner, 180 F.2d 494, 497–98 (l0th Cir.

1950), rev’g and rem’g 8 T.C.M. (CCH) 534 (1949); Harrison v. Commissioner, 24

T.C. 46 (1955); see also Copelon, supra note 121, at 870; Ness, supra note 121, at 331.

127

Rockwell v. Commissioner, 512 F.2d 882, 885 (9th Cir. 1975); see also Balter,

supra note 83, at 23; Copelon, supra note 121, at 868–69.

128

See, e.g., Longino v. Commissioner, T.C. Memo. 2013-80, 105 T.C.M. (CCH)

1491; Starr v. Commissioner, T.C. Memo. 1976-289, 35 T.C.M. (CCH) 1291, 1294.

Trial Procedure 685

providing the source of the taxpayer’s entire burden of proof.

129

These

cases suggested that until the taxpayer successfully carried his ultimate

burden of proof, the presumption remained a viable probative force.

130

Although the difference between the two views may be more apparent than

real, especially in cases in which the judge is the sole trier of fact, the second

approach generally has been rejected by the appellate courts.

131

The feeling

of these courts is that equating the presumption with the burden of proof

may result in improperly treating the presumption as evidence.

132

As a

result, the Commissioner may be able to hide behind the deficiency notice

in a doubtful case.

133

Additionally, such treatment of the presumption does

not provide an incentive for the trial court to evaluate properly the evidence

presented and supplies an easy escape hatch for judicial indecision.

134

modern decisions issued by the Tax Court suggest that the approach of

equating the presumption of correctness with the entire burden of proof

has fallen by the wayside.

135

The consequences of the taxpayer’s successful overturning of the

presumption have also been the subject of some judicial disagreement.

Some appellate decisions have indicated that the burden of proof then

shifts to the Commissioner to prove the deficiency.

136

This view has been

129

Hemphill Schools, Inc. v. Commissioner, 137 F.2d 961 (9th Cir. 1943),

vacating and rem’g 46 B.T.A. 1282 (1942); Fairmount Cemetery Ass’n v. Helvering, 79

F.2d 163 (D.C. Cir. 1935), rev’g and rem’g 30 B.T.A. 740 (1934).

130

Hemphill Schools, Inc. v. Commissioner, 137 F.2d 961, 963–64 (9th Cir.

1943).

131

Barnes v. Commissioner, 408 F.2d 65, 68 (7th Cir. 1969); Gersten v.

Commissioner, 267 F.2d 195, 199 (9th Cir. 1959), aff’g in part and rem’g in part 28

T.C. 756 (1957); A & A Tool & Supply Co. v. Commissioner, 182 F.2d 300, 303–04

(10th Cir. 1950), rev’g and rem’g 8 T.C.M. (CCH) 473 (1949); Hemphill Schools, Inc.

v. Commissioner, 137 F.2d 961, 962–63 (9th Cir. 1943), vacating and rem’g 46 B.T.A.

1282 (1942); Fairmount Cemetery Ass’n v. Commissioner, 79 F.2d 163, 164 (D.C.

Cir. 1935), rev’g and rem’g 30 B.T.A. 740 (1934).

132

Hemphill Schools, Inc. v. Commissioner, 137 F.2d 961, 964 (9th Cir. 1943),

vacating and rem’g 46 B.T.A. 1282 (1942); J.M. Perry & Co. v. Commissioner, 120

F.2d 123, 124 (9th Cir. 1941).

133

See Fairmount Cemetery Ass’n v. Commissioner, 79 F.2d 163, 164 (D.C.

Cir. 1935), rev’g and rem’g 30 B.T.A. 740 (1934).

134

See Hemphill Schools, Inc. v. Commissioner, 137 F.2d 961, 964 (9th Cir.

1943), vacating and rem’g 46 B.T.A. 1282 (1942).

135

E.g., Durovic v. Commissioner, 54 T.C. 1364, 1393 (1970), aff’d in part and

rev’d in part, 487 F.2d 36 (7th Cir. 1973); Longino v. Commissioner, T.C. Memo.

2013-80, 105 T.C.M. (CCH) 1491; Starr v. Commissioner, T.C. Memo. 1976-289,

35 T.C.M. (CCH) 1292.

136

See Cohen v. Commissioner, 266 F.2d 5, 11 (9th Cir. 1959), rem’g 16 T.C.M.

(CCH) 763 (1957); Clark v. Commissioner, 266 F.2d 698, 715 (9th Cir. 1959), aff’g

and rem’g T.C. Memo. 1957-129. In these cases, the courts indicated that

686 The United States Tax Court – An Historical Analysis

criticized as running counter to the express language of the Tax Court rules,

which place the burden of proof on the taxpayer, and has been rejected by

the Tax Court and most appellate courts.

137

The prevailing view does not

shift the burden of going forward until the evidence adduced by the

taxpayer is so overwhelming that it would be sufficient not only to put the

issue in dispute, but to have the court decide the issue in the taxpayer’s

favor on the ground that reasonable minds could not differ.

138

Since the

negation of presumption indicates solely that the taxpayer’s position may be

correct,

139

the Commissioner is not required to introduce any evidence in

his own behalf to prevail. The court may conclude that the taxpayer,

although successful in reaching the threshold quantum of proof to require a

decision on the evidence presented, has failed to carry his ultimate burden

of persuasion.

140

Although most cases agree that the taxpayer who has the burden of

proof must always satisfy the burden of going forward with evidence to

rebut the presumption, courts have been divided with regard to the

question of what the taxpayer must demonstrate to satisfy the final burden

of persuasion. Early decisions indicated that the burden was on the

taxpayer not only to establish that the Commissioner’s determination was

erroneous, but also to produce sufficient evidence from which a correct

determination of tax liability could be made.

141

For example, in Burnet v.

destruction of the presumption shifts the burden of proof to the Commissioner.

However, more recent cases clarify that a shift in the burden of persuasion to the

Commissioner (requiring the Commissioner to establish the amount of the

deficiency) occurs only when the taxpayer establishes that the determination

contained in the notice of deficiency was arbitrary and erroneous. See Estate of

Mitchell v. Commissioner, 250 F.3d 696, 702 (9th Cir. 2001); McCall v.

Commissioner, T.C. Memo. 2009-75, 97 T.C.M. (CCH) 1370.

137

See Rockwell v. Commissioner, 512 F.2d 882, 886 (9th Cir. 1975); United

States v. Rexach, 482 F.2d 10, 16–17 (1st Cir. 1973); Durovic v. Commissioner, 54

T.C. 1364, 1393 (1970), aff’d in part and rev’d in part, 487 F.2d 36 (7th Cir. 1973).

138

See Suarez v. Commissioner, 61 T.C. 841, 845 (1974); Durovic v.

Commissioner, 54 T.C. 1364, 1393 (1970), aff’d in part and rev’d in part, 487 F.2d 36

(7th Cir. 1973); Reiben v. Commissioner, T.C. Memo. 1959-91, 18 T.C.M. (CCH)

416, 418.

139

Niederkrome v. Commissioner, 266 F.2d 238, 241 (9th Cir. 1958), aff’g in

part and rem’g in part T.C. Memo. 1956-255; A & A Tool & Supply Co., 182 F.2d

300, 304 (10th Cir. 1950), rev’g and rem’g 8 T.C.M. (CCH) 473 (1949); see also 2

AWRENCE CASEY, FEDERAL TAX PRACTICE § 7.3, at 9 (1958).

140

Starr v. Commissioner, T.C. Memo. 1976-289, 35 T.C.M. (CCH) 1291,

1294.

141

See Mente v. Commissioner, 76 F.2d 965, 968 (5th Cir. 1935), aff’g 29 B.T.A.

804 (1934); Alexander Sprunt & Son, Inc. v. Commissioner, 64 F.2d 424, 427 (4th

Cir. 1933), aff’g and rev’g 24 B.T.A. 599 (1931); Ohio State Mortgage Co. v.

Commissioner, 22 B.T.A. 1162 (1931), appeal dismissed, 59 F.2d 1070 (6th Cir. 1932);

Trial Procedure 687

Houston,

142

the taxpayer was able to demonstrate that the deficiency was

excessive but was unable to produce sufficient proof of the correct amount

actually due. The Supreme Court, in a 1931 decision affirming the original

deficiency stated: “The impossibility of proving a material fact upon which

the right to relief depends, simply leaves the claimant upon whom the

burden rests with an unenforceble [sic] claim, a misfortune to be borne by

him . . . as a result of a failure of proof.”

143

Four years later, however, in the landmark case of Helvering v. Taylor,

144

the Supreme Court implicitly rejected its earlier position.

145

The Court

stated that it could not “reasonably be held that he [a taxpayer] is bound to

pay a tax that confessedly he does not owe, unless his evidence was

sufficient also to establish the correct amount that lawfully might be

charged against him.”

146

Although such a stringent burden, the Court

reasoned,

147

was applicable in refund suits in which the ultimate question

presented for decision was the amount of overpayment,

148

nothing in the

language of the Board’s burden of proof rule, the statutory language

defining the Commissioner’s assessment procedures, or the companion

legislative histories suggested such a burden for the taxpayer before the

Board. The proper rule, the Court concluded, required the Board to

redetermine the deficiency based upon the evidence presented, and not to

require the taxpayer to prove the correct amount, or lose everything.

149

Craven v. Commissioner, 21 B.T.A. 78 (1930); Brown v. Commissioner, 18 B.T.A.

859 (1930), rev’d and rem’d in part and aff’d in part, 54 F.2d 563 (1st Cir. 1931); Washer

v. Commissioner, 12 B.T.A. 632 (1928), aff’d, 35 F.2d 1023 (2d Cir. 1929).

142

283 U.S. 223, 227 (1931), rev’g 39 F.2d 351 (3d Cir. 1930), rev’g 13 B.T.A. 279

(1928).

143

Id. at 228.

144

293 U.S. 507 (1935), aff’g 70 F.2d 619 (2d Cir. 1934), rev’g and rem’g 27 B.T.A.

1426 (1933).

145

293 U.S. at 510–15. Although the Court in Taylor did not in its decision

specifically overrule Burnet v. Houston, 283 U.S. 223 (1931), it did distinguish the

cases on which Burnet was based as being refund actions and stated that the burden

in those cases was not to merely demonstrate that the assessment was erroneous

but also to establish the exact amount to which the taxpayer was entitled.

146

293 U.S. at 515.

147

Id. at 514.

148

See Lewis v. Reynolds, 284 U.S. 281 (1932).

149

293 U.S. at 516. For application of the Taylor rule, see Capital Blue Cross v.

Commissioner, 431 F.3d 117, 128–29 (3d Cir. 2005); Rockwell v. Commissioner,

512 F.2d 882, 887 (9th Cir. 1975); Barnes v. Commissioner, 408 F.2d 65, 68 (7th

Cir. 1969); Riss v. Commissioner, 374 F.2d 161, 164 (8th Cir. 1967), aff’g T.C.

Memo. 1964-190; Grubb v. Commissioner, 315 F.2d 753 (6th Cir. 1963), rev’g and

rem’g T.C. Memo. 1961-153; Commissioner v. Smith, 285 F.2d 91 (5th Cir. 1960),

aff’g T.C. Memo. 1958-210; A & A Tool & Supply Co. v. Commissioner, 182 F.2d

300 (l0th Cir. 1950), rev’g and rem’g 8 T.C.M. (CCH) 473 (1949); Federal Nat’l Bank

688 The United States Tax Court – An Historical Analysis

Thus, in situations in which the taxpayer is unable to produce proof of the

exact cost of property for an allowable loss deduction,

150

or the precise

amount of an expenditure for some purpose encompassed within the

deduction provisions of the Code,

151

but some reliable evidence is available

from which a reasonable allowance can be approximated, the Tax Court

generally will order a corresponding reduction of the deficiency.

152

Despite the difficulties of identifying the nature of the burden on the

taxpayer, the decision to place the burden of proof on the taxpayer has met

with little controversy during the Board/Tax Court’s existence.

153

When

the Board, in promulgating its first rules of practice and procedure,

154

chose

to place the burden of proof on the taxpayer, it was following a long

recognized principle that administrative actions of Government are

presumed correct.

155

Nonetheless, limited criticism of this decision was expressed in hearings

dealing with the 1926 Revenue Act. One witness asserted that the rule

placing the burden of proof on the taxpayer was “contrary to the rule that

obtains in any court outside of France . . . [in that] the taxpayer is required

to come into court and prove he is innocent.”

156

Another stated that

of Shawnee, Oklahoma v. Commissioner, 180 F.2d 494, 497 (l0th Cir. 1950), rev’g

and rem’g 8 T.C.M. (CCH) 534 (1949); National Weeklies, Inc. v. Commissioner, 137

F.2d 39, 42 (8th Cir. 1943), aff’g 43 B.T.A. 1209 (l941).

150

Gutwirth v. Commissioner, 40 T.C. 666 (1963); Brown v. Commissioner, 24

T.C. 256 (1955); Abraham v. Commissioner, 9 T.C. 222 (1947).

151

Cohan v. Commissioner, 11 B.T.A. 743 (1928), aff’d in part and rev’d in part,

39 F.2d 540 (2d Cir. 1930); see also Sharon v. Commissioner, 66 T.C. 515 (1976);

Green v. Commissioner, 66 T.C. 538 (l976); Durovic v. Commissioner, 65 T.C. 480

(1975), for applications of the “Cohan” rule.

152

The leading case in this area is Cohan v. Commissioner, 11 B.T.A. 743 (1928),

aff’d in part and rev'd in part, 39 F.2d 540 (2d Cir. 1930). In Cohan, the Board upheld

the Commissioner’s disallowance of certain travel and entertainment expenses. On

appeal, the Second Circuit stated that absolute certainty in the amount of an

expense was usually impossible, and was unnecessary as the Board should make as

close an approximation as it can, so long as the evidence indicated that the taxpayer

had spent sums allowable as deductions. Although strict requirements for

substantiation of travel and entertainment deductions are presently required under

§ 274(d), the “Cohan” rule has been broadly asserted by the Tax Court in other

situations. See generally Casey, supra note 114, for a further analysis of the “Cohan”

rule.

153

See supra note 113.

154

B.T.A. RULE 20 (July 1, 1924 ed.).

155

Phillips v. Commissioner, 283 U.S. 589, 600 (1931).

156

1925 House Hearings, supra note 113, at 877. Mr. Gore, representing the

American Institute of Accountants was adamant in his belief that the burden of

proof should be on the Commissioner:

It seems to us that if the Commissioner has a warrant for the proposition of

an additional assessment, the proof ought to be at hand, before him, and

Trial Procedure 689

taxpayers, under threat of criminal and civil sanctions for filing false

statements of taxable income should have their returns accorded a prima

facie correct status,

157

and thus, the Commissioner, if he asserted a

deficiency, should be required to disprove the validity of the return.

158

Nonetheless, strong arguments existed against changing the established

rule. The taxpayer was the party most familiar with the facts upon which he

based his return and was considered to be in a better position to produce

evidence supporting these facts if called upon to do so.

159

In this

connection, there were those who gloomily predicted that if the burden of

proof was placed on the Commissioner, 24 out of 25 cases otherwise won

by the Commissioner would be lost.

160

In fact, one commentator was of

the opinion that if the burden of proof was placed on the Commissioner,

“[y]ou might as well repeal the income tax law and pass the hat, because you

will practically be saying to the taxpayer, How much do you want to

contribute toward the support of the government? and in that case they

would have to decide for themselves.”

161

Moreover, the burden of proof rule in the Board closely corresponded

to that applicable in refund actions in Federal district court and the Court

of Claims, in which taxpayers had the burden of proving that they had

overpaid their tax.

162

Additionally, since Congress was not constitutionally

required to provide pre-assessment judicial-type review in tax disputes,

limiting such review with restrictive procedural rules could not be regarded

as unfair.

163

Finally, the taxpayer was the petitioner in Board litigation, and

having the proof, it is of no embarrassment for him to come before the

Board of Tax Appeals and present the proof. We know of no reason why

the right of the taxpayer should be sacrificed to the convenience of the

Commissioner where it is a matter of the Commissioner contending that

the taxpayer is wrong.

Id. at 877; see also Hopkins, supra note 114, at 470.

157

Hopkins, supra note 114, at 470.

158

1925 House Hearings, supra note 113, at 877 (testimony of Mr. Gore). The

Senate, during its deliberations on the 1926 Act added a provision which made the

return of the taxpayer prima facie evidence of its correctness. In conference, the

amendment was rejected, the conference committee stating that such a provision

would alter the burden of proof in Board cases and hence, would be inappropriate.

H.R.

REP. NO. 69-356, at 39 (1925).

159

1925 House Hearings, supra note 113, at 908, 930 (statements of Mr. Ivins

and Mr. Hamel); see also John E. McClure, Practice Before the U.S. Board of Tax Appeals,

6 N

AT’L INC. TAX MAG. 92 (1928).

160

1925 House Hearings, supra note 113, at 908 (statement of Mr. Ivins).

161

Id. at 907.

162

Id. at 908.

163

See Rockwell v. Commissioner, 512 F.2d 882, 887 (1975).

690 The United States Tax Court – An Historical Analysis

American jurisprudence has generally placed the burden of proof on the

party invoking the jurisdiction of the tribunal.

164

The advocates of the status quo were successful in maintaining the

burden of proof rule originally promulgated in 1924.

165

In a 1989 opinion,

the United States Claims Court succinctly summarized the standard

allocation of the burden of proof in tax proceedings in the following terms:

[The] presumption [of correctness] in favor of the Commissioner is a

procedural device that requires the plaintiff to go forward with prima

facie evidence to support a finding contrary to the Commissioner’s

determination. Once this procedural burden is satisfied, “the

taxpayer must still carry [the] ultimate burden of proof or

persuasion” on the merits. Thus, the plaintiff not only has the

burden of establishing that the Commissioner’s determination was

incorrect, but also of establishing the merit of its claims by a

preponderance of the evidence.

166

2. Fraud

Prior to the enactment of § 7491,

167

the principal statutory exception to

the general rule that places the burden of proof on the taxpayer concerned

the issue of civil tax fraud.

168

However, the burden on the Commissioner

to prove fraud has not always been provided by statute.

169

Under the 1924

Revenue Act, Congress provided the Board with the power to prescribe its

own rules of practice, procedure, and evidence,

170

and in its first rules, the

Board required that the taxpayer “shall open and close and the burden of

proof shall be upon him.”

171

Although in refund cases, the burden of proof

with respect to fraud was upon the party alleging it; hence the Government

had the responsibility of proving fraud. Yet early Board decisions indicated

that Board members were following the straightforward language of the

rule and were placing the burden of disproving fraud on the taxpayer.

172

164

1925 House Hearings, supra note 113, at 907–08 (statement of Mr. Ivins).

165

Compare Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337 with Revenue

Act of 1926, ch. 27, § 907(a), 44 Stat. 107.

166

Danville Plywood Corp. v. United States, 16 Cl. Ct. 584, 593–94 (1989)

(emphasis in original; internal citations omitted).

167

Section 7491 is addressed in Section C.4 below.

168

I.R.C. § 7454(a).

169

Compare I.R.C. § 7454(a) with Revenue Act of 1924, ch. 234, § 900(h), 43

Stat. 337.

170

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

171

B.T.A. RULE 20 (July 1, 1924 ed.).

172

See Ginsburg v. Commissioner, 13 B.T.A. 417, 421 (1928), appeal dismissed,

48 F.2d 1074 (6th Cir. 1930); Humphreys v. Commissioner, 9 B.T.A. 656, 658

Trial Procedure 691

Few complaints were heard against this practice during the first two years

of the Board’s existence.

173

This lack of criticism may have stemmed from

the fact that prior to 1926, an action before the Board was little more than a

“preliminary skirmish,”

174

and a party aggrieved by a decision of the Board

could bring a collateral action and have a trial de novo on issues of fact and

law.

175

As a result of the 1926 legislation, however, the Board’s decisions

were no longer open to collateral attack; direct appellate review of the

Board’s decisions was substituted.

176

Nevertheless, the Board did not

change its rule regarding burden of proof in fraud cases, and criticism was

soon forthcoming.

177

The practice was condemned as inconsistent with

fundamental concepts of Anglo-Saxon and American penal procedure,

178

under which the burden of proof in respect of fraud was invariably placed

upon the party asserting it.

179

Additionally, there was reference to

suspicions prevalent at the time that the Bureau occasionally alleged fraud

in cases in which no evidence of fraud existed, simply to avoid the running

of the period of limitations.

180

(1927). Cf. F.W. Lukins, 3 B.T.A. 204, 209 (1925) (the Board stated that proof of

fraud was upon the Commissioner in cases in which he had not asserted the

penalty as part of the deficiency).

173

An examination of the 1925 House Hearings, supra note 113, indicates that

no specific suggestions were proposed concerning proof of fraud. Additionally,

case law indicates that although the Board applied the presumption of correctness

to an assertion of a fraud penalty in the notice of deficiency, and required the

taxpayer to carry the burden of proof, the quantum of proof necessary to overturn

any presumption of fraudulent intent was minimal. See Humphreys v.

Commissioner, 9 B.T.A. 656, 658 (1927) (uncontradicted testimony of the taxpayer

was sufficient to overcome the presumption of fraud).

174

Blair v. Commissioner, 24 F.2d 390, 392 (1928).

175

Bolon B. Turner, The Tax Court of the United States, Its Origin and Function, in

HE HISTORY AND PHILOSOPHY OF TAXATION 31, 36 (1955).

176

Compare Revenue Act of 1924, ch. 234, § 900(g), 43 Stat. 337 with Revenue

Act of 1926, ch. 27, §§ 1001, l003(a), 44 Stat. 109, 110; see also C

HARLES D. HAMEL,

PRACTICE AND EVIDENCE BEFORE THE U.S. BOARD OF TAX APPEALS 168 (1938)

[hereinafter cited as C. Hamel].

177

Letter from ABA Special Committee on Federal Taxation to William Green,

Chairman, Joint Tax Committee, June 15, 1927, filed at the U.S. Tax Court in

“Burden of Proof: Memoranda & Correspondence;” see also Appeal Procedures

Changed, 5 N

AT’L INC. TAX MAG. 292 (1927); Hopkins, supra note 114, at 470.

178

Hearings on Revenue Revision, 1928, Before the Senate Finance Comm., 70th Cong.,

1st Sess. 25 (1928) [hereinafter cited as 1928 Senate Hearings]; Hearings on Revenue

Revision, 1928, Before the House Comm. on Ways and Means, 70th Cong., 1st Sess. 527

(1928).

179

Id. at 26.

180

Id. at 25.

692 The United States Tax Court – An Historical Analysis

The analogy of the civil fraud provision to a criminal penalty was not

lost on Congress,

181

and the statutory delegation of power given the Board

to prescribe its rules of practice and procedure was modified by an express

provision in the Revenue Act of 1928 that placed the burden of proving

fraud on the Commissioner.

182

Even in the absence of the 1928

amendment, it is likely that the Board’s original burden of proof rule as to

fraud could not have persisted for long. In Budd v. Commissioner,

183

decided

prior to the 1928 change, the Board decided the fraud issue adversely to the

taxpayer by holding that he had not satisfied his burden of proof. On

appeal, the Third Circuit reversed the Board,

184

holding that it was bound to

follow the general principle of evidence that the party who alleges fraud

must prove it.

185

The court reasoned that under the 1924 Revenue Act,

which provided that the Board could promulgate its own rules of evidence

and procedure, the Board had the power to alter such a basic principle.

186

However, the 1926 Revenue Act took away the power of the Board to

formulate its own rules of evidence, and instead required the Board to look

to the rules of evidence applicable in the equity courts in the District of

Columbia.

187

Because the burden of proof rule was a rule of evidence,

188

and since equity courts in the District followed the traditional rule, the

Board had no power to place the burden of disproving fraud on the

taxpayer.

189

In the view of the Third Circuit, the 1928 amendment was

merely declaratory of existing law.

190

With the change in the burden of proof rule, situations arose in which

the necessity of the Commissioner proving fraud was questioned.

191

First,

181

S. REP. NO. 70-960, at 38 (1928).

182

Revenue Act of 1928, ch. 851, § 601, 45 Stat. 872, amending Revenue Act of

1926, ch. 27, § 907(a), 44 Stat. 107. For a discussion of the new statutory

amendment and a proposed change in the Board’s rules of practice to reflect the

amendment, see Memorandum from Chairman Littleton to members of the Board,

June 12, 1928, filed at the U.S. Tax Court in “Burden of Proof: Memoranda &

Correspondence.” In 1931, the Board revised its rule to reflect the change. Compare

B.T.A.

RULE 30 (Feb. 1, 1931 ed.) with B.T.A. RULE 30 (May 1, 1928 ed.).

183

12 B.T.A. 490 (1928).

184

43 F.2d 509 (3d Cir. 1930).

185

Id. at 512.

186

See id.

187

Id.

188

See Central Vt. Ry. Co. v. White, 238 U.S. 507 (1915).

189

43 F.2d at 512.

190

Id. at 513.

191

See Memorandum from J. Murdock, Chairman, Rules Committee, to Rules

Committee, Feb. 23, 1937, filed at the U.S. Tax Court in “Responsive Pleadings:

Memoranda & Correspondence;” Memorandum entitled “Suggestions Relating to

Board Procedures and Functioning,” c. 1937, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda & Correspondence;” Memorandum from R.

Trial Procedure 693

if the taxpayer, ignoring Board pleading rules, failed to reply to an allegation

of fraud asserted in the Commissioner’s answer, would that failure to reply

be deemed an admission of fraud and thereby relieve the Commissioner of

his burden?

192

Second, if the taxpayer failed to appear at trial, should the

decision of the Board dismissing the proceeding result in a determination as

to the fraud penalty without the Commissioner offering proof on the

issue?

193

The initial treatment of these questions was varied

194

and provided

strong impetus for reconsideration of prevalent Board practices. As a

result, the reply rule was modified substantially to prevent harsh results

from a failure to respond.

195

Additionally, the Board rules committee

suggested that the general practice of including the fraud penalty in the

decision of the Board upon the taxpayer’s default be expressly authorized

by statutory amendment.

196

Although no such amendment has ever been

enacted, subsequent decisions by the Board/Tax Court have uniformly

included the fraud penalty without the Commissioner producing proof

upon default by the taxpayer.

197

Miller to J. Murdock, Chairman, Rules Committee, May 11, 1937, filed at the U.S.

Tax Court in “Responsive Pleadings: Memoranda & Correspondence;” Letter from

R. Miller to J. Murdock, Chairman, Rules Committee, Apr. 26, 1937, filed at the

U.S. Tax Court in “Responsive Pleadings: Memoranda & Correspondence.”

192

Under the Board’s rules of practice, a reply to a statement of facts contained

in the answer supporting issues in respect of which the burden of proof was placed

on the Commissioner was required. B.T.A.

RULE 15 (Feb. 1, 1931 ed.). Every

material allegation set out in the answer and not denied in the reply, where a reply

was required, would be deemed admitted. B.T.A.

RULE 9 (Feb. 1, 1931 ed.). For

an application of these rules, see Statler v. Commissioner, 27 B.T.A. 342, 345 (1932).

193

Memorandum from R. Miller to J. Murdock, Chairman, Rules Committee,

Apr. 28, 1937, filed at the U.S. Tax Court in “Responsive Pleadings: Memoranda &

Correspondence.”

194

See Kerbaugh v. Commissioner, 29 B.T.A. 1014, 1017 (1934), aff’d, 74 F.2d

749 (lst Cir. 1935); Statler v. Commissioner, 27 B.T.A. 342, 345 (1932).

195

Compare B.T.A. RULE 18 (Jan. 1, 1938 ed.) with B.T.A. RULE 19 (Feb. 1, 1931

ed.).

196

Report of Board Members of Joint Committee, c. 1937, at 19, filed at the

U.S. Tax Court in “Responsive Pleadings: Memoranda & Correspondence;” Letter

from S. Surrey to L. Morris, Aug. 2, 1937, at 4, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda & Correspondence.”

197

Doncaster v. Commissioner, 77 T.C. 334, 337 (1981); Gilday v.

Commissioner, 62 T.C. 260, 262 (1974); Morris v. Commissioner, 30 T.C. 928, 929

(1958). Cf. Black v. Commissioner, 19 T.C. 474 (1953) (holding that the

Commissioner’s burden of proof was sustained by an order of the court that the

undenied affirmative allegations contained in his amended pleading be deemed

admitted by the taxpayer). Pursuant to the Tax Court rules, “when any party has

failed to plead or otherwise proceed as provided by these Rules . . . such party may

be held in default . . . on motion of another party. . . . Thereafter, the Court may

694 The United States Tax Court – An Historical Analysis

Apart from situations in which the taxpayer defaults and the

Commissioner is spared the necessity of producing evidence, the burden of

proof in respect of fraud requires that fraud be proved by more than a mere

preponderance of the evidence.

198

The evidence must be of a clear and

convincing nature

199

and must be more than suspicions or mere probability

of dereliction.

200

In certain circumstances, however, the burden of proof

may be met by a consistent pattern of income understatement over a

number of years.

201

Additionally, conviction on criminal tax fraud

charges,

202

either by a plea of guilty or after trial and verdict, conclusively

establishes fraud for civil penalty purposes, and the taxpayer is collaterally

estopped from introducing evidence on the issue for the same tax years.

203

Finally, conviction for willful failure to file a timely return,

204

without more,

does not of itself establish the elements of fraud necessary to impose the

civil penalty.

205

3. New Matter

Perhaps the most controversial exception to the rule that the taxpayer

bears the burden of proof involves “new matter” pleaded in the

Commissioner’s answer. Tax Court rules specify that the burden shall be

on the Commissioner “in respect of any new matter, increases in deficiency,

and affirmative defenses, pleaded in his answer.”

206

Under the prior burden

of proof rule, all of these categories were collectively described as “new

enter a decision against the defaulting party upon such terms and conditions as the

Court may deem proper . . . .” T

AX CT. R. 123(a) (July 6, 2012 ed.).

198

E.g., Miller v. Commissioner, 51 T.C. 915, 918 (1969); Gano v.

Commissioner, 19 B.T.A. 518, 532–34 (1930).

199

TAX CT. R. 142(b) (July 6, 2012 ed.).

200

Shultze v. Commissioner, 18 B.T.A. 444, 447 (1929).

201

Compare Hounsell v. Commissioner, 9 T.C.M. (CCH) 611 (1950) with Arlette

Coat Co. v. Commissioner, 14 T.C. 751 (1950); see also Paul P. Lipton, Recent Civil

Fraud Cases—Problems of Burden of Proof, 31 T

AXES 110 (1953).

202

I.R.C. § 7201.

203

Gammill v. Commissioner, 62 T.C. 607 (1974); Amos v. Commissioner, 43

T.C. 50 (1964), aff’d, 360 F.2d 358 (4th Cir. 1965); see also Harry Graham Balter, Tax

Court Switch: New Case Holds Criminal Conviction Proves “Fraud” in Civil Action, 22 J.

AX’N 104 (1965). A conviction based on a nolo plea, however, does not

conclusively establish fraud in a subsequent Tax Court proceeding. See Mickler v.

Fahs, 243 F.2d 515 (5th Cir. 1965); Bell v. Commissioner, 320 F.2d 953 (8th Cir.

1963); see also John M. Bray, Nolo Pleas in Tax Cases, 26 T

AX LAW. 435, 437 (1973).

204

I.R.C. § 7203.

205

Anderson v. Commissioner, T.C. Memo. 1973-155, 32 T.C.M. (CCH) 762;

Arconti v. Commissioner, T.C. Memo. 1970-215, 29 T.C.M. (CCH) 945.

206

TAX CT. R. 142(a) (July 6, 2012 ed.).

Trial Procedure 695

matter.”

207

Since the early years of the Board, this term has proven difficult

to define and has been the subject of varying judicial interpretations.

208

Its

trifurcation in the current rules has eased the problem to some degree, but

by its nature, “new matter” is an elusive concept and will probably continue

to be so.

Under the original rules of the Board, the burden of proof was on the

taxpayer without exception.

209

Thus, strictly construing the language of the

rule, the Commissioner could assert an increased deficiency from that

originally claimed, and the burden of disproving the increased amount

would remain on the taxpayer. Nonetheless, statements by Board

members, both in decisions and in hearings before the Ways and Means

Committee, indicated that the Board was shifting the burden of proof to

the Commissioner if he requested such affirmative relief in his answer.

210

In 1926, the Board formally amended its rule to require that if “any new

matter of fact” was pleaded in the Commissioner’s answer,

211

the burden of

proof in respect of the “new matter” would be on the Commissioner. A

further change in the rule occurred in 1931, when the Board removed the

words “of fact” as modifying “new matter.”

212

Although the rule was to

remain unchanged until the 1974 revision,

213

dissatisfaction with the

wording of the rule surfaced as early as 1937 in deliberations of the Board’s

rules committee. At that time, various proposals were advanced to define

“new matter” more precisely. One suggestion considered substitution of

the term “additional deficiency” for “new matter.”

214

Another suggestion

207

Compare TAX CT. R. 142(a) (Jan. 1, 1974 ed.) with TAX CT. R. 32 (Jan. 25,

1971 ed.).

208

See generally Balter, supra note 83; Forman, supra note 120; Whitfield &

McCallum, supra note 120.

209

B.T.A. RULE 20 (July 1, 1924 ed.).

210

General Lead Batteries Co., 2 B.T.A. 392, 395 (1925); 1925 House Hearings,

supra note 113, at 907.

211

Compare B.T.A. RULE 20 (July 1, 1924 ed.) with B.T.A. RULE 30 (Apr. 1,

1926 ed.).

212

Compare B.T.A. RULE 30 (Apr. 1, 1926 ed.) with B.T.A. RULE 30 (Feb. 1.

1931 ed.).

213

Compare B.T.A. RULE 30 (Feb. 1, 1931 ed.) with TAX CT. R. 32 (Jan. 25, 1971

ed.) and T

AX CT. R. 142(a) (Jan. 1, 1974 ed.).

214

Memorandum from S. Surrey, Joint Committee member, to L. Morris,

Chairman, Joint Committee, Aug. 2, 1937, filed at the U.S. Tax Court in

“Responsive Pleadings: Memoranda & Correspondence;” Memorandum from R.

Ryan, Joint Committee member, to L. Morris, Chairman, Joint Committee, May 14,

1937, filed at the U.S. Tax Court in “Responsive Pleadings: Memoranda &

Correspondence.”

696 The United States Tax Court – An Historical Analysis

would have substituted “affirmative defenses” for “new matter.”

215

These

proposals, however, were rejected, primarily in the belief that they were too

limiting and that other circumstances might also constitute “new matter.”

216

Thus, the rules committee opted for the flexibility offered by continued

judicial construction of the term.

As subsequently interpreted, “new matter” came to be comprised of

four distinct categories: increased deficiencies, new adjustments, affirmative

defenses, and new theories. The first and third of these categories were

culled from “new matter” in the 1974 revision of the Tax Court rules and

are now stated specifically in the burden of proof rule as situations in which

the burden is on the Commissioner.

217

The second and fourth categories

remain as elements of “new matter.”

The first of the traditional pre-1974 categories of “new matter” involves

the assertion in the Commissioner’s answer or amended answer of an

increased deficiency.

218

Thus, if the Commissioner originally determines a

deficiency by disallowing one-half of a taxpayer’s moving expense and

subsequently asserts in the answer or amended answer that the entire

moving expense should be disallowed, the burden of proving the additional

deficiency rests with the Commissioner.

The second type of “new matter” arises if the Commissioner claims a

new or different adjustment from that originally made in the deficiency

notice.

219

For example, if the Commissioner disallows a moving expense

deduction in the deficiency notice and subsequently asserts in the answer or

amended answer that the moving expense is properly allowable, but a

medical deduction is not, the Commissioner bears the burden of proof with

respect to the disallowance of the medical deduction.

The Board/Tax Court has had little difficulty in its application of the

first two categories. Since the deficiency notice is accorded a presumption

of correctness, it would be theoretically inconsistent to allow the

Commissioner to subsequently increase or change the original adjustments

and still retain the benefit of the presumption as to the new or different

215

Memorandum to J. Murdock, Chairman, Rules Committee, Nov. 19, 1937,

filed at the U.S. Tax Court in “Responsive Pleadings: Memoranda &

Correspondence.”

216

Joint Committee Report, supra note 19, at 9.

217

TAX CT. R. 142(a) (July 6, 2012 ed.).

218

E.g., Estate of Cordeiro v. Commissioner, 51 T.C. 195, 203 (1968); Estate

of Schneider v. Commissioner, 29 T.C. 940, 956 (1958); Winston v. Commissioner,

15 T.C.M. (CCH) 477 (1956); Kimbell-Diamond Milling Co. v. Commissioner, 10

T.C. 7 (1948); Hull v. Commissioner, 18 B.T.A. 265, 266 (1929). Accord, Brook v.

Commissioner, 28 T.C.M. (CCH) 346 (1969).

219

E.g., Tauber v. Commissioner, 24 T.C. 179 (1955); Cedar Valley Distillery,

Inc. v. Commissioner, 16 T.C. 870 (1951); General Lead Batteries, 2 B.T.A. 392

(1925).

Trial Procedure 697

adjustments.

220

Additionally, the burden of proof traditionally has been

placed on the party who requests affirmative relief in his pleadings.

221

The third category comprises affirmative defenses asserted in the answer

or amended answer. Such affirmative defenses include res judicata,

collateral estoppel, estoppel, waiver, duress, fraud, and the statute of

limitations.

222

Although the original burden of proof rule was silent as to

affirmative defenses, it was clear that such defenses asserted in the answer

were considered “new matter” and the burden of proof was accordingly

shifted.

223

The final category of “new matter” consists of those situations in which

the Commissioner asserts in the answer or at trial a new or different reason

for the same adjustment made in the deficiency notice.

224

Unlike the

increased deficiency, different adjustment, or affirmative defense, the

development of this category has been a more recent occurrence and

denotes an expansive interpretation of “new matter” from the previous,

more limited approach.

225

Early Board/Tax Court decisions indicated that

the sole matter for decision was the correctness of the adjustment made to

the taxpayer’s income in the deficiency notice.

226

The issue was not

conceived as being the sufficiency of the reasoning assigned in the

deficiency notice for such adjustment.

227

In this connection, it was held that

220

Cascade Milling & Elevator Co. v. Commissioner, 25 B.T.A. 946, 948

(1932); see also Papineau v. Commissioner, 28 T.C. 54, 57 (1957).

221

CHARLES TILFORD MCCORMICK, HANDBOOK OF THE LAW OF EVIDENCE

§ 337, at 785 (2d ed. 1972).

222

TAX CT. R. 39 and 142(a) (July 6, 2012 ed.).

223

Hull v. Commissioner, 87 F.2d 260, 261–62 (4th Cir. 1937); 1925 House

Hearings, supra note 113, at 907; Memorandum entitled “Suggested Changes in

Rules of Practice of the Board of Tax Appeals,” c. 1937, at 7, filed at the U.S. Tax

Court in “Responsive Pleadings: Memoranda & Correspondence;” Jackson

Memorandum, supra note 49, at 22.

224

F.T.D. Florists, Inc. v. Commissioner, 67 T.C. 333 (1976); Jayne v.

Commissioner, 61 T.C. 744, 748 (1974); Horvath v. Commissioner, 59 T.C. 551

(1973); Estate of Falese v. Commissioner, 58 T.C. 895 (1972); McSpadden v.

Commissioner, 50 T.C. 478, 492–93 (1968); Estate of Scharf v. Commissioner, 38

T.C. 15 (1962), aff’d, 316 F.2d 625 (7th Cir. 1963); see also Estate of Emerson v.

Commissioner, 67 T.C. 612 (1977).

225

Compare C. Hamel, supra note 176, at 141 n.51 with Rules Comm. Note, TAX

CT. R. 142(a) (Jan. 1, 1974 ed.).

226

Estate of Finder v. Commissioner, 37 T.C. 411, 423 (1961); Fleischmann v.

Commissioner, 40 B.T.A. 672 (1939); Chipley v. Commissioner, 25 B.T.A. 1103,

1106 (1932); Gossett v. Commissioner, 22 B.T.A. 1279, 1284 (1931), aff’d, 59 F.2d

365 (4th Cir. 1932); Brown v. Commissioner, 18 B.T.A. 859 (1930), rev’d in part, 54

F.2d 563 (1st Cir. 1931).

227

Bair v. Commissioner, 16 T.C. 90 (1951), aff’d, 199 F.2d 589 (2d Cir. 1952);

Carnrick v. Commissioner, 21 B.T.A. 12 (1930).

698 The United States Tax Court – An Historical Analysis

the Commissioner need not assign any reason whatsoever for a specific

adjustment.

228

So long as the Commissioner did not allege a new reason for

the deficiency that would result in an increased deficiency or a new

adjustment, he was free to assign any reason without concern that the

burden of proof would shift.

229

For example, if the Commissioner had

determined a deficiency by disallowance of a bad debt deduction and gave

as his reason that the debt had been paid, he could, at trial, or in his answer,

allege the additional reason that no debt had ever existed and the burden of

proof as to both theories would remain on the taxpayer. Since the two

reasons were directed at the same adjustment, the Board/Tax Court

believed that this additional and different reason was not “new matter,”

even though different factual issues might be put in dispute.

230

Nonetheless, subsequent commentary and judicial decisions suggest that

such an approach does not withstand careful analysis.

231

“Burden of proof

has meaning only in relation to disputed issues of fact.”

232

Accordingly,

modern Tax Court decisions have broken from the early line of cases and

now indicate that in cases in which the Commissioner raises a new theory

to sustain a deficiency, and such new theory necessitates the presentation of

different evidence, the Commissioner shall bear the burden of proving any

factual matter on which the new theory is based.

233

Thus, if the

Commissioner asserts in the deficiency notice that a bad debt deduction is

disallowed on the ground that the debt was paid, and subsequently raises

the issue that no debt ever existed, the Commissioner would have the

burden of proving the new allegation.

On the other hand, if the new position taken by the Commissioner

merely clarifies or develops the original determination in a manner that is

not inconsistent with the original position, the new theory does not rise to

the level of a new matter that otherwise would operate to shift the burden

228

Standard Oil Co. v. Commissioner, 43 B.T.A. 973, 998 (1941), aff’d, 129 F.2d

363 (7th Cir. 1942).

229

Estate of Scharf v. Commissioner, 38 T.C. 15 (1962), aff’d, 316 F.2d 625

(7th Cir. 1963); Bair v. Commissioner, 16 T.C. 90 (1951), aff’d, 199 F.2d 589 (2d

Cir. 1952); Fleischmann v. Commissioner, 40 B.T.A. 672, 682 (1939).

230

Fleischmann v. Commissioner, 40 B.T.A. 672, 682 (1939).

231

Whitfield & McCallum, supra note 120, at 1186; see also Sanderling, Inc. v.

Commissioner, 66 T.C. 743 (1976); Estate of Falese v. Commissioner, 58 T.C. 895

(1972).

232

Whitfield & McCallum, supra note 120, at 1186.

233

See Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500 (1989); Achiro v.

Commissioner, 77 T.C. 881 (1981); Estate of Emerson v. Commissioner, 67 T.C.

612 (1977); F.T.D. Florists, Inc. v. Commissioner, 67 T.C. 333 (1976); Sanderling,

Inc. v. Commissioner, 66 T.C. 743 (1976); Horvath v. Commissioner, 59 T.C. 551

(1973); Estate of Gorby v. Commissioner, 53 T.C. 80 (1969).

Trial Procedure 699

of proof.

234

The bounds of when a new theory raised by the

Commissioner will not be considered a new matter for burden-of-proof

purposes were tested in Sorin v. Commissioner.

235

In Sorin, the Commissioner

had determined a deficiency without providing any specific Code provision

as a reason for his determination. At the hearing, the Commissioner raised

a specific Code section as a more specific ground for his position.

236

refusing to shift the burden of proof to the Commissioner, the court

concluded that “when the determination is made in indefinite and general

terms, and [the reason advanced] is not inconsistent with some position

necessarily implicit in the determination itself . . .,” no “new matter” is

raised.

237

Such an approach has been criticized as encouraging overly broad

and uninformative deficiency notices.

238

4. Reassignment of Burden of Proof Pursuant to Section 7491

a. General Rule

As part of the Internal Revenue Service Restructuring and Reform Act

of 1998,

239

Congress modified the prevailing burden-of-proof norms in tax

cases through the enactment of § 7491. On its face, the most significant

change introduced by the statute is the prospect of the taxpayer shifting the

burden of proof to the Commissioner under § 7491(a)(1). Congress was

concerned that individuals and small businesses stood at a disadvantage

when forced to litigate against the Service, and that the general presumption

of correctness in favor of the Commissioner contributed to that

disadvantage.

240

Accordingly, Congress set out to craft an exception that

would place the burden of proving factual matters on the Commissioner in

cases where the individual or small business taxpayer cooperated with the

Service and satisfied the relevant substantiation and recordkeeping

requirements. The shifting of the burden of proof was believed to

effectuate a better balance in the parties’ relative litigating postures without

encouraging tax avoidance.

241

Consistent with the motivation to level the

234

Estate of Emerson v. Commissioner, 67 T.C. 612 (1977); Estate of Jayne v.

Commissioner, 61 T.C. 744 (1974).

235

29 T.C. 959 (1958), aff’d per curiam, 271 F.2d 741 (2d Cir. 1961).

236

Id. at 968.

237

Id. at 969.

238

For an analysis of the deficiency notice, see Part VI.A.2.b.

239

Pub. L. No. 105-206, § 3001(a), 112 Stat. 685, 727. Section 7491 is

applicable to court proceedings arising in connection with examinations

commenced after the July 22, 1998 effective date of the legislation. Id. § 3001(c),

112 Stat. at 727.

240

See S. REP. NO. 105-174, at 44 (1998); H.R. REP. NO. 105-599 at 238 (1998).

241

S. REP. NO. 105-174, at 44 (1998).

700 The United States Tax Court – An Historical Analysis

litigating playing field, a shift in the burden of proof is available only to

those non-individual taxpayers (specifically, corporations, partnerships, and

trusts) whose net worth does not exceed $7 million.

242

Section 7491(a)(1) imposes several conditions on the taxpayer’s ability to

shift the burden of proof, all of which the taxpayer bears the burden of

establishing.

243

Most significantly, the taxpayer must introduce “credible

evidence” with respect to a factual matter relevant to ascertaining the

taxpayer’s tax liability.

244

As explained in the report of the Senate Finance

Committee, credible evidence for this purpose “is the quality of evidence

which, after critical analysis, the court would find sufficient upon which to

base a decision on the issue if no contrary evidence were submitted

(without regard to the judicial presumption of correctness).”

245

Hence, the

statute requires the taxpayer to satisfy the burden of production in order to

shift the ultimate burden of proof (that is, the burden of persuasion) to the

Commissioner.

246

Not all evidence offered by the taxpayer contributes to the

establishment of the credible evidence prerequisite. As the modifier

“credible” indicates, only evidence that a court determines is worthy of

belief will assist the taxpayer in satisfying the evidentiary prerequisite.

247

that regard, the Senate Finance Committee specifically noted that

“implausible factual assertions, frivolous claims, or tax protestor-type

arguments” will not contribute to the establishment of credible evidence of

the taxpayer’s factual position.

248

242

See I.R.C. § 7491(a)(2)(C) (incorporating net worth limitation of

§ 7430(c)(4)(C)(A)(ii), which in turn incorporates the definition of a party under the

first sentence of 28 U.S.C. § 2412(d)(1)(B)).

243

See Hibgee v. Commissioner, 116 T.C. 438 (2001). Additionally, the

taxpayer must raise the prospect of § 7491(a)(1) at trial to permit the Commissioner

to present evidence that the statutory conditions had not been satisfied. The

taxpayer may not raise § 7491(a)(1) for the first time in post-trial briefing. See

Estate of Deputy v. Commissioner, T.C. Memo. 2003-176, 85 T.C.M. (CCH) 1497.

244

I.R.C. § 7491(a)(1).

245

S. REP. NO. 105-174, at 45 (1998).

246

See Philip N. Jones, The Burden of Proof Under the ’98 Act—Not Much Substance

Under All That Smoke, 90 J.

TAX’N 133, 134 (Mar. 1999) (detailing distinction

between burden or production and burden of persuasion in tax setting).

Interestingly, Congress expressly employed the concept of “burden of production”

in § 7491(c), which places the burden of production on the Commissioner with

respect to penalties and additions to tax.

247

See S. REP. NO. 105-174, at 45–46 (1998). As explained by the Eighth

Circuit Court of Appeals in Blodgett v. Commissioner, 394 F.3d 1030, 1036 (8th Cir.

2005), the prospect of a court rejecting testimony as incredible is “not only

fundamental since incredible testimony, axiomatically, cannot constitute credible

evidence, but this concept is contained within the definition of credible evidence.”

248

See S. REP. NO. 105-174, at 45 (1998).

Trial Procedure 701

In addition to establishing credible evidence of the taxpayer’s factual

position, the taxpayer must satisfy a host of prerequisites enumerated in

§ 7491(a)(2) before the burden of persuasion will be shifted to the

Commissioner. First, the taxpayer must comply with all substantiation

requirements provided in the Code and the regulations issued thereunder.

249

The second prerequisite shares a similar documentation theme by requiring

the taxpayer to maintain all of the records required by the Code and

regulations.

250

As the first two prerequisites under § 7491(a)(2) appear to be

legal requirements of the tax treatment sought by the taxpayer, they

effectively amount to reminders rather than meaningful conditions to the

potential burden shift under § 7491(a). A shift in the burden of proof

concerning a factual matter relating to the tax treatment of an item is

irrelevant if the claimed tax treatment is not permitted as a matter of law.

The third prerequisite is more intriguing. The taxpayer must

“cooperate” with all reasonable requests by the Secretary for witnesses,

information, documents, meetings, and interviews.

251

As explained in the

legislative materials accompanying this provision, the notion of full

cooperation for this purpose entails providing the Secretary with

“reasonable assistance” in obtaining access and inspection of witnesses,

information, and documents that are not within the taxpayer’s control, even

if the witnesses or other items are located in a foreign country.

252

Although

not expressly stated in the statute, the legislative materials provide that a

“necessary element” of the taxpayer’s full cooperation with the Secretary is

the taxpayer’s exhaustion of his or her administrative remedies—including

the exhaustion of any appeal rights provided by the Service.

253

However,

the legislative materials clarify that a taxpayer will not be viewed as failing to

cooperate for this purpose simply by refusing to extend the statute of

limitations on assessment.

254

The “full cooperation” prerequisite therefore

injects a measure of strategy into the litigation process: Does the cost to

the taxpayer of (1) providing reasonable assistance to the Service in its fact

gathering process and (2) fully exhausting available administrative remedies

(including pursuing the case before the IRS Office of Appeals) justify the

benefit to be achieved from the shift in the burden of proof?

255

Given the

249

I.R.C. § 7491(a)(2)(A); see also H.R. REP. NO. 105-599, at 239–40 (1998)

(“[I]f a taxpayer required to substantiate an item fails to do so in the manner

required (or destroys the substantiation), this burden of proof provision is

inapplicable.”).

250

I.R.C. § 7491(a)(2)(B).

251

Id.

252

H.R. REP. NO. 105-364, at 56 (1998); S. REP. NO. 105-174, at 45 (1998).

253

H.R. REP. NO. 105-364, at 56–57 (1998); S. REP. NO. 105-174, at 45 (1998).

254

S. REP. NO. 105-174, at 45 (1998).

255

See Jones, supra note 246, at 135 (detailing the downside to the taxpayer of

seeking to comply with the § 7491(a) conditions).

702 The United States Tax Court – An Historical Analysis

limited benefit of the burden shift described below, the § 7491(a) calculus

may not justify a change in taxpayer behavior.

Despite the apparent significance of shifting the burden of proof to the

Commissioner under § 7491(a)(1), the provision appears to have had little

practical effect.

256

The report of the Senate Finance Committee describes

the potential payoff of § 7491(a)(1) as follows: “If after evidence from both

sides, the court believes that the evidence is equally balanced, the court shall

find that the Secretary has not sustained his burden of proof.”

257

Hence,

the shift in the burden of proof under § 7491(a)(1) will be meaningful only

in the rare instance of an evidentiary tie. The provision therefore appears

more symbolic than substantive.

258

The Tax Court quickly fell into a practice of not addressing the merits of

the taxpayer’s contention that § 7491(a)(1) shifted the burden of proof to

the Commissioner, noting that it was deciding the matter on the

preponderance of the evidence. As a result, the court dispensed with the

taxpayer’s invocation of § 7491(a) as irrelevant. However, the Eighth

Circuit Court of Appeals took issue with this practice in Griffin v.

Commissioner.

259

At trial, the Tax Court in Griffin determined that the taxpayers had

produced no credible evidence that certain real estate tax payments made

on behalf of their closely held corporations constituted ordinary and

necessary expenses of the taxpayers’ individual trades or businesses

(separate and apart from the trades or businesses in which the corporations

engaged). Accordingly, the court rejected the taxpayers’ invocation of the

burden shifting rule of § 7491(a).

260

Nonetheless, the court explained by

way of footnote that even if the burden of proof had been placed on the

Commissioner, “we would decide this issue in his favor based on the

256

See Janene R. Finley & Allan Karnes, An Empirical Study of the Change in the

Burden of Proof in the United States Tax Court, 6 P

ITT L. REV. 61, 81 (2008) (concluding

that “[o]verall, the change in the burden of proof in the Act did not have a

statistically significant effect on those cases decided within the Tax Court when the

taxpayer was an individual”). But see John R. Gardner & Benjamin R. Norman,

Effects of the Shift in the Disposition of Tax Cases, 38 W

AKE FOREST L. REV. 1357,

1374–75 (2003) (observing that it is “largely inconclusive” whether the taxpayer or

the Government has fared better in terms of percentage victories following the

legislation, but concluding that the shift in the burden of proof under § 7491

“likely” had a positive effect on taxpayers resulting from the reduction in the

number of cases brought by the Government).

257

S. REP. NO. 105-174, at 46 (1998).

258

See Jones, supra note 246, at 135 (“Thus, it appears that the new shift in the

burden of proof in credible evidence cases is an example of Congress claiming to

have made a significant change for the benefit of taxpayers, without having made a

significant change at all.”).

259

315 F.3d 1017 (8th Cir. 2003).

260

T.C. Memo. 2002-6, 83 T.C.M. (CCH) 1058, 1061–62.

Trial Procedure 703

preponderance of the evidence.”

261

The Circuit Court of Appeals, on the

other hand, held that the taxpayer’s testimony supplied the requisite

“credible evidence” required under § 7491(a)(1), and directed the Tax Court

to explain how the Commissioner had met his burden of proving that the

payments did not relate to an individual trade or business of the

taxpayers.

262

The appellate court chided the Tax Court in the process,

declaring, “It is not sufficient to summarily conclude that the outcome is

the same regardless of who bears the burden of proof; if that were the case,

§ 7491(a) would have no meaning.”

263

On remand, bound by the appellate

court’s determination that the taxpayers had introduced credible evidence

of deductibility, the Tax Court held for the taxpayers on the basis that the

Commissioner had not offered sufficient evidence to the contrary.

264

Following its apparent injection of a measure of fortitude into the

shifting of the burden of proof under § 7491(a)(1) in Griffin, the Eighth

Circuit Court of Appeals addressed the practical consequence of a shift in

the burden of proof—this time, however, in the context of a new matter—

in Polack v. Commissioner.

265

As in Griffin, the Tax Court had concluded that

it need not determine whether the burden of proof had been shifted to the

Commissioner because the court decided the case on a preponderance of

the evidence.

266

However, in Polack, the Eighth Circuit agreed. Without

mentioning its prior decision in Griffin, the appellate court observed that

“‘[t]he shifting of an evidentiary burden of preponderance is of practical

consequence only in the rare event of an evidentiary tie . . . .’”

267

Recognizing an “apparent conflict in precedents on the significance of

the shifting burden of proof,” the Eighth Circuit resolved the conflict in

Blodgett v. Commissioner.

268

In short, the panel in Blodgett favored the

approach of Polack. The court explained as follows:

There is a simple reason for our choice. In a situation in which

both parties have satisfied their burden of production by offering

some evidence, then the party supported by the weight of the

evidence will prevail regardless of which party bore the burden of

persuasion, proof or preponderance. Therefore, a shift in the

261

Id. at 1061 n.4.

262

315 F.3d at 1022.

263

Id.

264

Griffin v. Commissioner, T.C. Memo. 2004-64, 87 T.C.M. (CCH) 1084,

1086.

265

366 F.3d 608 (8th Cir. 2004).

266

Polack v. Commissioner, T.C. Memo. 2002-145, 83 T.C.M. (CCH) 1811,

1814 n.7.

267

Polack, 366 F.3d at 613 (quoting Cigaran v. Heston, 159 F.3d 355, 357 (8th

Cir. 1998)).

268

394 F.3d 1030, 1039 (8th Cir. 2005).

704 The United States Tax Court – An Historical Analysis

burden of preponderance has real significance only in the rare

event of an evidentiary tie. Here, the record is clear, if the tax

court did err in failing to shift the burden of proof, any error was

harmless because the weight of the evidence supported a decision

for the Commissioner.

269

The Tax Court has endorsed the approach of the Eighth Circuit Court

of Appeals in Blodgett. In Knudsen v. Commissioner,

270

the court declared that

where the preponderance of the evidence served as the standard of proof

and the preponderance of evidence favored one party, the court could

decide the case “on the weight of the evidence and not on an allocation of

the burden of proof.”

271

This approach is consistent with the explanation

in the legislative record accompanying the enactment of § 7491(a) that the

provision would operate to the benefit of the taxpayer if the evidence

presented by the parties were equally balanced.

b. Statistical Reconstruction Cases

Section 7491(b) places the burden of proof on the Commissioner with

respect to any item of income of an individual taxpayer that the

Commissioner reconstructs solely through the use of statistical evidence

pertaining to unrelated taxpayers. As an example, if an individual taxpayer’s

income is reconstructed solely by reference to the average income of

taxpayers in the area where the taxpayer resides, the Government will bear

the burden of establishing the taxpayer’s income by a preponderance of the

evidence.

272

Given the tenuous relationship between the taxpayer’s income

and the statistical averages of data pertaining to unrelated taxpayers, the

statutory placement of the burden of proof likely will render it more

difficult for the Government to rely on such statistical data alone.

273

The

probative value of the statistical data would need to outweigh any opposing

evidence offered by the taxpayer. The existence of § 7491(b) therefore will

discourage the Government from relying on such statistical evidence alone,

and instead encourage the Government to bolster such statistical evidence

with facts relating to the particular taxpayer before the court (such as a

269

Id. (internal citations omitted).

270

131 T.C. 185 (2008).

271

Id. at 189.

272

See S. REP. NO. 105-174, at 46 (1998) (supplying this example).

273

On the other hand, if the Government rests on the statistical data in

reconstructing the taxpayer’s income and the taxpayer offers no evidence in

rebuttal, then placement of the burden of proof on the Government pursuant to

§ 7491(b) will have no practical effect. So long as the statistical data carries any

probative weight, the preponderance of the evidence necessarily will tilt in the

Government’s favor absent evidence to the contrary.

Trial Procedure 705

cash-flow analysis). Doing so will preclude the application of § 7491(b)

while also strengthening the Government’s case under the preponderance-

of-evidence standard.

c. Penalties

Section 7491(c) places the “burden of production” on the

Commissioner with respect to any penalty or addition to tax imposed on an

individual taxpayer. The statute does not define “burden of production” or

otherwise attempt to distinguish it from the “burden of proof” addressed in

the provisions of subsections (a) and (b) of the statute. Nonetheless, the

legislative materials accompanying the enactment of § 7491(a) couch the

Government’s burden in terms of the burden of going forward: “[T]he

Secretary must come forward initially with evidence regarding the

appropriateness of applying a particular penalty to the taxpayer.”

274

In its

first opportunity to interpret § 7491(c), the Tax Court in Higbee v.

Commissioner

275

announced that, to meet its burden of production, the

Commissioner “must come forward with sufficient evidence indicating that

it is appropriate to impose the relevant penalty.”

276

With respect to penalties or additions to tax that are implicated by

objective standards, such as the accuracy related penalty or the additions to

tax for late filing or payment, the Government should find its burden of

production under § 7491(c) fairly easy to satisfy. For example, the Tax

Court in Higbee determined that the Commissioner had satisfied its burden

of production with respect to the § 6651(a)(1) addition to tax for late filing

by perfunctorily noting the parties’ stipulation that the return was filed one

year late.

277

However, penalties asserted under § 6662(a) based on

negligence or disregard of the rules or regulations could present a more

difficult evidentiary challenge, as the Commissioner must make a

preliminary showing that the taxpayer’s behavior fell within those

descriptive categories.

278

Litigation concerning penalties and additions to tax often reduces to the

availability of defenses to those additional levies. In that regard, § 7491(c)

does not provide taxpayers any evidentiary comfort. The legislative history

accompanying the enactment of § 7491(c) clarifies that the provision does

not affect the burden of establishing defenses to penalties and additions to

274

S. REP. NO. 105-174, at 46 (1998).

275

116 T.C. 438 (2001).

276

Id. at 446.

277

Id. at 447.

278

See, e.g., Brooks v. Commissioner, T.C. Memo. 2013-141, 105 T.C.M. (CCH)

1832 (noting that the Commissioner introduced evidence showing that petitioner

failed to make a reasonable attempt to ascertain the correctness of her reporting

positions with respect to various deductions).

706 The United States Tax Court – An Historical Analysis

tax. Rather, the burden of proof with respect to defenses remains with the

taxpayer: “[I]f the taxpayer believes that, because of reasonable cause,

substantial authority, or a similar provision, it is inappropriate to impose the

penalty, it is the taxpayer’s responsibility (and not the Secretary’s obligation)

to raise those issues.”

279

This approach is sensible, as it prevents the

Commissioner from being placed in the difficult, if not impossible, position

of establishing a negative proposition—that is, the absence of a reasonable

justification for the taxpayer’s position.

Section 7491(c) places the “burden of production” on the taxpayer, as

opposed to the “burden of proof.” The Tax Court in Higbee v. Commissioner

found the distinction in terminology deliberate. Accordingly, the court

reasoned that, once the Government carries its burden of production, the

ultimate burden of persuasion with respect to penalties and additions to tax

remains with the taxpayer.

280

D. Damages for Frivolous or Groundless Proceedings

1. Pre-TEFRA Damages

A persistent problem for the Tax Court has been the management of

the large number of petitions filed by taxpayers challenging Service

determinations. Although most Tax Court proceedings are based on bona

fide disputes, many taxpayers have brought appeals as a means of delaying

the assessment and collection of taxes. In response to an increasing

number of groundless appeals,

281

the Revenue Act of 1926 authorized the

court to impose damages for frivolous petitions.

282

The 1926 provision

(now codified, with amendments described below, as § 6673 of the Internal

Revenue Code) provided that:

279

Higbee, 116 T.C. at 446 (citing H.R. REP. NO. 105-599, at 241 (1998)).

280

Id. at 446–47 (“Congress’ use of the phrase ‘burden of production’ and not

the more general phrase ‘burden of proof’ as used in section 7491(a) indicates to us

that Congress did not desire that the burden of proof be placed on the

Commissioner with regard to penalties.”). But see Allison v. United States, 80 Fed.

Cl. 568, 582 (2008) (reasoning that the Government bears both the burden of

production and burden of persuasion with respect to penalties as a result of the

combination of § 7491(a) and (c)).

281

Revenue Revision, 1925, Hearings Before the House Comm. on Ways and Means,

68th Cong., 1st Sess. (1925), in 7 U.S. R

EVENUE ACTS, 1909–1950 THE LAWS,

LEGISLATIVE HISTORIES & ADMIN. DOCUMENTS 892–93, 906, 912 (B. Reams, Jr.

ed. 1979).

282

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 9, 105, 109 (adding new

section 911 to amend Revenue Act of 1924, ch. 234, 43 Stat. 253).

Trial Procedure 707

Whenever it appears to the Board that proceedings before it have

been instituted by the taxpayer merely for delay, damages in an

amount not in excess of $500 shall be awarded to the United States

by the Board in its decision. Damages so awarded shall be assessed

at the same time as the deficiency and shall be paid upon notice and

demand from the collector, and shall be collected as a part of the

tax.

283

Despite this authority, which continued unchanged until 1982,

284

the

Tax Court traditionally had been hesitant to impose damages against

taxpayers with groundless claims,

285

presumably because of the concern that

it would inhibit those with legitimate disputes with the Service from

petitioning the court. Yet, faced with an increasing number of cases

advancing specious arguments that crowded the court’s already congested

docket,

286

it seemed inevitable that the court’s tolerance of groundless

claims would wear thin.

287

In 1977, the court expressed its increasing impatience with the volume

of tax protest cases in Hatfield v. Commissioner,

288

a case involving a petitioner

who had written “Object Self Incrimination” in answer to wages and

income questions on her income tax return:

In recent times, this Court has been faced with numerous cases,

such as this one, which have been commenced without any legal

justification but solely for the purpose of protesting the Federal tax

laws. This Court has before it a large number of cases which deserve

careful consideration as speedily as possible, and cases of this sort

needlessly disrupt our consideration of those genuine controversies.

Moreover, by filing cases of this type, the protesters add to the

caseload of the Court, which has reached a record size, and such

cases increase the expenses of conducting this Court and the

283

Id.

284

See infra notes 312–339 and accompanying text for a description of the

TEFRA amendments to § 6673.

285

See, e.g., Bateman v. Commissioner, 34 B.T.A. 351, 370–71 (1936); W.E.

Beckmann Bakers’ & Confectioners’ Supply Co. v. Commissioner, 13 B.T.A. 860,

863–64 (1928). The Board of Tax Appeals did not exercise its authority to impose

damages until 1933. See Coombs v. Commissioner, 28 B.T.A. 1216, 1216–17

(1933).

286

See H.R. REP. NO. 98-861, at 985 (1984); Theodore Tannenwald, Jr.,

Reflections on the Tax Court, 36 T

AX LAW. 853, 854, 856 (1983).

287

Murray H. Falk, Damages Against Taxpayers in the Tax Court Under TEFRA,

61 T

AXES 92, 93 (1983).

288

68 T.C. 895 (1977).

708 The United States Tax Court – An Historical Analysis

operations of the IRS, which expenses must eventually be borne by

all of us.

Many citizens may dislike paying their fair share of taxes;

everyone feels that he or she needs the money more than the

Government. On the other hand, as Justice Oliver Wendell Holmes

so eloquently stated: “Taxes are what we pay for civilized society.”

The greatness of our nation is in no small part due to the willingness

of our citizens to honestly and fairly participate in our tax collection

system which depends upon self-assessment. Any citizen may resort

to the courts whenever he or she in good faith and with a colorable

claim desires to challenge the Commissioner’s determination; but

that does not mean that a citizen may resort to the courts merely to

vent his or her anger and attempt symbolically to throw a wrench at

the system. Access to the courts depends upon a real and actual

wrong–not an imagined wrong–which is susceptible of judicial

resolution. General grievances against the policies of the

Government, or against the tax system as a whole, are not the types

of controversies to be resolved in the courts; Congress is the

appropriate body to which such matters should be referred.

289

Although the court did not impose damages against the petitioner in

Hatfield, it did warn that it would give “serious consideration” to imposing

damages under § 6673 in future cases involving frivolous claims.

290

Two years later, in Wilkinson v. Commissioner,

291

it became clear that the

court’s reservoir of patience with frivolous claims had run dry. The

taxpayer refused to substantiate various deductions claimed on his income

tax return at the audit level and at the subsequent Tax Court trial.

292

The

taxpayer also failed to comply with a district court order requiring

compliance with an administrative summons; the district court ordered the

petitioner to produce records to substantiate his deductions, or to assert

some “‘legitimate constitutional privilege or right.’”

293

The taxpayer argued

that producing his books and records would be self-incriminatory and

would violate his Fifth Amendment rights.

294

The court stated that this

289

Id. at 899 (citation omitted).

290

Id. at 900. The Tax Court subsequently repeated its warning in two

memorandum opinions. See Clippinger v. Commissioner, T.C. Memo. 1978-107,

37 T.C.M. (CCH) 484, 486; Crowder v. Commissioner, T.C. Memo. 1978-273, 37

T.C.M. (CCH) 1173, 1173-3.

291

71 T.C. 633 (1979).

292

Id. at 634, 636.

293

Id. at 634 (apparently quoting district court order to enforce administrative

summons) (emphasis added by Tax Court).

294

71 T.C. at 637–39. Specifically, petitioner argued that: (1) requiring him to

produce his books would result in a deprivation of his right to a jury trial and an

Trial Procedure 709

argument was “completely without legal merit,” citing earlier decisions in

which it had rejected the argument.

295

Significantly, the taxpayer was aware

that his arguments were frivolous because the Service had sent him copies

of Tax Court decisions involving similar constitutional attacks and he had

been repeatedly informed at various stages of the audit and Tax Court

proceedings that his claim was without merit.

296

The taxpayer nonetheless

refused to abandon his claim, and the court imposed damages of $500, the

maximum penalty then authorized by § 6673, holding that he had

commenced the action merely to delay paying his taxes.

297

Subsequently, the Tax Court made it clear that a personal warning was

not a predicate to the imposition of § 6673 damages when it imposed

damages sua sponte in Sydnes v. Commissioner.

298

Apparently, the court

believed that its warning in earlier cases served to inform the petitioner and

others of the possibility of the imposition of damages. Furthermore, the

taxpayer in Sydnes had previously litigated the same issue,

299

twice in the Tax

Court and once on appeal to the United States Court of Appeals for the

Eighth Circuit.

300

The Tax Court thus was satisfied that the taxpayer “had

no reasonable expectation of receiving a favorable decision” at the time he

filed the petition.

301

unconstitutional shifting of the burden of proof; (2) the determination of a

deficiency, made without access to his books, was arbitrary; (3) there had been an

infringement of his right to petition for redress of grievances; (4) the tax was an

unlawful taking of property; and (5) the Service was engaged in extortion. Id. at

638–39.

295

Id. at 638.

296

Id. at 642–43.

297

Id. at 643.

298

74 T.C. 864, 872 (1980), aff'd per curiam, 647 F.2d 813 (8th Cir. 1981).

299

The only issue involved in Sydnes was whether mortgage payments made by

the taxpayer on “property awarded to his former wife under a divorce decree were

support payments or part of a property settlement.” Id. at 865.

300

See Sydnes v. Commissioner, No. 1889-77 (T.C. Nov. 7, 1979); Sydnes v.

Commissioner, 68 T.C. 170 (1977), aff’d in part and rev’d and rem’d in part, 577 F.2d 60

(8th Cir. 1978).

301

Sydnes, 74 T.C. at 872. In awarding maximum damages against the taxpayer,

the court explained that it would not hesitate to award damages sua sponte in

appropriate cases:

While in the past we have been reluctant to impose damages in cases

involving persons other than those who were merely protesting the Federal

tax laws, we think the imposition of damages in the circumstances here is

fully warranted. Moreover, since the statute does not restrict us to those

cases in which a party has requested us to impose damages, we think we

should do so, on our own motion, where the facts and circumstances so

dictate.

710 The United States Tax Court – An Historical Analysis

Despite its increased readiness to impose § 6673 damages, the Tax

Court was reluctant to extend the damages penalty to cases in which a real

possibility existed that the petitioner had a bona fide purpose in maintaining

the Tax Court proceeding. An illustration of this reluctance occurred in

1979, when the court considered whether a proceeding instituted by Ms.

Hatfield, “the same taxpayer whose earlier case had ushered in this new

era,”

302

was instituted merely for delay.

303

The Service’s primary argument

for imposition of damages was that taxpayer’s involvement in earlier

proceedings in which the Tax Court called attention to § 6673 was

convincing evidence that the present proceedings were instituted merely for

delay.

304

The court found that the petition contained “no real indication of

the grounds on which petitioner contests the deficiencies determined.”

305

The taxpayer’s motion to strike the Service’s answer did, however, assert

that “[w]hat Petitioner has or has not done in this ‘court’ in the past is of

absolutely no consequences [sic] as concerns this Case; . . . this Case should

stand or fall on its own merits.”

306

In these statements, the court found an

“indicat[ion] that petitioner may have intended to contest respondent’s

determination . . . on grounds other than those raised in her 1974 case.”

307

Because the Service’s only argument for imposing § 6673 damages was

petitioner’s prior involvement in a case that involved the issue of § 6673

damages, and because the record contained no details regarding the

taxpayer’s present claim (the taxpayer did not personally appear at court to

tell the court the nature of her objection to the notice of deficiency), the

Id.; see Greenberg v. Commissioner, 73 T.C. 806 (1980) (taxpayer contested the

disallowance of deductions taken by him to protest the use of his taxes “to support

war” after having previously filed two Tax Court petitions based on same grounds

and each time being informed of their lack of merit).

302

Falk, supra note 287, at 94.

303

Hatfield v. Commissioner, T.C. Memo. 1979-181, 38 T.C.M. (CCH) 756; see

also Ritchie v. Commissioner, 72 T.C. 126 (1979). The taxpayer in Ritchie offered

frivolous arguments; nonetheless, damages were denied because the taxpayer,

having not appeared at trial, was not informed that his constitutional objections

were without basis. Id. at 131. Contrasting Wilkinson v. Commissioner, 71 T.C. 633

(1979), the court discussed the significance of the extent to which both the Service

and the court had gone to inform the taxpayer that these claims were without

merit. Although the Service’s memorandum of authorities attached to the Service’s

motion for damages against Ritchie cited Hatfield, the court did not deem this

sufficient to provide the petitioner with subjective knowledge of the baselessness of

his claim. Ritchie, 72 T.C. at 130–31.

304

Hatfield, 38 T.C.M. (CCH) at 757.

305

Id. at 758.

306

Id.

307

Id.

Trial Procedure 711

court concluded that there was not sufficient evidence to warrant the

imposition of § 6673 damages.

308

Prior to the amendment of § 6673 of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA),

309

the statutory requirement that

proceedings be instituted “merely for delay” was interpreted by the Tax

Court to preclude the imposition of damages unless the petitioner

understood that no genuine grounds existed for resisting the Service’s

determination.

310

Proof of such understanding could be found in prior

unsuccessful litigation of the same issue or in the taxpayer's actual

awareness of Tax Court decisions holding the taxpayer’s position

groundless as a matter of law. In cases in which the taxpayer was unaware

of precedent rejecting the position asserted, damages were not imposed,

regardless of the total inadequacy of the taxpayer’s assertions.

311

2. Damages Expanded by TEFRA

In TEFRA, Congress both expanded the circumstances in which the

Tax Court could impose damages against taxpayers and raised the

maximum penalty to $5,000.

312

The purpose of these amendments was to

308

Id. Any doubts under current law regarding whether the Tax Court will

impose damages against taxpayers who fail to appear at trial seem to have been

resolved. See, e.g., Telemaque v. Commissioner, No. 38490-84 Tax Ct.

Memorandum Sur Order (Jan. 3, 1986) (imposing $2,000 damages). For a more

recent case imposing the current maximum § 6673 penalty of $25,000 on taxpayer

who had a history of filing frivolous proceedings (which subjected the taxpayer to

lighter § 6673 penalties) and who then failed to appear at trial, see Precourt v.

Commissioner, T.C. Memo. 2010-24, 99 T.C.M. (CCH) 1112.

309

TEFRA, Pub. L. No. 97-248, § 292(b), 96 Stat. 324, 574 (1982) (currently

codified at I.R.C. § 6673).

310

The court’s restrictive reading of § 6673 stemmed from the statutory

requirement that the action must have been instituted “merely for delay,”

precluding the court from imposing damages when the taxpayers may have had

purposes other than delay for petitioning the court. The 1982 amendment of

§ 6673, however, provides that the Tax Court may now impose damages against

taxpayers who file petitions “primarily for delay.” See infra notes 312–316 and

accompanying text.

311

Falk, supra note 287, at 94.

312

Pub. L. No. 97-248, § 292(b), 96 Stat. 324, 574 (1982). In Wilkinson v.

Commissioner, 71 T.C. 633 (1979), the Tax Court noted that “[w]hen the costs

incurred by this Court and respondent are considered, the maximum damages

authorized by law ($500) do not begin to indemnify the United States for the

expenses which petitioner’s frivolous position has occasioned.” Id. at 643.

Taxpayers using the “Court as their soapbox” merely had to pay a $500 “toll.”

Graves v. Commissioner, T.C. Memo. 1981-154, 41 T.C.M. (CCH) 1204, 1207

(taxpayer protesting the use of his taxes for military expenditures), aff'd without

712 The United States Tax Court – An Historical Analysis

assist the court in curbing its “ever-increasing caseload.”

313

As amended by

TEFRA, § 6673 provided as follows:

Whenever it appears to the Tax Court that proceedings before it

have been instituted or maintained by the taxpayer primarily for

delay or that the taxpayer’s position in such proceedings is frivolous

or groundless, damages in an amount not in excess of $5,000 shall be

awarded to the United States by the Tax Court in its decision.

Damages so awarded shall be assessed at the same time as the

deficiency and shall be paid upon notice and demand from the

Secretary and shall be collected as a part of the tax.

314

The former standard for applying damages under § 6673 was thus

replaced with a two-prong test. First, the Tax Court may impose damages

if the proceedings are commenced “primarily” to delay paying the

determined deficiency.

315

The court had interpreted this “subjective”

condition to the imposition of damages as requiring a determination that

the taxpayer had no bona fide purpose in instituting the Tax Court

proceeding. The change from “merely” to “primarily” authorizes the court

to impose damages against taxpayers commencing dilatory proceedings,

even though delay may not have been the only purpose for commencing

the proceeding.

316

Additionally, the 1982 amendment of § 6673 strongly

suggests that damages may be imposed if the taxpayer “maintains” a

dilatory position, irrespective of his original intent in commencing the

proceeding.

317

Second, the Tax Court may impose damages against a taxpayer whose

“position in such proceedings is frivolous or groundless” under the

“objective” condition of the statute.

318

This part of § 6673 should authorize

the Tax Court to impose damages against a taxpayer whose position is

groundless, i.e., a position that conflicts with established precedent, without

published opinion, 698 F.2d 1219 (6th Cir. 1982). Increasing the maximum damages

authorized under § 6673 was necessary to adequately compensate the Government

for the dilatory tactics of certain taxpayers and to act as a greater deterrent to

frivolous proceedings. See Falk, supra note 287, at 95.

313

H.R. REP. NO. 97-404, at 10, 11 (1981).

314

I.R.C. § 6673, following amendment by Pub. L. No. 97-248, § 292(b), 96 Stat.

324, 574 (1982).

315

Id.

316

Id.; see also Grimes v. Commissioner, 82 T.C. 235, 238–39 (1984), aff’d, 806

F.2d 1451 (9th Cir. 1986).

317

See Grimes v. Commissioner, 82 T.C. 235, 238–39 (1984), aff'd, 806 F.2d

1451 (9th Cir. 1986).

318

I.R.C. § 6673, following amendment by Pub. L. No. 97-248, § 292(b), 96 Stat.

324, 574 (1982).

Trial Procedure 713

requiring proof that the taxpayer is actually aware that his position is

meritless.

319

In Abrams v. Commissioner,

320

the taxpayer contended that he incurred no

tax liability for the years 1980 and 1981.

321

His petition stated that

“Petitioner’s only income was in the form of wages which are personal

property and, as such, are not subject to the imposition . . . of a direct

tax.”

322

Finding that “[i]t is clear beyond doubt that the petition raises no

justiciable facts respecting any of respondent’s determinations,”

323

the Tax

Court, sua sponte, imposed damages of $5,000 against the taxpayer.

324

The

319

McLaughlin v. Commissioner, 832 F.2d 986 (7th Cir. 1987).

320

82 T.C. 403 (1984) (taxpayer asserted that wages are not subject to income

tax). For other cases holding as frivolous the claim that wages are not income and

imposing § 6673 damages, see Connor v. Commissioner, 770 F.2d 17, 20 (2d Cir.

1985); Stephens v. Commissioner, T.C. Memo. 1987-196, 53 T.C.M. (CCH) 607

(damages of $1,000 imposed), motion to vacate granted, 88 T.C. 1529 (imposed

additional damages of $1000 for filing a frivolous motion to vacate); McCabe v.

Commissioner, T.C. Memo. 1986-533, 52 T.C.M. (CCH) 962; Borders v.

Commissioner, T.C. Memo. 1986-466, 52 T.C.M. (CCH) 617. The first Tax Court

case awarding higher damages as authorized by TEFRA marked no definitive

revision of the standard the Tax Court would follow in imposing damages. The

Tax Court warned, however, that the damages penalty would not, in light of the

TEFRA amendment, be limited to cases in which the taxpayer was aware prior to

filing the petition that the position taken was groundless. Grimes v.

Commissioner, 82 T.C. 235, 238–39 (1984). In Grimes, the taxpayer argued that his

wages were not includable in gross income. Damages of $2,500 were imposed. In

a subsequent proceeding, no longer contending that wages were not income, but

asserting an equally baseless exemption for living expenses, Mr. Grimes was

assessed damages of $5,000 by the Tax Court. When he appealed the Tax Court’s

decision, the Ninth Circuit affirmed and assessed an additional $1,500 for pursuing

a frivolous appeal. Grimes v. Commissioner, 806 F.2d 1451 (9th Cir. 1986).

321

82 T.C. at 405.

322

Id.

323

Id. (emphasis in original).

324

Id. at 413. Section 6673 does not require that the Tax Court determine the

actual costs incurred by the Government. The “primary purpose of the statute is

not to compensate the United States as opposing party but instead to penalize

taxpayers who raise frivolous claims in the tax court.” Sauers v. Commissioner,

771 F.2d 64, 67 (3d Cir. 1985); see also Larsen v. Commissioner, 765 F.2d 939, 941

(9th Cir. 1985) (referring to § 6673 damages as a “penalty”); Crain v.

Commissioner, 737 F.2d 1417, 1418 (5th Cir. 1984) (affirming Tax Court’s penalty

assessment). The Third Circuit held in Sauers that the Tax Court neither had to

determine the actual damages sustained by the Government nor relate those

damages to the § 6673 penalty. 771 F.2d at 67–69. Cf. Carter v. Commissioner,

784 F.2d 1006, 1009 (9th Cir. 1986) (Tax Court not authorized to impose double

penalty ($10,000) on husband and wife, even though two separate notices of

deficiency were issued, because the Tax Court entered only one decision in the

714 The United States Tax Court – An Historical Analysis

court did so even though it did not appear that the taxpayer had previously

litigated the same issue or that he was aware of court precedents holding his

position to be frivolous.

325

In our view, petitioner is yet another in a seemingly unending parade

of tax protesters bent on glutting the docket of this Court and others

with frivolous and groundless claims (all of which have been

summarily rejected by this Court and others on innumerable

occasions), and he has instituted and maintained this proceeding

primarily for delay.

326

The Abrams decision is significant because it marked the first occasion on

which the Tax Court imposed damages upon a taxpayer without evidence

that the taxpayer had personal knowledge of the lack of merit of his action.

Later cases have made it clear that the Tax Court will impose damages

against taxpayers who should have been aware that the arguments they

presented were previously rejected by the court.

327

Increasingly, the court

case); Ruberto v. Commissioner, 774 F.2d 61 (2d Cir. 1985) (Tax Court abused its

discretion when it did not give taxpayers reasonable time to submit original checks

in support of deductions), rev’g T.C. Memo. 1984-557.

It has been held that the taxpayer has the burden of proving that the imposition

of damages was improper. See Carter, 784 F.2d at 1009; Larsen, 765 F.2d at 941.

The burden of proof analysis in these cases is subject to doubt. Unlike deficiencies

in tax, additions to tax, and other assessable penalties, § 6673 damages cannot be

determined by the Service as part of the 90-day letter. Cf. I.R.C. § 6662. This is so

because the application of § 6673 depends on the taxpayer’s actions after receiving

the 90-day letter, viz. whether a frivolous or dilatory Tax Court proceeding is

brought or maintained. Thus, the normal presumption of correctness attaching to

administrative determinations (which is the basis for generally placing the burden

of proof on the taxpayer) does not apply to § 6673. These damages are imposed by

the Tax Court either pursuant to motion by the Service or sua sponte. The Tax

Court has not addressed the issue of the burden of proof in its application of

damages. Since the court is, in a real sense, a party to the transaction giving rise to

the damages, burden of proof rules may be unnecessary. Insofar as appellate courts

are concerned, whether the Tax Court’s imposition of damages should be sustained

is a matter of the standard of appellate review rather than the burden of proof, i.e.

the “clearly erroneous” rule. See I.R.C. § 7482(a)(1).

325

The petitioner also argued for a jury trial and against the validity of the

Service’s procedures. Abrams, 82 T.C. at 405.

326

Id.

327

See, e.g., Oneal v. Commissioner, 84 T.C. 1235, 1243 (1985) (awarding

damages because despite “numerous Court opinions squarely on point, petitioners

have forced an already overburdened Court and tax system to unnecessarily

consume precious resources”); Smith v. Commissioner, T.C. Memo. 1986-487, 52

T.C.M. (CCH) 691 (imposing damages because numerous Tax Court decisions had

previously held the same trust schemes invalid).

Trial Procedure 715

has been willing to impose damages against taxpayers raising frivolous

arguments in a summary fashion without lengthy opinions.

328

Furthermore,

the court has not limited the application of § 6673 to situations involving

the spurious arguments denying the legitimacy of the tax system, but has

also imposed damages against taxpayers litigating the merits of abusive tax

shelters.

329

328

See, e.g., Allen v. Commissioner, T.C. Memo. 1987-242, 53 T.C.M. (CCH)

814; Klimek v. Commissioner, T.C. Memo. 1987-246, 48 T.C.M. (CCH) 50; Ross v.

Commissioner, T.C. Memo. 1984-27, 47 T.C.M. (CCH) 920. Cf. McLaughlin v.

Commissioner, 832 F.2d 986 (7th Cir. 1987) (reducing Tax Court awarded damages

from $5,000 to $3,500 because Tax Court did not make findings demonstrating that

the egregiousness of taxpayer’s conduct warranted maximum damages); May v.

Commissioner, 752 F.2d 1301, 1309 (8th Cir. 1985) (urging the Tax Court to make

specific findings of fact that support the imposition of damages so that an appellate

court can efficiently review the Tax Court’s determination). In McCoy v.

Commissioner, 76 T.C. 1027(1981), aff’d, 696 F.2d 1234 (9th Cir. 1983), the court,

indicating that it would summarily dispose of frivolous and frequently rejected

arguments, stated:

It may be appropriate to note further that this Court has been flooded with

a large number of so-called tax protester cases in which thoroughly

meritless issues have been raised in, at best, misguided reliance upon lofty

principles. Such cases tend to disrupt the orderly conduct of serious

litigation in this Court, and the issues raised therein are of the type that have

been consistently decided against such protesters and their contentions

often characterized as frivolous. The time has arrived when the Court

should deal summarily and decisively with such cases without engaging in

scholarly discussion of the issues or attempting to soothe the feelings of the

petitioners by referring to the supposed “sincerity” of their wildly espoused

positions.

Id. at 1029–30.

329

See, e.g., Oneal v. Commissioner, 84 T.C. 1235 (1985) (taxpayers insisted on

litigating merits of coal shelter despite the adverse precedent of previous cases

involving similar facts); Hawkins v. Commissioner, T.C. Memo. 1987-233, 53

T.C.M. (CCH) 780 (imposing damages of $5,000 on taxpayer litigating merits of

master sound recording tax shelter).

Samuel Sterrett, former Chief Judge of the Tax Court, stated:

If the lawyer is presenting issues arising out of a tax shelter that is

transparently abusive, I don’t know why we should absolve the taxpayer

from paying the 6673 penalty simply because a shelter is involved rather

than a claim that the income tax law is unconstitutional. . . . It certainly is

not the goal or purpose of the court to impose an additional penalty on

someone for losing a case . . . . [However, a] lawyer who presents arguments

with respect to a shelter that has been held to be abusive in prior cases, and

those opinions have been sustained by circuit courts, will do well to

consider whether or not he has any reasonable expectation of prevailing, or

simply is trying to buy time.

716 The United States Tax Court – An Historical Analysis

If the taxpayer has any legitimate grounds for maintaining the suit,

however, it appears that damages will not be imposed.

330

In a

memorandum opinion, Judge Featherston stated:

Section 6673 is no doubt intended . . . to assist the Court in

regulating its docket by deterring frivolous filings. It is not intended,

however, to be used as a bludgeon to force settlements or a threat

against the good faith advocacy of potentially meritorious legal and

factual positions. There is a difference between a frivolous

proceeding and one ultimately found to be without merit.

331

Moreover, resolution of novel issues against the taxpayer will not occasion

imposition of § 6673 damages, even if the resolution is predictable based

upon relevant precedent. Thus, in a case involving taxpayers engaged in a

tax straddling scheme utilizing mortgage certificates issued by the

Government National Mortgage Association and the Federal Home Loan

Mortgage Corporation, damages were not imposed—even though the court

Marvin J. Garbis, Interview: Samuel Sterrett on How the Tax Court Sees Its Docket, 1 TAX

TIMES 3, 26 (July 19, 1987).

330

See, e.g., Fowler v. Commissioner, T.C. Memo. 1987-142, 53 T.C.M. (CCH)

373, 376 (denying damages when Service failed to prove fraud in two of three years

at issue); Petersen v. Commissioner, T.C. Memo. 1987-108, 53 T.C.M. (CCH) 235,

241 (denying damages under § 6673 when taxpayer’s case was somewhat

distinguishable from other tax protester cases); McMains v. Commissioner, T.C.

Memo. 1987-85, 53 T.C.M. (CCH) 118, 120 (damages denied when taxpayer

prevailed on issue of unreported income); Kellner v. Commissioner, T.C. Memo.

1986-524, 52 T.C.M. (CCH) 875, 880 (damages denied even though it was the

taxpayer’s fifth appearance before the court, because “some evidence and authority

. . . arguably supported her position”); Miller v. Commissioner, T.C. Memo. 1986-

278, 51 T.C.M. (CCH) 1378, 1386 (court held it was “tempting to award damages”

on sham family trust, but declined to do so “[b]ecause of the now conceded

deductions and the extent of disputed facts”); Sampson v. Commissioner, T.C.

Memo. 1986-231, 51 T.C.M. (CCH) 1148, 1154 (reluctantly denying damages on

sham family trust because case also involved an issue of jurisdiction); Estate of

duBois v. Commissioner, T.C. Memo. 1986-160, 51 T.C.M. (CCH) 895, 902

(damages denied because case presented some legitimate issues). But cf.

McLaughlin v. Commissioner, 832 F.2d 986 (7th Cir. 1987) (court reduced damages

awarded by Tax Court because of absence of findings of egregiousness of

taxpayer’s conduct, but imposed sanctions for taking a frivolous appeal based on

taxpayer’s grounds for not paying income tax).

331

Johnson v. Commissioner, T.C. Memo. 1986-488, 52 T.C.M. (CCH) 694,

699; see also Marx v. Commissioner, No. 36612-85, Tax Ct. Memorandum Sur

Order (Mar. 23, 1986), reprinted in 33 T

AX NOTES (microfiche Doc. No. 86-7221)

(Dec. 1, 1986) (holding that Service’s offer to concede fraud penalty in exchange

for maximum damages award was improper because the amount of § 6673 damage

awards is a matter of judicial discretion).

Trial Procedure 717

noted that the petitioners were knowledgeable businessmen who should

have been aware, and were aware, that the schemes were “‘too good’ to be

real”—because the law regarding tax straddles was uncertain until after the

trial date.

332

The court took the opportunity, however, to serve notice that

it would not be reluctant to impose damages in future cases against

petitioners who knew or reasonably should have known that the tax shelters

they disputed were “factual shams.”

333

Although the 1982 amendment to § 6673 may have eliminated the

requirement of subjective knowledge that the taxpayer’s position is

“frivolous or groundless,”

334

it appears likely that in most cases in which

332

Brown v. Commissioner, 85 T.C. 968, 1001 (1985), aff'd sub nom. Sochin v.

Commissioner, 843 F.2d 351 (9th Cir. 1988).

333

Id. at 1002.

334

TEFRA, Pub. L. No. 97-248, § 292(b), 96 Stat. 324, 574 (1982). The

Seventh Circuit has held that in determining whether the taxpayer has taken a

frivolous position under § 6673 “[t]he inquiry is objective. If a person should have

known that his position is groundless, a court may and should impose sanctions.”

Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986). According to the

Seventh Circuit, the purpose of § 6673

is to induce litigants to conform their behavior to the governing rules

regardless of their subjective beliefs. Groundless litigation diverts the time

and energies of judges from more serious claims; it imposes needless costs

on other litigants. Once the legal system has resolved a claim, judges and

lawyers must move on to other things. They cannot endlessly rehear stale

arguments. Both appellants say that the penalties stifle their right to

petition for redress of grievances. But there is no constitutional right to

bring frivolous suits.

Id. at 72. (citation omitted) (emphasis in original). According to the Seventh

Circuit, however, whether the petition was filed primarily for delay is a subjective

inquiry. Id. Under this prong of § 6673, it must be established that the taxpayer

intentionally commenced the case to delay paying his taxes before damages may be

imposed for delaying the proceedings. In most cases, such a showing will be

unnecessary since the court has the authority to impose damages against taxpayers

whose positions are frivolous on their face. Cf. May v. Commissioner, 752 F.2d

1301 (8th Cir. 1985). In May, the court held that sanctions are proper under § 6673

if it is “incontrovertible” that the taxpayer did not pursue his claim “in good faith

because he knew or should have known that the claim or argument was frivolous or

because he sought to delay payment of taxes.” Id. at 1306 (emphasis added).

Nonetheless, the court also stated that when a taxpayer files a claim with no

knowledge of its frivolity, “[u]nless th[e] petitioner subsequently becomes aware

that his petition is frivolous, . . . he should not be subject to section 6673

damages.” Id. at 1308. Accordingly, it is not clear whether the Eighth Circuit

adheres to the view that § 6673 may appropriately be applied simply if the

taxpayer’s petition is frivolous.

Confusion regarding the scope of § 6673 as it relates to the state of mind of the

taxpayer has been compounded by the Seventh Circuit’s subsequent decision in

718 The United States Tax Court – An Historical Analysis

damages are imposed, the taxpayer is aware that his position is frivolous. A

number of cases holding taxpayers subject to damages involve petitioners

who have had the same or similar arguments rejected in prior suits.

335

others, the taxpayer’s actual knowledge that his position is without merit is

apparent, either because the taxpayer admitted awareness of cases in which

similar arguments were rejected

336

or because the taxpayer was informed by

the Service or the court that damages may be expected.

337

McLaughlin v. Commissioner, 832 F.2d 986 (1987). In McLaughlin, the Seventh Circuit

reviewed the Tax Court’s imposition of $5,000 in § 6673 damages. Concluding that

the Tax Court had not made factual findings demonstrating the egregiousness of

the taxpayer’s conduct, the Seventh Circuit reduced the § 6673 damages to $3,500.

In doing so, the court stated that “meaningful appellate review . . . requires an

articulation by the Tax Court of those particular factors, both objective and, in

appropriate cases, subjective, upon which it has relied in fixing the sum assessed.”

Id. at 988. The taxpayer’s victory in McLaughlin was totally eroded by the Seventh

Circuit’s decision to impose frivolous appeal sanctions of $1,500, thus restoring to

$5,000 the taxpayer’s total bill for engaging in frivolous litigation.

335

See, e.g., Pollard v. Commissioner, 816 F.2d 603 (11th Cir. 1987) (one prior

suit); Lukovsky v. Commissioner, 734 F.2d 1320 (8th Cir. 1984) (one prior suit);

Coulter v. Commissioner, 82 T.C. 580 (1984) (one prior suit); Grimes v.

Commissioner, 82 T.C. 235 (1984) (one prior suit); Sydnes v. Commissioner, 74

T.C. 864 (1980) (two prior suits), aff’d per curiam, 647 F.2d 813 (8th Cir. 1981);

Bentson v. Commissioner, T.C. Memo. 1987-172, 53 T.C.M. (CCH) 495 (one prior

suit); Jacobs v. Commissioner, T.C. Memo. 1983-490, 46 T.C.M. (CCH) 1119 (four

prior suits); see also May v. Commissioner, 752 F.2d 1301, 1307 n.7 (8th Cir. 1985)

(listing cases that have awarded § 6673 damages when taxpayers brought suit using

arguments that had been previously rejected and deemed frivolous by the court).

336

See, e.g., Beard v. Commissioner, 82 T.C. 766, 770 (1984), aff’d, 793 F.2d 139

(6th Cir. 1986) (taxpayer admitted studying cases and statutes); see also May, 752

F.2d at 1307 n.8 (listing cases in which § 6673 damages have been assessed against

a taxpayer having actual knowledge that the claim was frivolous and asserting it to

delay payment).

337

Allen v. Commissioner, T.C. Memo. 1987-242, 53 T.C.M. (CCH) 814, 816

(taxpayer advised during trial of authority of court to impose damages); Weeks v.

Commissioner, T.C. Memo. 1987-198, 53 T.C.M. (CCH) 609, 610 (Service

provided taxpayer with names of cases rejecting taxpayer’s arguments as “legal

garbage”); Boaz v. Commissioner, T.C. Memo. 1987-180, 53 T.C.M. (CCH) 512,

514 (Service warned taxpayer repeatedly that the Fifth Amendment claims asserted

were frequently rejected); Lawrence v. Commissioner, T.C. Memo. 1987-242, 53

T.C.M. (CCH) 361, 363 (taxpayer advised by Service prior to trial that damages

would be requested); Lam v. Commissioner, T.C. Memo. 1987-138, 53 T.C.M.

(CCH) 359, 361 (court advised taxpayer not to pursue his case on frequently

rejected claims). Cf. Graboske v. Commissioner, T.C. Memo. 1987-262, 53 T.C.M.

(CCH) 896, 901 (damages denied based on the record and considering that Service

did not move for damages until the conclusion of the trial).

Additionally, the taxpayer may be deemed to have constructive knowledge that

an argument is frivolous if counsel for the taxpayer had the same argument rejected

Trial Procedure 719

Despite the fact that § 6673 does not require the Tax Court to warn the

taxpayer personally of its authority to impose damages,

338

the court often

has issued a warning before imposing damages in certain types of cases.

339

in previous suits. See May v. Commissioner, 752 F.2d 1301, 1307 n.9 (8th Cir.

1985); Manley v. Commissioner, T.C. Memo. 1983-558, 46 T.C.M. (CCH) 1359,

1361 (decided under pre-TEFRA version of § 6673).

338

See Carter v. Commissioner, 784 F.2d 1006, 1009 (9th Cir. 1986); May, 752

F.2d at 1305.

339

In Grace v. Commissioner, T.C. Memo. 1986-304, 51 T.C.M. (CCH) 1484, a

case involving a master sound recording tax shelter, the court warned taxpayers

“involved in similar tax avoidance or evasion schemes” of its authority to impose

damages. Id. at 1491. Subsequently, in Hawkins v. Commissioner, T.C. Memo. 1987-

233, 53 T.C.M. (CCH) 780, another master sound recording tax shelter case, the

court, sua sponte, awarded damages of $5,000 to the Government. Id. at 785.

In Sampson v. Commissioner, T.C. Memo. 1986-231, 51 T.C.M. (CCH) 1148, the

Tax Court “reluctantly” declined to award damages against a petitioner contesting

deficiencies stemming from a sham family trust because of a separate jurisdictional

issue in the case. Id. at 1154. However, the court noted that it did not believe

petitioners had a meritorious case and, at least implicitly, indicated that damages

might be imposed against taxpayers maintaining similar positions. Id. Again, in

Miller v. Commissioner, T.C. Memo. 1986-278, 51 T.C.M. (CCH) 1378, the court

stated that “[i]t is tempting to award damages in view of the groundless contentions

of petitioners and our conclusion that the Trust was a sham. Because of the now

conceded deductions and the extent of disputed facts, we do not award damages in

this case.” Id. at 1386. In Smith v. Commissioner, T.C. Memo. 1986-487, 52 T.C.M.

(CCH) 691, however, damages of $2,500 were imposed against a taxpayer arguing

the merits of a sham family trust. Id. at 694. The court noted that “[p]etitioners

herein should have been aware of the numerous decisions of this Court that have

declared invalid family trust schemes similar to the Trust employed by petitioners.”

Id.; accord Schauer v. Commissioner, T.C. Memo. 1987-237, 53 T.C.M. (CCH) 793,

797 (awarding damages and noting that the court has refused to award damages “in

several family trust cases only because of factors separate and apart from the family

trust transactions”).

In 1983, the Tax Court issued a warning to taxpayers seeking to use the

“church” as a means of avoiding the payment of taxes:

[O]ur tolerance for taxpayers who establish churches solely for

tax-avoidance purposes is reaching a breaking point. Not only do these

taxpayers use the pretext of a church to avoid paying their fair share of

taxes, even when their brazen schemes are uncovered many of them resort

to the courts in a shameless attempt to vindicate themselves. When such

frivolous cases are brought to this Court, there is a question as to whether

damages should be imposed under section 6673. Although we have decided

not to impose such damages in the instant case, if taxpayers continue to

make frivolous claims with respect to churches established solely for

tax-avoidance purposes, serious consideration will be given to imposing

such damages in those cases.

720 The United States Tax Court – An Historical Analysis

3. Subsequent Statutory Developments

a. Additional Predicate for Imposition of Damages

In 1984, Congress indicated its approval of the increased imposition of

the damage penalty by the Tax Court and urged the court to take further

action to dispense with lengthy opinions in routine tax protester cases and

Miedaner v. Commissioner, 81 T.C. 272, 282 (1983) (footnote omitted); see also

McGahen v. Commissioner, 76 T.C. 468, 484 n.16 (1981) (noting that “[i]n cases of

this type [church avoidance schemes], an award of damages under sec. 6673 may be

in order under appropriate circumstances”), aff’d without published opinion, 720 F.2d

664 (3d Cir. 1983); Adamson v. Commissioner, T.C. Memo. 1986-489, 52 T.C.M.

(CCH) 699, 701–02 (awarding $5,000 in damages to the Government in “church”

case and warning that damages would be assessed against attorneys who brought

frivolous suits); Sigelbaum v. Commissioner, T.C. Memo. 1986-472, 52 T.C.M.

(CCH) 630, 632 (rejecting petitioner’s first amendment argument and awarding the

Government $2,000 in damages); Riggs v. Commissioner, T.C. Memo. 1986-317,

51 T.C.M. (CCH) 1566, 1568 (awarding $1,000 in damages to the Government for

basing suit on “church” case arguments previously rejected). But see Fowler v.

Commissioner, T.C. Memo. 1987-142, 53 T.C.M. (CCH) 373, 376 (denying

damages when Service failed to prove fraud in contributions claimed to be made to

church in two of three years at issue); Petersen v. Commissioner, T.C. Memo.

1987-108, 53 T.C.M. (CCH) 235, 241 (damages denied because the case was

“somewhat unique and capable of distinction from the plethora of cases

concerning tax protestor sponsored ‘churches’ where [the Tax Court] awarded

damages without hesitation”); McMains v. Commissioner, T.C. Memo. 1987-85, 53

T.C.M. (CCH) 118, 120 (damages denied when taxpayer prevailed on issue of

unreported income); Brown v. Commissioner, T.C. Memo. 1986-268, 51 T.C.M.

(CCH) 1321, 1325 (denying damages in “church” case and explaining that taxpayer

seemed “somewhat different from most of the taxpayers seeking the benefit of [the

Universal Life Church] connection, even though on balance, the scales in our

judgment tipped against him”). The Tax Court also issued a warning to taxpayers

engaged in abusive tax shelters when it stated that “[t]his case was well tried and

skillfully briefed by able counsel, but neither the evidence nor the briefs present

anything new. At some point, the arguments in these highly leveraged tax

avoidance (or evasion) schemes must be regarded as ‘frivolous or groundless.’”

Elliot v. Commissioner, 84 T.C. 227 (1985), aff’d without published opinion, 782 F.2d

1027 (3d Cir. 1986). The court imposed $5,000 in damages against taxpayers who

insisted on litigating the merits of an abusive coal shelter lease despite previously

published decisions involving the same material facts. Oneal v. Commissioner, 84

T.C. 1235, 1242–44 (1985). The Tax Court’s first warning to taxpayers of its

readiness to impose § 6673 damages was in Hatfield v. Commissioner, 68 T.C. 895

(1977). See supra notes 288–290 and accompanying text.

Trial Procedure 721

to consolidate tax shelter cases, “as well as to assert, without hesitancy in

appropriate instances, the penalties that the Congress has provided.”

340

In the Tax Reform Act of 1986,

341

Congress again amended § 6673 to

extend the circumstances in which the damage penalty may be applied. The

damages sanction may now be applied in cases in which a taxpayer

“unreasonably failed to pursue available administrative remedies.”

342

This

amendment reemphasizes congressional concern over the flood of cases

then congesting the Tax Court’s docket and serves as an important

inducement to taxpayers to attempt to resolve their disputes before filing

petitions with the Tax Court.

Initially, the House proposed to authorize the Tax Court to impose a

penalty of $120, an amount in addition to and twice the fee for filing a Tax

Court petition, against taxpayers who unreasonably failed to resolve their

disputes administratively.

343

Presumably because Congress believed that a

stronger deterrent to dilatory or frivolous proceedings was needed to assist

the Tax Court in the management of its congested docket, it concluded that

the failure to exhaust administrative remedies was more appropriately

included as an additional basis to impose damages under § 6673.

Although the House bill was not enacted in the form originally

proposed, the legislative history to the House proposal is helpful in

understanding the reasons for the amendment of § 6673:

340

H.R. REP. NO. 98-861, at 1673 (1984); see also Brown v. Commissioner, 85

T.C. 968, 1002 (1985), aff’d sub nom. Sochin v. Commissioner, 843 F.2d 351 (9th Cir.

1988); Oneal v. Commissioner, 84 T.C. 1235, 1243 (1985). In 1987, Chief Judge

Sterrett noted that

[a]s mandated by Congress, we have been liberal in our imposition of the

6673 penalties in the so-called tax protestor area. We are seeing a marked

effect, which we think has been very salutory [sic], and we expect to see a

continuing diminishment in the number of tax protestor cases filed.

Garbis, supra note 329, at 26.

341

Pub. L. No. 99-514, 100 Stat. 2085.

342

Id. § 1552(a), 100 Stat. at 2753 (codified at I.R.C. § 6673). As amended,

§ 6673 provided at the time:

Whenever it appears to the Tax Court that proceedings before it have been

instituted or maintained by the taxpayer primarily for delay, that the

taxpayer’s position in such proceeding is frivolous or groundless, or that the

taxpayer unreasonably failed to pursue available administrative remedies, damages in

an amount not in excess of $5,000 shall be awarded to the United States by

the Tax Court in its decision. Damages so awarded shall be assessed at the

same time as the deficiency and shall be paid upon notice and demand from

the Secretary and shall be collected as a part of the tax.

I.R.C. § 6673 (1986) (emphasis added).

343

H.R. REP. NO. 99-426, at 841–42 (1985) (explaining section 1316 of H.R.

3838, 99th Cong. (1985)).

722 The United States Tax Court – An Historical Analysis

The Tax Court inventory has risen dramatically over the past ten

years. One factor contributing to this increase has been the practice

of taxpayers petitioning their cases directly to the Tax Court without

attempting to settle the dispute with the Appeals Division of the IRS.

The Appeals Division has more authority to settle cases than the

Examination Division of IRS does. Appeals regularly settles large

numbers of cases based on the hazards of litigation. Many of the

cases taken directly to the Tax Court are eventually settled by the

Appeals Officers after the case has been opened in the Tax Court

with little involvement by the Court.

The committee consequently believes that it is appropriate to

provide a penalty for failure to exhaust administrative remedies. This

new penalty will allow the Tax Court to penalize taxpayers who

needlessly involve the Court in a dispute that should have been

resolved in the Appeals Division of the IRS.

344

b. Statutory Designation as a Penalty

As part of the Omnibus Budget Reconciliation Act of 1989,

345

Congress

clarified the nature of the § 6673 charge while also significantly increasing

the monetary amount that could be levied under the provision. Seeking to

clarify that the Government need not prove specific damages before the

Tax Court could impose the § 6673 penalty,

346

Congress eliminated any

references to “damages” under the statute. In addition to changing the

heading from “Damages Assessable For Instituting Proceedings . . .” to

“Sanctions and Costs Awarded by Courts,” Congress changed the reference

344

Id. at 841. The House Report indicates that a taxpayer should not be

subject to damages, under the proposed standard, in the following cases: (1) if the

taxpayer is challenging a regulation, ruling, or other matter outside the negotiating

authority of the Appeals Division; (2) if the taxpayer attended a first level appeals

meeting or cannot attend because of the undue burden to the taxpayer; (3) if the

Service waives the appeals meeting; or (4) if no action was taken by appeals after

having the case for six months or longer. Id. at 841–42. The 1986 legislation also

included a reporting provision enabling Congress to monitor the Tax Court

inventory. The Tax Reform Act of 1986 requires that

[t]he Secretary of the Treasury or his delegate and the Tax Court shall each

prepare a report for 1987 and for each 2-calendar year period thereafter on

the inventory of cases in the Tax Court and the measures to close cases

more efficiently. Such reports shall be submitted to the Committee on

Ways and Means of the House of Representatives and the Committee on

Finance of the Senate.

Pub. L. No. 99-514, § 1552(c), 100 Stat. 2085, 2753–54.

345

Pub. L. No. 101-239, 103 Stat. 2106 (1989).

346

See H.R. REP. NO. 101-247, at 1399–1400 (1989).

Trial Procedure 723

to “damages” under § 6673(a) to a “penalty.”

347

Clarification that the

charge imposed under § 6673 constituted a penalty for tax purposes had the

further benefit of permitting the Government to employ its administrative

collection powers to recover the amount imposed under the provision.

348

In addition to clarifying what may be considered a technical point,

Congress acted to enhance the deterrent effect of the § 6673 penalty.

Concerned that the prevailing $5,000 penalty was not effective in deterring

taxpayers in “tax shelter cases” from taking frivolous positions, Congress

raised the ceiling on the § 6673 penalty to $25,000.

349

In so doing, Congress

expressed its intention that the enhanced penalty be applied primarily—but

not exclusively—in the tax shelter context.

350

No such limitation was

included in the statute, however, and the Tax Court has imposed the

$25,000 maximum penalty generally upon taxpayers outside of the tax

shelter context who consistently advance frivolous arguments or generally

abuse the legal process in the face of prior warnings or prior impositions of

lesser § 6673 penalties.

351

c. Sanctions Against Counsel

Effective July 1, 1986, Tax Court Rule 33(b) was amended to provide

for the imposition of sanctions against counsel or parties who sign frivolous

pleadings presented to the court.

352

The amendment was derived from a

347

Pub. L. No. 101-239, § 7731(a), 103 Stat. 2400.

348

See H.R. REP. NO. 101-447, at 1400.

349

Pub. L. No. 101-239, § 7731(a), 103 Stat. 2106, 2400 (1989) (amending

I.R.C. § 6673(a)).

350

H.R. REP. NO. 101-247, at 1399.

351

See, e.g., Nis Family Trust v. Commissioner, 115 T.C. 523 (2000); Powell v.

Commissioner, T.C. Memo. 2009-174, 98 T.C.M. (CCH) 56; Precourt v.

Commissioner, T.C. Memo. 2010-24, 99 T.C.M. (CCH) 1112; Tinnerman v.

Commissioner, T.C. Memo. 2010-150, 100 T.C.M. (CCH) 20, aff’d, 111 A.F.T.R.2d

2013-1368 (D.C. Cir. 2012).

352

TAX CT. R. 33(b), 85 T.C. 1125–26 (1985). The rule provides:

(b) Effect of Signature: The signature of counsel or a party

constitutes a certificate by him that he has read the pleading; that to the best

of his knowledge, information, and belief formed after reasonable inquiry, it

is well grounded in fact and is warranted by existing law or a good faith

argument for the extension, modification, or reversal of existing law, and

that it is not interposed for any improper purpose, such as to harass or to

cause unnecessary delay or needless increase in the cost of litigation. The

signature of counsel also constitutes a representation by him that he is

authorized to represent the party or parties on whose behalf the pleading is

filed. If a pleading is not signed, it shall be stricken, unless it is signed

promptly after the omission is called to the attention of the pleader. If a

pleading is signed in violation of this Rule, the Court, upon motion or upon

724 The United States Tax Court – An Historical Analysis

1983 revision of Rule 11 of the Federal Rules of Civil Procedure,

353

and the

purposes for amending that rule are helpful in explaining the reasons for

the amendment of Rule 33(b).

354

Although prior to its revision, Rule 11 of the Federal Rules of Civil

Procedure

355

had provided for the imposition of sanctions against abusive

its own initiative, may impose upon the person who signed it, a represented

party, or both, an appropriate sanction, which may include an order to pay

to the other party or parties the amount of the reasonable expenses incurred

because of the filing of the pleading, including reasonable counsel’s fees.

Id. Rule 33(b) remains unchanged following the 1985 amendment.

353

FED. R. CIV. P. 11 (as amended in 1983, but prior to amendments in 1987,

1993, and 2007). The rule then provided as follows:

Signing of Pleadings, Motions, and Other Papers; Sanctions

Every pleading, motion, and other paper of a party represented by an

attorney shall be signed by at least one attorney of record in the attorney’s

individual name, whose address shall be stated. A party who is not

represented by an attorney shall sign the party’s pleading, motion, or other

paper and state the party’s address. Except when otherwise specifically

provided by rule or statute, pleadings need not be verified or accompanied

by affidavit. The rule in equity that the averments of an answer under oath

must be overcome by the testimony of two witnesses or of one witness

sustained by corroborating circumstances is abolished. The signature of an

attorney or party constitutes a certificate by the signer that the signer has

read the pleading, motion, or other paper; that to the best of the signer’s

knowledge, information, and belief formed after reasonable inquiry it is well

grounded in fact and is warranted by existing law or a good faith argument

for the extension, modification, or reversal of existing law, and that it is not

interposed for any improper purpose, such as to harass or to cause

unnecessary delay or needless increase in the cost of litigation. If a

pleading, motion, or other paper is not signed, it shall be stricken unless it is

signed promptly after the omission is called to the attention of the pleader

or movant. If a pleading, motion, or other paper is signed in violation of

this rule, the court, upon motion or upon its own initiative, shall impose

upon the person who signed it, a represented party, or both, an appropriate

sanction, which may include an order to pay to the other party or parties the

amount of the reasonable expenses incurred because of the filing of the

pleading, motion, or other paper, including a reasonable attorney’s fee.

354

See TAX CT. R. 33(b), 85 T.C. 1125–26; Versteeg v. Commissioner, 91 T.C.

339, 342 (1988); Memorandum from Judge Simpson to Chief Judge Sterrett, at 4,

Sept. 11, 1985, filed at U.S. Tax Court in “Rules Committee: Litigation Costs”

(pointing out that Tax Court Rule 33 is one of the rules “taken virtually verbatim

from the Federal Rules of Civil Procedure”).

355

Prior to its amendment in 1983, Rule 11 provided as follows:

Every pleading of a party represented by an attorney shall be signed by

at least one attorney of record in his individual name, whose address shall

be stated. A party who is not represented by an attorney shall sign his

pleading and state his address. Except when otherwise specifically provided

Trial Procedure 725

counsel, “experience shows that in practice [the former rule] was not

effective in deterring abuses.”

356

For example, considerable confusion

existed under Rule 11, regarding “the standard of conduct expected of

attorneys” and the sanctions available if counsel was found to have delayed

the court’s processes through abusive actions such as the filing of frivolous

pleadings.

357

The amendment of Rule 11 was “intended to reduce the

reluctance of courts to impose sanctions by emphasizing the responsibilities

of the attorney and reenforcing those obligations by the imposition of

sanctions.”

358

It was believed that “[g]reater attention by the district courts

to pleading and motion abuses and the imposition of sanctions when

appropriate, should discourage dilatory or abusive tactics and help to

streamline the litigation process by lessening frivolous claims or

defenses.”

359

Rule 11, as amended in 1983, was calculated to remove any

doubt regarding the availability of sanctions or the propriety of imposing

them against abusive counsel.

360

Tax Court Rule 33(b) was changed for

similar reasons. The amendment was “designed to emphasize the

responsibilities of counsel and deter dilatory and abusive tactics by

imposing effective sanctions therefor.”

361

Under Rule 33(b), counsel has a

by rule or statute, pleadings need not be verified or accompanied by

affidavit. The rule in equity that the averments of an answer under oath

must be overcome by the testimony of two witnesses or of one witness

sustained by corroborating circumstances is abolished. The signature of an

attorney constitutes a certificate by him that he has read the pleading; that

to the best of his knowledge, information, and belief there is good ground

to support it; and that it is not interposed for delay. If a pleading is not

signed or is signed with intent to defeat the purpose of this rule, it may be

stricken as sham and false and the action may proceed as though the

pleading had not been served. For a willful violation of this rule an attorney

may be subjected to appropriate disciplinary action. Similarly action may be

taken if scandalous or indecent matter is inserted.

ED. R. CIV. P. 11 (1982).

356

See FED. R. CIV. P. 11, Notes of Adv. Comm. on Rules – 1983 Amendment.

357

Id. at 106–07; see ROBERT E. RODES, KENNETH F. RIPPLE & CAROL

MOONEY, SANCTIONS IMPOSABLE FOR VIOLATIONS OF THE FEDERAL RULES OF

CIVIL PROCEDURE 64–65 (Federal Judicial Center 1981).

358

See FED. R. CIV. P. 11, Notes of Adv. Comm. on Rules – 1983 Amendment

(citation omitted).

359

Id. Although Rule 11 “is not intended to chill an attorney’s enthusiasm or

creativity in pursuing factual or legal theories,” it is intended to stress the

“affirmative duty” of counsel to reasonably inquire into the facts and law prior to

any filing. Id. What amounts to a reasonable inquiry will depend on the

circumstances surrounding a particular case. Id.

360

See id.

361

Rules Comm. Note, TAX CT. R. 33, 85 T.C. 1126 (1985). The note states

that “[a]lthough the Rule as amended also applies to unrepresented parties, the

Court has discretion to take into account the special circumstances that may arise in

726 The United States Tax Court – An Historical Analysis

“duty to make reasonable inquiry as to both the facts and the law prior to

the filing of any pleading.”

362

The additional burden of frivolous claims and a crowded Tax Court

docket were the impetus behind the amendment of Rule 33(b).

363

“The

historic sanctions, such as exclusion of evidence, deeming facts admitted,

and dismissal of actions, often penalize the party when the real culprit is the

counsel.”

364

Now that fair notice has been given, the court has indicated

that it “will not hesitate to impose . . . sanction[s] upon offending counsel in

appropriate cases in the future.”

365

Rule 33(b) apparently is not restricted to taxpayers and their counsel. In

appropriate cases, one may anticipate imposition of sanctions against the

Government and its counsel. It is more likely, however, that the Tax Court

would use its statutory authority to award reasonable litigation costs to the

prevailing taxpayer

366

if the position adhered to by the Service was found to

be without grounds.

367

pro se situations.” Id. Pro se taxpayers who are warned that their position is

frivolous, yet continue to stick to their guns, may expect imposition of § 6673

damages. See, e.g., Wilcox v. Commissioner, T.C. Memo. 1987-225, 53 T.C.M.

(CCH) 741, aff’d, 848 F.2d 1007 (9th Cir. 1988). In Wilcox, the court imposed

$2,000 in damages against a pro se taxpayer who “regurgitates many of the now

familiar tax protester arguments that have repeatedly been held to be utterly

without merit and frivolous.” Id. at 742; Weeks v. Commissioner, T.C. Memo.

1987-198, 53 T.C.M. (CCH) 609, 610 (damages of $5,000 determined against a pro

se taxpayer who presented frivolous arguments, despite the fact that the Service

had provided the taxpayer with cases rejecting the arguments as “legal garbage”)

(citation omitted).

362

Rules Comm. Note, TAX CT. R. 33, 85 T.C. 1126 (1985).

363

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

354, at 4.

364

Id.

365

Adamson v. Commissioner, 52 T.C.M. (CCH) 699, 702 (1986) (prior to

effective date of amended Rule 33(b)). The Tax Court exercised its authority under

Rule 33(b) in Versteeg v. Commissioner, 91 T.C. 339 (1988) (litigation costs of

$498.90 awarded against petitioner’s counsel for pursuing litigation over which

court lacked jurisdiction); see also Larsen v. Commissioner, 765 F.2d 939 (9th Cir.

1985); Kalgaard v. Commissioner, 764 F.2d 1322 (9th Cir. 1985); Pittler v.

Commissioner, T.C. Memo. 1986-320, 51 T.C.M. (CCH) 1587, 1588 n.1 (noting

that “additional sanctions” would be imposed under new Rule 33(b) “against

counsel who signs a pleading that he knows is not well founded in fact and

warranted in law and/or that is interposed to cause delay”).

366

I.R.C. § 7430.

367

See, e.g., Powers v. Commissioner, 100 T.C. 457, 494 (1933) (determining the

taxpayer’s motion for sanctions under Rule 33(b) to be moot in light of award of

litigation costs under § 7430), aff’d in part and rev’d in part on other grounds, 43 F.3d 172

(5th Cir. 1995).

Trial Procedure 727

The application of Rule 33(b) to counsel in connection with the

prosecution of frivolous claims has been obviated in large part by the

expansion of § 6673 to permit the Tax Court to impose costs on attorneys

and others admitted to practice before the Tax Court pursuant to §

6673(a)(2).

368

As part of the 1989 amendment to § 6673, Congress

authorized the Tax Court to require any attorney or other non-attorney

representative to pay excess costs, expenses, and attorney’s fees that are

incurred because the representative “multiplied the proceedings in any case

unreasonably and vexatiously.”

369

The Tax Court first imposed the sanction under § 6673(a)(2) in Harper v.

Commissioner.

370

There, the court found that the attorney’s tactic of

producing documents for copying one at a time violated the court’s order

compelling document production and prevented discovery from moving

forward.

371

The court further found that the attorney’s conduct prevented

the case from being ready for trial on the last day of the scheduled trial

session. Finding that the production of documents was crucial to the

substantive issues of whether the taxpayer had adequately substantiated

business expenses and itemized deductions, the court concluded that the

attorney’s conduct with respect to discovery “unreasonably and vexatiously

multiplied the proceedings.”

372

Additionally, the attorney filed a motion for

summary judgment while conceding that the principal issue in the case was

a question of fact, and the attorney refused to comply with the pretrial

order to stipulate facts and to submit a trial memorandum.

373

The amount of “excess” attorney’s fees to be imposed under

§ 6673(a)(2) is limited to that attributable to the sanctioned misconduct of

the attorney or other representative. Once the amount of time has been

determined, the court applies an hourly rate based on the experience level

of the opposing attorney and the cost of living in the area where the

attorney practices.

374

In making these determinations, the Tax Court looks

368

In Gillespie v. Commissioner, T.C. Memo. 2007-202, 94 T.C.M. (CCH) 91, the

Tax Court invoked Rule 33(b) as an alternative basis to § 6673(a)(2) for requiring

the taxpayer’s counsel to pay the Government’s excess attorney’s fees attributable

to the unreasonable and vexatious multiplication of the proceedings. Id. at 101 n.6.

369

I.R.C. § 6673(a)(2) (as added by Pub. L. No. 101-239, § 7731(a), 103 Stat.

2106, 2400 (1989)). Congress indicated that § 6673(a)(2) was modeled on 28 U.S.C.

§ 1927, which confers similar authority upon Federal district courts. H.R.

REP. NO.

101-247, at 1399-1400 (1989).

370

99 T.C. 533 (1992).

371

Id. at 547.

372

Id. at 547–48.

373

Id. at 548.

374

See id. at 549 (“Attorney’s fees awarded under section 6673(a)(2) are to be

computed by multiplying the excess hour reasonably expended on the litigation by

a reasonable hourly rate. The product is known as the ‘lodestar’ amount.”).

728 The United States Tax Court – An Historical Analysis

to authorities interpreting 28 U.S.C. § 1927, a substantially identical

provision applicable in Federal district court.

375

Section 6673(a)(2) applies to both representatives of the taxpayer and

attorneys representing the Government. Nonetheless, an imposition of

costs under § 6673(a)(2) most often accompanies the imposition of a

§ 6673(a)(1) penalty against the taxpayer when the taxpayer’s attorney is

complicit in the sanctioned conduct.

376

The prospect of sanctions for pursuing frivolous actions does not end at

the trial level. Rule 38 of the Federal Rules of Appellate Procedure

provides that “[i]f a court of appeals determines that an appeal is frivolous,

it may . . . award just damages and single or double costs to the

appellee.”

377

Damages and costs under Rule 38 can be imposed on counsel

as well as a party in interest.

378

375

See id. at 551 (looking to authorities under 28 U.S.C. § 1927 for guidance).

376

See, e.g., Nis Family Trust v. Commissioner, 115 T.C. 523 (2000); Powell v.

Commissioner, T.C. Memo. 2009-174, 98 T.C.M. (CCH) 56, aff’d sub nom., Barringer

v. United States Tax Court, 108 A.F.T.R.2d 2011-5368 (D.C. Cir. 2011).

377

FED. R. APP. P. 38; see also 28 U.S.C. § 1912 (“Where a judgment is affirmed

by the Supreme Court or a court of appeals, the court in its discretion may adjudge

to the prevailing party just damages for his delay, and single or double costs.”).

378

See 28 U.S.C. § 1927, which provides as follows:

Any attorney or other person admitted to conduct cases in any court of the

United States or any Territory thereof who so multiplies the proceedings in

any case unreasonably and vexatiously may be required by the court to

satisfy personally the excess costs, expenses, and attorneys’ fees reasonably

incurred because of such conduct.

Opinions, Decisions, and Appeals 729

ART XI

OPINIONS, DECISIONS, AND APPEALS

A. The Decision Process

Upon the completion of trial and submission of briefs, the Tax Court’s

decision process begins. This process has been shaped by the court’s desire

to provide an impartial and expedient judicial review of tax controversies

that will serve as a source of uniform precedents for the Service and the

public.

Accordingly, it is imperative that accurate and well-reasoned

written findings of fact and opinions be prepared as quickly as is

practicable.

The findings of fact and opinion in a case (referred to in the

statute as a “report”)

as well as the decision thereon

are prepared by one

of the judicial officers of the court. To disseminate effectively these

opinions, the statute provides for general publication of the court’s reports;

however, such publication is not necessary in cases that concern well-settled

legal principles.

See generally Lyle T. Alverson, Has the Board of Tax Appeals Failed?, 4 NAT’L INC.

TAX MAG. 337 (1926); Gerald D. Babbitt & William Morris, An Introduction to the

Tax Court of the United States, 21 T

AX LAW. 615 (1968); Charles D. Hamel, The United

States Board of Tax Appeals, 2 N

AT’L INC. TAX MAG. 293, 308 (1925) [hereinafter

cited as Hamel]; John W. Kern, The Process of Decision in the United States Tax Court, 8

N.Y.U. A

NN. INST. ON FED. TAX’N 1013 (1949) [hereinafter cited as Kern]; J.

Gilmer Korner, Procedure in the Appeal of Tax Cases Under the Revenue Act of 1926, 4

AT’L INC. TAX MAG. 413 (1926) [hereinafter cited as Korner]; J. Edgar Murdock,

Tax Court is Fulfilling its Function; No Fundamental Changes Needed, 8 J. T

AX’N 106

(1958) [hereinafter cited as Murdock]; Percy W. Phillips, Possible Methods of

Eliminating Congestion of Tax Appeals, 5 N

AT’L INC. TAX MAG. 243 (1927)

[hereinafter cited as Phillips]; Edward N. Polisher, Tax Court Commissioners, 28

AXES 413 (1950); Forest D. Siefkin, Has the Board of Tax Appeals Failed?, 5 NAT’L

INC. TAX Mag. 45 (1927) [hereinafter cited as Siefkin]; Theodore Tannenwald, Jr.,

After Trial

How A Case is Decided, 27 N.Y.U. ANN. INST. ON FED. TAX’N 1505

(1968); Theodore Tannenwald, Jr., Tax Court Trials: A View from the Bench, 59 A.B.A.

J. 295 (1973).

I.R.C. § 7459(a)–(b) provides:

A report upon any proceeding instituted before the Tax Court and a

decision thereon shall be made as quickly as practicable. . . . It shall be the

duty of the Tax Court and of each division to include in its report upon any

proceeding its findings of fact or opinion or memorandum opinion.

I.R.C. § 7459(b).

I.R.C. § 7459(a), (c).

I.R.C. § 7462 provides: “The Tax Court shall provide for the publication . . .

in such form and manner as may be best adapted for public information and use.”

730 The United States Tax Court – An Historical Analysis

Since 1924, the division, whether composed of three members or a

single member, has been the basic decision-making unit of the court.

Because the danger of inconsistent interpretations made necessary some

form of internal review,

a conference procedure was authorized by the

Revenue Act of 1924 and established by the Board in the same year to

make possible the review of division reports prior to their promulgation.

Although the objectives of conference review have remained unchanged,

difficulties with respect to the selection of cases for review,

taxpayer

misunderstanding as to the nature of conference review,

and the

mechanics of conference operation, particularly in voting practices,

have

confronted the court.

Upon completion of action by the conference, or, if no conference

review is directed by the chief judge,

the findings of fact and opinion in

the controversy are filed and served on the parties.

If the entire deficiency

has been upheld or the entire deficiency has been rejected, the decision is

entered in the records of the court.

The date of decision is the date when

it is entered in the records of the court indicating the amount of the

deficiency.

In the event that the deficiency is neither totally approved nor

rejected, it is generally necessary to employ the procedures of Rule 155 of

the Tax Court Rules of Practice and Procedure to reach a final

determination of the precise monetary amount of the tax liability.

In these

See Section B of this Part.

See Letter from Chairman Korner to Secretary Mellon, May 24, 1926, at 5,

filed at the U.S. Tax Court in “Divisions: Memoranda & Correspondence”

[hereinafter cited as Korner Letter].

Revenue Act of 1924, ch. 234, § 900(f), 43 Stat. 337.

Compare Korner Letter, supra note 7, with Kern, supra note 1 and Murdock,

supra note 1.

Early practice of the Board was to review every division decision. Korner

Letter, supra note 7, at 5. See Section F of this Part for a discussion of the

development of the present practice under which the chief judge determines which

cases will be reviewed by the court.

E.g., United States Bd. of Tax Appeals v. United States ex rel. James S.

McCandless, 26 F.2d 1000 (D.C. Cir. 1928); see also 69 C

ONG. REC. 10135 (1928).

See Section F.2 and F.3 of this Part.

I.R.C. § 7460(b) provides: “The report of the division shall become the report

of the Tax Court within 30 days after such report by the division unless within such

period the chief judge has directed that such report shall be reviewed by the Tax

Court.”

I.R.C. § 7459.

Id.

I.R.C. § 7459(c) provides: “A decision of the Tax Court . . . shall be held to be

rendered upon the date that an order specifying the amount of the deficiency is

entered in the records of the Tax Court. . . .”

TAX CT. R. 155 (July 6, 2012 ed.).

Opinions, Decisions, and Appeals 731

cases, the responsibility rests with the parties to provide the court with the

necessary computations.

Upon the filing of a computation, either by

agreement of the parties, or by decision of the court when the parties are

unable to agree, the court will enter the decision.

B. Development of the Single-Member Division Structure

Under the provisions of the 1924 Revenue Act, the Board was to have

not less than seven and not more than twenty-eight members.

The

Chairman was empowered to divide the Board into divisions,

and

although no particular number of members per division was dictated

specifically,

the statutory provisions authorizing division of the Board

and its legislative history

indicated that Congress intended at least three

members per division.

The statute required the divisions to hear and

determine appeals assigned by the Chairman.

Decisions of a division

became decisions of the Board upon the expiration of 30 days unless the

Chairman directed review by the entire Board.

The division concept

undoubtedly had its roots in the predecessor to the Board of Tax Appeals,

the Committee on Appeals and Review, which also had been divided into

groups of three.

Despite the statutory provision of a division structure, in the early

months of the Board’s operation, the members sat en banc.

This was due

to a lack of cases ready for trial. By September, 1924, however, the work

before the Board had progressed to a point at which it was deemed

Id.

Revenue Act of 1924, ch. 234, § 900(a), 43 Stat. 336 (now codified at I.R.C.

§ 7443).

Revenue Act of 1924, ch. 234, § 900(f), 43 Stat. 337 (now codified at I.R.C.

§ 7444(c)).

Id.

Hearings on Revenue Revision, 1924, Before the Senate Finance Comm., 68th Cong.,

1st Sess., at 24 (testimony of Mr. Gregg) [hereinafter cited as 1924 Senate

Hearings].

Korner Letter, supra note 7, at 3.

Revenue Act of 1924, ch. 234, § 900(e)–(f), 43 Stat. 337 (now codified at

I.R.C. § 7460(a)).

Id. § 900(f) (now codified at I.R.C. § 7460(b)). For a discussion of the court

review procedures, see Section F of this Part.

1924 Senate Hearings, supra note 24, at 24.

See John H. Parrot, 1 B.T.A. 1 (1924); Everett Knitting Works, 1 B.T.A. 5

(1924). The Revenue Act of 1924 clearly provided that decisions could be made by

the full Board. Ch. 234, § 900(f), 43 Stat. 337.

732 The United States Tax Court – An Historical Analysis

advisable to divide the membership into divisions.

At this time, the Board

was divided into three divisions, one of three members, two others of four

members each.

Subsequently, as additional members were appointed to

the Board, another division consisting of three members was added.

During the initial year and a half of the Board’s operation, these divisions

sat four days a week for the hearing of appeals.

After the hearing, a

division conference would be held at which a decision would be reached;

thereupon one of the members of the division would be assigned the task

of writing the division’s findings of fact, opinion, and decision.

Board

conferences, at which the division decisions were reviewed by the entire

Board, occupied two additional days of the week.

Accordingly, the only

time that individual members had for deciding appeals and writing findings

of fact and opinions was in the evening hours, on Sundays or at such times

as they could be spared from the hearing of cases.

To maximize this time,

a practice developed of having only two or three divisions, a total of six to

eleven members, sit each week.

Because each division could hear only

approximately four cases a day,

it soon became apparent that the three- or

four-member divisional structure was not conducive to a rapid

determination of tax appeals.

During the first two years of the Board’s

Press Release from the U.S. Board of Tax Appeals, Sept. 4, 1924, filed at the

U.S. Court in “Decisions: Memoranda & Correspondence.”

Division No. 1 was comprised of Mr. Ivins, Chief, Mr. Korner, and Mr.

Marquette. Division No. 2 was comprised of Mr. James, Chief, Mr. Sternhagen,

Mr. Trammell, and Mr. Trussell. Division No. 3 was comprised of Mr. Graupner,

Chief, Mr. Lansdon, Mr. Littleton, and Mr. Smith. Memorandum from Chairman

Hamel, Sept. 3, 1924, filed at the U.S. Tax Court in “Organizing the Board:

Memoranda & Correspondence.”

Announcement from Chairman Hamel, Mar. 28, 1925, filed at the U.S. Tax

Court in “Decisions: Memoranda & Correspondence.”

Memorandum from Chairman Korner to members of the Board, June 11,

1926, at 8, filed at the U.S. Tax Court in “Divisions: Memoranda &

Correspondence” [hereinafter cited as Reorganization Memorandum]; Korner

Letter, supra note 7, at 3–4.

Reorganization Memorandum, supra note 33, at 8.

Id.

Id.; see also Hearings on Revenue Revision, 1925, Before the House Comm. on Ways and

Means, 69th Cong., 1st Sess., at 860 [hereinafter cited as 1925 House Hearings].

In an effort to alleviate the difficulties attendant upon three-man divisions,

the Board informally permitted a single member of a division to hear a case, who

would report to the full division. The full division would render a decision that

would be subject to Board review. Arguments of counsel at the close of the

evidence, were, in each appeal, to be heard by the entire division, so far as

practicable. Circular on Internal Administration, Sept. 12, 1924, filed at the U.S.

Opinions, Decisions, and Appeals 733

existence, an unexpected and heavy influx of appeals brought the number

of pending appeals to 10,000 by early 1926, which aggravated the problem

and provided a strong impetus to find a remedy for the backlog of cases.

The cause for the heavy influx of appeals was twofold. First, it was

believed that many taxpayers appealed from deficiencies that were clearly

proper.

Second, the Bureau had sent out many deficiency notices without

a sufficient effort on the part of the conferees of its Income Tax Unit to

settle disputes.

Various remedies were developed to alleviate the increasing congestion.

For example, in the Revenue Act of 1926, Congress authorized the Board

to impose a filing fee of up to $10 as a means of discouraging the large

number of trivial appeals.

Additionally, the Bureau indicated that it would

initiate a policy that would encourage conferees to settle with taxpayers

more readily, and would expand the process of stipulation so as to shorten

the length of hearings.

These measures were not, however, believed to be

adequate to cure the problem, and the Board proposed to Congress in 1925

that it be empowered to create divisions of one member each.

The

hearing of a case required far less time than the decision process, but

because divisions of three or four members were required to sit and hear

Tax Court in “Divisions: Memoranda & Correspondence.” See also 1925 House

Hearings, supra note 38, at 890.

See Reorganization Memorandum, supra note 33, at 1; see also B.T.A.

Conference Minutes, June 23, 1926.

Reorganization Memorandum, supra note 33, at 2; Korner Letter, supra note 7,

at 1–2.

Korner Letter, supra note 7, at 2.

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 106. The adoption of the $10

filing fee resulted in a 25% reduction in the number of appeals brought before the

Board. See Reorganization Memorandum, supra note 33, at 4. But see Alverson,

supra note 1, at 339. Another possibility suggested to reduce the number of appeals

before the Board was to set a jurisdictional limitation on the amount of a deficiency

that could be appealed to the Board. Letter from A.E. Graupner to J. Gilmer

Korner, Aug. 28, 1925, filed at the U.S. Tax Court in “Revenue Act of 1926:

Memoranda & Correspondence”; J.S.Y. Ivins, What Should Congress Do With the

Board of Tax Appeals?, 3 N

AT’L INC. TAX MAG. 391, 392 (1925). This alternative

was not considered politically expedient and was not seriously advocated. Cf. 1925

House Hearings, supra note 38, at 887–89 (testimony of Mr. Morris). Another

proposal involved the imposition of a penalty against the taxpayer when it appeared

that a proceeding was brought merely for delay. Id. at 892. Such a proposal was

enacted as part of the 1926 legislation and is still effective. See I.R.C. § 6673.

Reorganization Memorandum, supra note 33, at 6.

1925 House Hearings, supra note 38, at 887 (remarks of Mr. Morris), 912

(remarks of Mr. Ivins). Strong support for one-member divisions was apparent in

the tax bar. See George Maurice Morris, American Bar Association Tax Revision

Recommendations, 3 N

AT’L INC. TAX MAG. 403, 404 (1925).

734 The United States Tax Court – An Historical Analysis

each case, a necessary result was the hearing of more cases than the

members could decide without frequent intervals of recess from the hearing

process.

Under a one-member division structure, each division could hear

the same number of cases as a three- or four-member division in the same

amount of time. More importantly, one-member divisions would provide

substantially more time for members to remain off the bench and engage in

the decision process.

Thus, whereas under the then existing practice two

divisions were on the bench and two were off, the new system would create

16 divisions and permit five divisions to be on the bench hearing cases with

ten divisions off the bench engaged in the decision process.

The

remaining division consisted of the Chairman, whose review and

administrative duties precluded him from hearing a significant number of

cases.

The Board was confident that this system would enable it to hear

and decide a greater number of cases in a shorter period of time and would

serve to reduce the mounting congestion.

The move to permit the Board to have single-member divisions met

with some resistance in Congress. First, fears were raised that the risk of

pro-Government bias would be greater than with multi-member divisions.

Second, the express language of the statute provided for Board review of

division decisions only in the discretion of the Chairman,

and it was

possible that the Board could reverse its established policy of reviewing

each division decision.

Were such a reversal to come about under a

system that would have 16 divisions, the danger of inconsistent opinions

would multiply.

Accordingly, the Ways and Means Committee in its report

proposed that one-member division decisions automatically be reviewed by

the entire Board, while division decisions that were made by two or more

members be subject to the same statutory provisions established under the

1924 Revenue Act.

The Senate, however, rejected these proposals and

Reorganization Memorandum, supra note 33 at 8–9; Korner Letter, supra note

7, at 4.

Korner Letter, supra note 7, at 4.

Id.

Id. at 5.

As a result, the House bill provided that one-member division decisions be

automatically reviewed by the Board. This proposal was deleted in conference.

H.R. R

EP. No. 356, 69th Cong., 1st Sess. 53 (1926).

Revenue Act of 1924, ch. 234, § 900(f), 43 Stat. 337.

The Board did in fact reverse its prior policy in the spring of 1927 and

henceforth required the Chairman to review each decision to determine if Board

review was necessary. See infra note 216 accompanying text.

See Alverson, supra note 1, at 339; J.S.Y. Ivins, What Should Congress Do With the

Board of Tax Appeals?, 3 N

AT’L INC. TAX MAG. 391 (1925).

H.R. REP. NO. 69-1, at 18 (1925).

Opinions, Decisions, and Appeals 735

instead provided that one-member divisions be established and that the

statutory direction to the Chairman be left unchanged.

In conference, the

House receded from its proposal.

Shortly thereafter, the Board was divided into 16 single-member

divisions.

Although Congress increased the number of Tax Court judges

(and hence the number of divisions) from 16 to 19 in 1980 due to the

court’s increased workload,

the procedures employed with respect to the

single-member divisions have remained essentially unchanged since 1926.

The opinion is prepared by the judge who hears the case.

The report

(opinion or memorandum opinion) is transmitted to the chief judge who,

with the assistance of legal staff, reviews the opinion, notes any comments

or suggested revisions, and decides whether to direct that the opinion be

reviewed by the Court Conference.

Summary opinions authored by

special trial judges undergo similar review by a Presidentially-appointed

judge assigned to the Small Tax Case Division.

To enhance the goal of consistency of result in the Court’s opinions, all

opinions are circulated to the judges before they are released to the public.

Opinions normally are released to the parties and are available to the public

on the court’s website at 3 p.m. The Reporter of Decisions telephonically

S. REP. NO. 69-52, at 35 (1925).

H.R. REP. NO. 69-356, at 53 (1925). The 1926 Act provided that the

Chairman was authorized to divide the Board into divisions of one or more

members. Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 106, amending Revenue Act

of 1924, ch. 234, § 900(f), 43 Stat. 337.

Memorandum from Chairman Korner to members of the Board, June 25,

1926, filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence”;

Board Conference Minutes, June 23, 1926. As part of Board reorganization in that

year, the “part” system was established. The “parts” were composed of three

divisions and provided an initial collegial review of a division decision with specific

recommendations made as to the necessity of full Board review. This procedure

was eliminated in 1932. For a discussion of the part system and conference review,

see infra notes 211–216 and accompanying text.

See Pub. L. No. 96-439, § 1(a), 94 Stat. 1878 (1980); S. REP. NO. 96-933, at 2

(1980) (citing the increased workload of the Tax Court as the basis for the

expansion).

Compare I.R.C. §§ 7459–7460 with Revenue Act of 1926, ch. 27, § 1000, 44

Stat. 105–07, amending Revenue Act of 1924, ch. 234, § 900(a)–(h), 43 Stat. 337–38.

I.R.C. §§ 7459(b), 7460(a). See Hamlin’s Trust v. Commissioner, 209 F.2d 761

(10th Cir. 1954); Hawaiian Freight Forwarders Ltd. v. Commissioner, 196 F.2d 745

(9th Cir. 1952).

I.R.C. § 7460(b). This policy of chief judge discretion was established in

1927. See infra note 216 and accompanying text. If review is warranted, the report

of the division is reviewed in accordance with the procedures established for the

Court Conference. See Section F of this Part.

736 The United States Tax Court – An Historical Analysis

notifies the parties when an opinion is released. Thereafter, a decision is

entered in the case in accordance with the opinion.

C. Findings of Fact and Opinion

Under the provisions of the Revenue Act of 1924, the Board was

required to make written findings of fact in every case.

These findings

served as prima facie evidence in any further proceedings between the

taxpayer and the Bureau.

Although the necessity of providing a written

statement of fact findings was clear from the outset, there was a division of

views during deliberations on the 1924 Act with respect to the need for a

written opinion. The proponents of an opinion requirement argued that it

would be impossible to convince a litigant that a case was being decided

fairly if a Board member could refuse to give his reasons for a decision.

Second, the Board in its opinion might make a serious mistake that the

interested party could discover and point out to the Board without the

necessity of further action.

Finally, the proponents of an opinion

requirement believed that Congress was creating a judicial entity, and

traditionally courts gave reasons for their decision.

On the other hand, an

opinion requirement was not viewed as conducive to an expeditious

handling of the expected heavy influx of tax appeals.

In addition, the lack

of direct appeal from the Board’s decision in a case obviated the necessity

of a written opinion.

If either party was dissatisfied with the Board’s

determination, a de novo action could be instituted. In such a proceeding

the court would not be obligated to consider the Board’s reasoning.

As a

compromise between those urging an opinion requirement and those

See Section G of this Part.

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337.

Revenue Act of 1924, ch. 234, § 900(g), 43 Stat. 337, provided that in “any

proceeding in court under sections 274, 279, 308, or 312, and in any suit or

proceeding by a taxpayer to recover any amounts paid in pursuance of a decision of

the Board, the findings of the Board shall be prima facie evidence of the facts

therein stated.”

1924 Senate Hearings, supra note 24, at 389–90, 392 (testimony of F. Lowsen,

American Institute of Accountants).

Id.

65 CONG. REC. 8132-34 (1924).

See id. at 2684 (remarks of Mr. Chindblom).

Revenue Act of 1924, ch. 234, § 274(b), 43 Stat. 297; H.R. REP. NO. 68-179,

at 8 (1924); S.

REP. NO. 68-398, at 42 (1924).

Bolon B. Turner, The Tax Court of the United States, Its Origin and Function, THE

HISTORY AND PHILOSOPHY OF TAXATION 31, 36 (1955); Memorandum from T. C.

Lavery to R. H. Jackson, General Counsel, Internal Revenue Service, c. Aug. 1935,

at 19, filed at the U.S. Tax Court in “Evidence: Memoranda & Correspondence”

[hereinafter cited as Jackson Memorandum].

Opinions, Decisions, and Appeals 737

doubting the necessity of such a requirement, the 1924 Act required a

written opinion only in those cases in which the amount of tax in

controversy exceeded $10,000.

Difficulties soon arose in the application of the statutory provisions with

respect to the necessity of findings of fact in every case and the situations in

which an opinion was required. It had become apparent that numerous

cases were brought by taxpayers appealing from obviously correct

determinations.

Likewise, a substantial number of cases were brought

merely for delay, were not prosecuted, or were filed improperly. Such futile

appeals resulted in a mounting backlog on the Board’s calendar,

and the

necessity of preparing findings of fact in these cases served only to reduce

the amount of available time the members had for preparing the findings of

fact in cases that involved bona fide disputes.

Accordingly, it was believed

appropriate that, in the above types of cases, the Board be permitted to

dispense with findings of fact.

The House, in the Revenue Bill of 1926,

agreed to relieve the Board of the duty in instances in which a case was “not

decided upon the merits but was dismissed on motion on the ground that

the proof” was clearly insufficient to sustain the allegation of the petition or

that there was a failure to prosecute or to conform to the rules of the

Board.

However, the House was cognizant of the danger of accusations

of pro-Government partiality that might be leveled at the Board by

disgruntled taxpayers dismissed on motion.

Accordingly, the House bill

directed automatic Board review of cases dismissed by a division on the

ground that the proof was insufficient.

The Senate Finance Committee,

however, viewed such a requirement as being unnecessary, particularly in

view of the provision that permitted the Chairman of the Board to direct

review of a division opinion.

In conference, the House receded on its

proposal to require automatic review.

In addition to difficulties with the requirement of written findings of

fact, the Board discovered that the opinion requirement established in the

Revenue Act of 1924 was not responsive to actual needs. The basic

problem, pointed out by the Board during congressional deliberations on

Revenue Act of 1924, ch. 234, § 900(h), 43 Stat. 337. Indexed for inflation,

the initial $10,000 threshold for the amount in controversy equates to roughly

$133,000 in 2012 dollars.

Korner Letter, supra note 7, at 2.

See H.R. REP. NO. 69-1, at 18–19 (1925).

See 1925 House Hearings, supra note 38, at 910–12.

See H.R. REP. NO. 69-1, at 18–19 (1925).

Id.

S. REP. NO. 69-52, at 35–36 (1925).

H.R. REP. NO. 69-356, at 53 (1926).

738 The United States Tax Court – An Historical Analysis

the 1926 Act, was that cases in which the taxes in controversy exceeded

$10,000 sometimes involved no substantial question of law, whereas other

cases, in which the disputed amounts were substantially less, frequently

involved difficult questions of law that affected many cases.

Consistent

with this view, the practice of the Board, despite the provisions of the 1924

Act, had been to write opinions in all cases, regardless of the amount in

dispute.

The Board believed that well-reasoned opinions were important

in building public confidence and providing precedents in the interpretation

of the tax law.

Moreover, other provisions of the 1926 legislation that

limited review of Board determinations to direct appeal of its decisions

increased the importance of opinions. A reviewing court would be less

likely to reverse a decision of the Board in which an opinion setting forth

the reasons for a decision was provided.

As a result of these

considerations, the congressional tax committees recommended that the

Board have discretion to determine the cases in which an opinion would be

provided.

Notwithstanding the fears of certain members of Congress that

the Board would abuse the discretion accorded it,

and the suggestion that

the Commissioner be permitted to request the Board to write an opinion

when he deemed it advisable,

the recommendations of the committees

were adopted without amendment.

The final major statutory change in the requirements for findings of fact

and opinion was incorporated in the Revenue Act of 1928, which

eliminated the necessity of findings of fact in certain cases decided on the

merits. Instead, the Act provided the Board, in promulgating its report,

with discretion to include, in the alternative, findings of fact, an opinion, a

memorandum opinion, or both a findings of fact and an opinion or

memorandum opinion.

In view of the availability of a record of the

evidence presented to the Board, the requirement of detailed findings of

fact in every case was believed to be unnecessary.

However, in those

See 67 CONG. REC. 1136–37 (1925).

Id.

See generally 1925 House Hearings, supra note 38.

See generally Jackson Memorandum, supra note 71, at 30.

E.g., H.R. 1, 69th Cong., 1st Sess. § 907(b) (1925).

67 CONG. REC. 1136 (1925).

Id. at 1137.

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 107, amending Revenue Act of

1924, ch. 234, § 900(h), 43 Stat. 337.

Revenue Act of 1928, ch. 852, § 601, 45 Stat. 872, amending Revenue Act of

1926, ch. 27, § 907(b), 44 Stat. 107 (now codified at I.R.C. § 7459(b)).

H.R. REP. NO. 70-2, at 30 (1928); Hearings on Revenue Revision, 1928, Before the

House Comm. on Ways and Means, 70th Cong., 1st Sess. at 540, 553–59 (1928)

(statement of Special Committee on Federal Taxation of American Bar

Association) [hereinafter cited as 1928 House Hearings]; Hearings on Revenue Revision,

Opinions, Decisions, and Appeals 739

cases in which a complicated factual setting was presented, the new

provision provided necessary flexibility.

Concern on the part of some

members of Congress that omission of a findings of fact would permit the

circuit courts to substitute their judgment on the facts for that of the Board

was countered by the fact that the circuit courts were able to reverse or

modify decisions of the Board (so far as facts were concerned) only if no

substantial evidence existed to support the decision of the Board.

The statutory provisions in respect of the obligation of the Board/Tax

Court to prepare findings of fact and opinions remained unchanged from

1928 to 1982.

These statutory provisions, however, have never been

incorporated into the Tax Court rules. Although it was suggested that such

provisions be incorporated into the rules as part of the 1974 rules revision,

the court’s rules committee rejected the proposal.

Rather, the committee

referred to the appropriate statutory provisions by footnote in the court’s

rules.

D. Bench Opinions

1. The Amendment of Section 7459(b)

The requirement of written findings of fact and opinions (collectively

referred to as “reports”)

served several important functions. First, written

reports disclosed the court’s view of the law in the circumstances before it.

Second, written reports kept the general public informed of the court’s

interpretation of the tax law. Third, written reports assisted the courts of

appeals in reviewing Tax Court decisions, which became appealable under

the 1926 Act.

Finally, because written reports were subject to the court’s

1928, Before the Senate Finance Comm., 70th Cong., 1st Sess. 332 (1928) (remarks of

W. A. Staub).

H.R. REP. NO. 70-2, at 30 (1928).

Id.

Compare Revenue Act of 1928, ch. 852, § 601, 45 Stat. 872 with I.R.C.

§ 7459(b).

See Draft of Proposed Rules in Connection With 1974 Rules Revision, §§ 155

and 156 of Title XV entitled “Opinion and Decision,” Dec. 3, 1971, filed at the

U.S. Tax Court in “Decisions: Memoranda & Correspondence;” Tax Court Rules

Committee Minutes, Dec. 20, 1971.

TAX CT. R., Title XV, “Decision” (July 6, 2012 ed.).

See I.R.C. § 7459(b).

Ch. 27, §§ 1001, 1003(a), 44 Stat. 9, 109–10. See I.R.C. § 7482(a) (providing

for appellate review in the United States Courts of Appeals).

740 The United States Tax Court – An Historical Analysis

procedures for review by the chief judge and court conference,

they

helped to assure the consistency of Tax Court precedents.

Faced with an increasing number of frivolous cases,

100

however, it

became apparent that the written report requirement was often needlessly

burdensome. Because the court had previously disposed of many

groundless claims in similar proceedings, a written report in these cases was

of little value.

In 1982, in an effort “to promote the efficient operation of the [Tax]

Court,”

101

Congress amended § 7459(b) of the Code to provide that

“[s]ubject to such conditions as the Tax Court may by rule provide, the

requirements of this subsection and of section 7460 are met if findings of

fact or opinion are stated orally and recorded in the transcript of the

proceedings.”

102

This amendment prompted concern among some Tax Court members

who were apprehensive of the potential adverse effect that the authority to

issue oral findings of fact and opinion (hereinafter “bench opinions”) could

have on the consistency of Tax Court opinions.

103

Accordingly, a prime

objective of the Tax Court in implementing its bench opinion authority was

the adoption of a rule to assure the continuing consistency of its

precedents.

104

In defining and implementing that policy, however, the Tax

A division report “shall become the report of the Tax Court within 30 days

after such report by the division, unless within such period the chief judge has

directed that such report shall be reviewed by the Tax Court.” I.R.C. § 7460(b).

The court conference procedures are discussed in Section F of this Part.

100

See H.R. REP. NO. 98-861, at 985 (1984); Theodore Tannenwald, Jr.,

Reflections on the Tax Court, 36 T

AX LAW. 853, 857 (1983).

101

127 CONG. REC. 32078 (1981) (Senate Finance Committee Technical

Explanation of the Miscellaneous Revenue Act of 1982).

102

Miscellaneous Revenue Act of 1982, Pub. L. No. 97-362, § 106, 96 Stat.

1726, 1730. While initially findings of fact and opinion were referred to as “bench

decisions,” the phrase “bench opinions” is now used.

103

See Memorandum from Judge Simpson to Rules Committee, Nov. 12, 1982,

filed at the U.S. Tax Court in “Rules Committee: Bench Decisions” (expressing his

concern regarding the maintenance of consistency when bench opinions are

rendered); Memorandum from Judge Goffe to the Judges, Jan. 24, 1983, filed at the

U.S. Tax Court in “Rules Committee: Bench Decisions” (favoring the adoption of

guidelines for use by the judges and special trial judges, but opposing such

guidelines in the published rules of the court because published rules would invite

motions for written opinions and create an unnecessary vehicle for appellate review

of the Tax Court’s interpretations of its rules); Memorandum from Judge Sterrett

to Chief Judge Tannenwald, Jan. 17, 1983, filed at the U.S. Tax Court in “Rules

Committee: Bench Decisions” (expressing fear that uniformity of decision might be

weakened by “a proliferation of unguided bench opinions” if the court were to

adopt Judge Goffe’s suggestion).

104

See supra note 103.

Opinions, Decisions, and Appeals 741

Court could not lose sight of the purpose of the amendment to § 7459(b)—

that is, to enable the court to cope with its tremendous workload by

disposing expeditiously of cases appropriate for bench opinions.

105

Finally,

the Tax Court did not intend to allow these objectives to interfere with the

rights of parties by subjecting them to arbitrary actions; it was the intent of

the Tax Court that the bench opinion authority be exercised with fairness,

consistency, and compatibility with the spirit of court precedents.

106

A great concern of the Tax Court in considering guidelines for the

issuance of bench opinions was the maintenance of consistency in court

opinions.

107

Because a bench opinion issued under § 7459(b) would avoid

review by the chief judge and the court conference,

108

other safeguards were

clearly needed to prevent inconsistencies between the law as applied in

bench opinions on the one hand and written precedents on the other.

Intricately interwoven with these considerations was whether guidelines for

the issuance of bench opinions should be promulgated in the Rules of

Practice and Procedure, or whether internal guidelines would be more

appropriate.

109

The advantages of a rule would be to inform parties of the

court’s bench opinion authority, and if general standards were included in

the rule, to help assure consistency in the circumstances in which bench

opinions were issued.

110

There was fear, however, that the promulgation of

a specific rule would restrict the Tax Court’s flexibility in exercising its

bench decision authority.

111

105

See Memorandum from Judge Simpson to the Judges, Jan. 27, 1983, filed at

the U.S. Tax Court in “Rules Committee: Bench Decisions.”

106

See id.

107

See Memorandum from Chief Judge Tannenwald to Judges and Special Trial

Judges, Jan. 1983, filed at the U.S. Tax Court in “Rules Committee: Bench

Decisions” (setting forth guidelines for the exercise of discretion granted by Rule

152); Memorandum from Judge Simpson to Rules Committee, supra note 103.

108

The amendment to § 7459(b) provides that “the requirements of this

subsection and of section 7460 are met if findings of fact or opinion are stated

orally and recorded in the transcript of the proceedings.” I.R.C. § 7459(b). The

court conference procedures are discussed in Section F of this Part.

109

Memorandum from Judge Simpson to the Judges, supra note 105;

Memorandum from Judge Goffe to the Judges, supra note 103; Memorandum from

Judge Sterrett to Chief Judge Tannenwald, supra note 103; Memorandum from

Joanne Hickcox to Judge Simpson, Nov. 10, 1982, filed at the U.S. Tax Court in

“Rules Committee: Bench Decisions” (suggesting that a specific rule that delineates

certain types of cases in which bench opinions are appropriate may preclude a

judge “from rendering a bench decision in an otherwise appropriate case . . . and

may invite complaints from parties who believe that a judge has rendered a bench

decision in a case not covered by the rule”).

110

See Memorandum from Judge Simpson to the Judges, supra note 105, at 3–4.

111

See Memorandum from Judge Goffe to the Judges, supra note 103. Judge

Goffe was particularly concerned that the inclusion of guidelines in the proposed

742 The United States Tax Court – An Historical Analysis

Another point of concern to Tax Court members was whether the

guidelines controlling the exercise of the bench opinion authority should be

general, so as to grant the individual judges a broader range of discretion in

determining the cases appropriate for bench opinions, or whether the

guidelines should be specific and limited to a few circumscribed cases.

112

Most judges seemed to believe that general standards would best enable a

judge to exercise the discretionary authority properly.

113

They also

recognized, however, that general, imprecise standards could be interpreted

differently by different judges, and the consistency that had historically been

a significant feature of Tax Court precedents could be lost.

114

The Tax Court considered whether to enumerate within a rule the types

of cases that could appropriately be disposed of by bench opinions.

115

Although the adoption of a rule specifying the types of cases in which

bench opinions could be issued would probably assist in maintaining

consistency in court opinions, such a rule also could present problems.

First, in drafting the rule, it would be difficult for the court to conceive of

every type of case that would be appropriate for a bench opinion.

116

Consequently, a judge might be prevented from issuing a bench opinion in

rules of the court—particularly the language, “if he is satisfied as to the factual

conclusions to be reached in the case and that the law to be applied thereto is

clear”—could be interpreted by a court of appeals to restrict the court “in

circumstances we cannot now anticipate.” Id. Judge Goffe also pointed out that a

specific rule would create a standard of review different from the existing clearly

erroneous standard. He saw the phrase “law being clear” as limiting language that

could create “another unnecessary vehicle for interpretations of our rules.” Id.

112

See Memorandum from Chief Judge Tannenwald to Judges and Special Trial

Judges, supra note 107. Chief Judge Tannenwald listed seven types of cases that

“may be particularly appropriate for bench decisions,” see infra note 158, but he

recognized the necessity of allowing judges flexibility in applying such guidelines:

“Obviously, not every case of the types enumerated above will be appropriate for

bench decision. I also am sure that you will have cases of a type not enumerated

above in which a bench decision will be appropriate.” Memorandum from Chief

Judge Tannenwald to Judges and Special Trial Judges, supra note 107, at 4; see also

Memorandum from Judge Simpson to Rules Committee, supra note 103 (expressing

his concern that requiring a transcript of each bench decision to be provided to the

chief judge would place an undue burden on the chief judge and his staff, as would

a provision allowing a losing party to make a motion for reconsideration of a bench

decision, which motion would be considered by the chief judge).

113

See Memorandum from Chief Judge Tannenwald to Judges and Special Trial

Judges, supra note 107; Memorandum from Judge Simpson to Rules Committee,

supra note 103.

114

See Memorandum from Judge Simpson to Rules Committee, supra note 24.

115

See Memorandum from Judge Simpson to the Judges, supra note 105;

Memorandum from Joanne Hickcox to Judge Simpson, supra note 109.

116

Memorandum from Joanne Hickcox to Judge Simpson, supra note 109, at 7.

Opinions, Decisions, and Appeals 743

an otherwise appropriate case simply by the fact that it was not of the type

enumerated.

117

Second, a specific rule could give rise to complaints from

parties who believed that a bench opinion had been given in a case not

specified within the rule.

118

In either event, the goal of increasing the

efficiency of the Tax Court would be subverted.

2. The Proposal of Rule 152

Rule 152, as proposed by the Rules Committee in 1982, provided as

follows:

[e]xcept in actions for declaratory judgment or for disclosure . . ., the

Judge, or the Special Trial Judge in any case in which he is authorized

to make the decision of the Court pursuant to Code section

7456(d)(2) or (3), may, in his discretion, orally state his findings of

fact or opinion if he is fully satisfied as to the factual conclusions to

be reached in the case and that the law to be applied thereto is

clear.

119

Examples of the types of cases in which bench opinions might be rendered

were included in the note accompanying the proposed rule, with a

specification that the examples were not intended to be all inclusive.

120

117

Id.

118

Id.

119

See Letter from Judge Simpson to Kenneth W. Gideon, Chief Counsel to

Internal Revenue Service, Dec. 15, 1982, filed at the U.S. Tax Court in “Rules

Committee: Bench Decisions” (this letter includes a draft of the proposed rule

which was sent to the Service and the tax bar for comment). For the complete text

of Proposed Rule 152, see infra note 149.

120

The note accompanying the proposed rule provided in part:

Examples (which are not intended to be all-inclusive) of the types of

cases in which oral findings of fact or opinion might be rendered include:

(1) Cases involving substantiation of deductions (e.g., for medical care,

charitable contributions, or casualty losses), including cases where the rule

in Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930), is applicable;

(2) fraud cases in which the deficiencies have been admitted and the only

issue is whether there was the requisite intent to evade tax; (3) depreciation

cases in which the issue is the useful life or cost of property; and (4)

valuation cases.

Under the Rule, the Court’s findings will be recorded in the transcript of

the proceeding. Those pages of the transcript which record the Court’s

findings of fact or opinion (or a written summary thereof) will be provided

to all parties free of charge.

See Letter from Judge Simpson to Kenneth W. Gideon, supra note 119.

744 The United States Tax Court – An Historical Analysis

a. Opposition to the Proposed Rule

Although Judge Goffe favored the adoption of guidelines for the use of

the judges and special trial judges in issuing bench opinions, he opposed

setting forth these guidelines in a rule.

121

Specifically, he opposed the clause

in proposed Rule 152 that would limit the use of bench opinions to cases in

which the facts and law were clear.

122

Judge Goffe argued that the Tax Court rules did not specify the

circumstances in which an opinion would be published or issued as a

memorandum, nor was there a rule to inform parties when or whether

court review would be directed.

123

Judge Goffe believed that if the general

guidelines for issuing bench decisions were included in a rule, a party could

pursue an appeal on the grounds that the judge had failed to follow that

rule.

124

In this event, a court of appeals could restrict the Tax Court’s

flexibility in exercising the bench opinion authority through an

unanticipated interpretation of the rule.

125

Moreover, Judge Goffe expressed concern that the language limiting the

use of bench opinions to cases in which the facts and law were clear might

encourage motions seeking written opinions.

126

Presumably, parties

believing they would win would move for the judge to issue a bench

opinion. Conversely, losing parties, apprehensive that a bench opinion

might result in an additional obstacle to overcome on appeal, could file a

motion that the judge issue a written opinion, on the grounds that the facts

or law in a particular case were not clear. Judge Goffe asserted that these

problems would frustrate the congressional goal of increasing Tax Court

efficiency. Judge Goffe argued that Congress had not included such

limiting language in its amendment to § 7459(b), and the Tax Court should

not so limit itself by a specific rule.

127

b. The Rule’s Proponents

The Rules Committee was convinced that the advantages of setting

forth the guidelines for issuing bench opinions within a rule outweighed the

121

Memorandum from Judge Goffe to the Judges, supra note 103, at 1.

122

Id.; see supra note 111 (quoting the language Judge Goffe opposed).

123

Memorandum from Judge Goffe to the Judges, supra note 103, at 1–2.

124

Id. at 2.

125

Id.

126

Id.; see also Memorandum from Joanne Hickcox to Judge Simpson, supra

note 109, at 8–9 (recommending against the court’s granting parties the right to

object to a judge’s decision to render a bench decision because such a right would

be inconsistent with the statutory language and with the congressional purpose of

promoting more efficient operation of the court).

127

Memorandum from Judge Goffe to the Judges, supra note 103.

Opinions, Decisions, and Appeals 745

disadvantages.

128

The Chairman of the Rules Committee, Judge Simpson,

argued that although the amendment to § 7459(b) had been enacted to

enable the Tax Court to cope with its heavy workload, it was important that

bench opinions be issued only in appropriate cases.

129

This was particularly

important because of the lack of opportunity for review by the chief judge

or court conference in cases in which a bench opinion was issued.

130

addition, because there might be a propensity to consider bench opinions

less carefully than written opinions, the record in such cases would tend to

make the task of a reviewing court of appeals more difficult.

131

Because of

his concern that the authority to issue bench opinions could significantly

alter the operation of the Tax Court, Judge Simpson believed that the use of

bench opinions should be approached with extreme care.

132

Judge Simpson pointed out that through its issuance of written opinions

and because of the procedures for review by the chief judge and at court

conference, Tax Court decisions were consistent in their application of the

tax law.

133

Judge Simpson believed that the authority to issue bench

opinions should be exercised while keeping the traditions and practices of

the Tax Court in perspective.

134

A written opinion should be prepared

whenever the facts or law of the case are such that there is reason to advise

the Service and the bar of the Tax Court’s view of the law in those

circumstances.

135

Similarly, in cases in which questions arise as to whether a

proposed conclusion is consistent with other decisions of the court, a

written opinion should be prepared to avoid circumvention of the review

procedures.

136

The Rules Committee was not convinced that the issuance of internal

guidelines regarding the use of bench opinions would, in itself, ensure

consistency in the application of the law by Tax Court judges.

137

Including

the guidelines within a rule, the Rules Committee believed, would be more

effective and would have the additional benefit of informing Congress and

the tax bar of the circumstances in which a bench opinion might be

made.

138

Moreover, the Rules Committee was concerned that if the

guidelines were not specified, Congress and the bar might be curious as to

Tax Court policy regarding bench opinions and ask for a specific statement

128

See Memorandum from Judge Simpson to the Judges, supra note 105.

129

Id. at 1–2.

130

Id. at 2.

131

Id.

132

Id.

133

Id. at 3.

134

Id.

135

Id.

136

Id. at 3–4

137

Id. at 4.

138

Id.

746 The United States Tax Court – An Historical Analysis

regarding the court’s bench opinion policy.

139

If the Tax Court were to

issue a statement more specific than a rule, it could restrict the court’s range

of discretion in exercising the bench opinion authority.

The Rules Committee concluded that there was only a minimal risk that

a court of appeals would limit the court’s ability to exercise the bench

opinion authority with an unnecessarily restrictive interpretation of the

rule.

140

The proposed rule left the determination whether to issue a bench

opinion to the judge.

141

It was believed that an appellate court would be

unlikely to conclude that such a determination was appropriate for

review.

142

Furthermore, even if review were to be granted and a court of

appeals were to rule that the trial judge had abused his discretion in

rendering a bench opinion, the court would merely remand and order the

preparation of a written opinion.

143

c. Comments from the Service and Tax Bar

Although proposed Rule 152 had support from members of the tax bar

and the Service,

144

a question was raised whether the last clause of the rule

would preclude a judge from giving his factual conclusions orally when the

facts of the case were clear but the law was unclear.

145

Often a judge’s

factual conclusions can be very helpful to counsel in preparing their

arguments of law, and there was some concern that proposed Rule 152

might be read to preclude a judge from stating his factual conclusions, if the

judge’s legal conclusions were not stated simultaneously.

146

Although Rule 152 had the general support of the Service, the Service

recommended amending the rule to allow either party to make a motion for

a bench opinion.

147

Presumably because it was intended that the discretion

139

Id.

140

Id. at 5.

141

Id.

142

Id.

143

Id.

144

See Letter from Tax Practitioner to Judge Simpson, Jan. 11, 1983, filed at the

U.S. Tax Court in “Rules Committee: Bench Decisions”; (Letter from Kenneth W.

Gideon, Chief Counsel of Internal Revenue Service, to Judge Simpson, Jan. 12,

1983, filed at the U.S. Tax Court in “Rules Committee: Bench Decisions.”

145

See Letter from Tax Practitioner to Judge Simpson, supra note 144. The last

clause of the proposed rule provided that the judge could render a bench opinion

“if he is fully satisfied as to the factual conclusions to be reached in the case and

that the law to be applied thereto is clear.”

146

See Letter from tax practitioner to Judge Simpson, supra note 144.

147

See Letter from Kenneth W. Gideon, Chief Counsel of Internal Revenue

Service, to Judge Simpson, supra note 144.

Opinions, Decisions, and Appeals 747

to issue a bench decision would rest entirely with the trial judge, no

amendment was made to the rule to address this concern.

148

3. The Adoption and Employment of Rule 152

Rule 152, in virtually the same form proposed by the Rules Committee,

was adopted by the court and went into effect in 1983.

149

The note

accompanying Rule 152, however, was revised from its proposed form to

exclude enumeration of types of cases in which bench opinions might be

expected.

150

The court felt that it would be more appropriate to set forth a

148

TAX CT. R. 152, 79 T.C. 1147 (1982).

149

Id. At the time of its adoption, Rule 152 provided as follows:

(a) General: Except in actions for declaratory judgment or for

disclosure (see Titles XXI and XXII), the Judge, or the Special Trial Judge

in any case in which he is authorized to make the decision of the Court

pursuant to Code Section 7456(d)(2) or (3), may, in his discretion, orally

state his findings of fact or opinion if he is satisfied as to the factual

conclusions to be reached in the case and that the law to be applied thereto

is clear.

(b) Transcript: Oral findings of fact or opinion shall be recorded in the

transcript of the trial. The pages of the transcript that contain such findings

of fact or opinion (or a written summary thereof) shall be served by the

Clerk upon all parties.

this Rule shall not be cited or relied upon as precedent. However, such

opinions (including findings of fact) may be referred to for purposes of the

application of the doctrine of res judicata, collateral estoppel, or law of the

case.

Id. The only material difference between the rule as proposed and as adopted is

that proposed Rule 152(a) required the judge or special trial judge to be “fully”

satisfied as to facts and law. Cf. supra note 119. Rule 152 remains in material

respects the same as when it was introduced. See T

AX CT. R. 152 (July 6, 2012 ed.).

150

Rules Comm. Note, TAX CT. R. 152, 79 T.C. 1148 (1982). The note

provides:

Rule 152 permits the presiding Judge or Special Trial Judge to orally

state findings of fact or opinion in appropriate cases, pursuant to the

authority of section 106(b) of the Miscellaneous Revenue Act of 1982, Pub.

L. 97-362 (Oct. 25, 1982). The Rule does not apply in actions for

declaratory judgment or for disclosure.

Under the Rule, the Court’s findings will be recorded in the transcript of

the proceeding. Those pages of the transcript which record the Court’s

findings of fact or opinion (or a written summary thereof) will be provided

to all parties free of charge.

The authority conferred by this Rule may be exercised on and after

March 1, 1983, in pending and future cases.

Id.

748 The United States Tax Court – An Historical Analysis

general standard for issuing bench opinions, rather than designate particular

types of cases, and that the broad discretion granted the trial judge by Rule

152 was necessary for the effective employment of the Tax Court’s bench

opinion authority.

151

It was also recognized, however, that considerable

problems could be created by this broad grant of discretion. Shortly after

the enactment of Rule 152, Chief Judge Tannenwald issued a set of

suggested guidelines to be followed in exercising the bench opinion

authority.

152

Initially, Chief Judge Tannenwald pointed out that the court was

required by statute to record “findings of fact or opinion” in the

transcript;

153

a mere final pronouncement in favor of the Service or the

taxpayer would not be sufficient to meet the requirements of § 7459(b).

154

Accordingly, Chief Judge Tannenwald urged that a bench opinion should

not be rendered in any case unless both the relevant facts and the applicable

law could be readily summarized from the bench.

155

Additional

considerations exist in appealable cases, i.e., cases not governed by the small

case procedures.

156

Appellate courts expect complete and detailed findings

of fact and a full discussion of the legal issues involved in Tax Court cases.

To reduce the possibility of reversal, Chief Judge Tannenwald suggested

that bench opinions be rendered in appealable cases only if the expectations

of appellate courts could be met, and a statement of the facts and legal

issues were recorded clearly in the transcripts.

157

Chief Judge Tannenwald listed seven types of cases in which bench

opinions may be particularly appropriate.

158

He recognized that not every

151

See Memorandum from Chief Judge Tannenwald to Judges and Special Trial

Judges, supra note 107.

152

Id. Theodore Tannenwald, Jr. began his tenure as Judge of the United

States Tax Court on August 2, 1965. On July 1, 1981, he became Chief Judge and

served in that position until July 1, 1983.

153

Id. The legislative history of the amendment to § 7459(b) indicates that

transcripts of the proceedings are to be provided to parties free of charge. See H.R.

EP. NO. 97-929, at 34 (1982).

154

In 1992, the Court Conference reconfirmed the Court’s policy that a bench

opinion must be stated on the record at the trial session at which the testimony was

concluded in that case.

155

See Memorandum from Chief Judge Tannenwald to Judges and Special Trial

Judges, supra note 107.

156

Cf. I.R.C. § 7463(b).

157

Memorandum from Chief Judge Tannenwald to Judges and Special Trial

Judges, supra note 107.

158

Id. Chief Judge Tannenwald listed the following types of cases as

appropriate for bench decisions:

(1) “Protester” cases involving legal arguments that have been raised

and rejected repeatedly in the past.

Opinions, Decisions, and Appeals 749

type of case enumerated would be appropriate for a bench opinion, and

that there would be unlisted cases suitable for disposition through bench

opinions.

159

Nonetheless, he thought it would be helpful to suggest certain

cases in which bench opinions might be appropriate, because pretrial

preparation in those cases might aid in the effective use of Rule 152. Chief

Judge Tannenwald suggested the judges and special trial judges bring

sample opinions to trial in cases that appear appropriate for disposition

through bench opinions.

160

Chief Judge Tannenwald expressed the importance of ensuring that the

“consistency and uniformity which have been the hallmark of our opinions

are preserved.”

161

He reiterated that in cases in which a bench opinion is

rendered, the parties are deprived of the opportunity to file briefs, and the

opinion is not subject to review by the chief judge or court conference.

162

Chief Judge Tannenwald also noted that in small tax cases, the losing party

cannot appeal a decision the party believes to be contrary to established

precedent of the Tax Court.

163

Thus, he requested that the transcript of

cases in which bench opinions were rendered be forwarded to him, or in

small tax cases, to the judge in charge of the small tax division.

164

(2) Fraud cases in which the deficiencies have been admitted and the

only issue is whether there was the requisite intent to evade tax, particularly

where determination of that issue depends upon an evaluation of the

petitioner’s credibility as a witness.

(3) Substantiation cases in which the taxpayer does not have books and

records to support deductions taken (e.g., for medical care, charitable

contributions, or casualty losses) and determination of the deductible

amount depends on application of the rule in Cohan v. Commissioner, 39 F.2d

540, 543–44 (2d Cir. 1930).

(4) Cases in which the Court must determine whether a particular

expenditure constitutes an ordinary and necessary business expense

deductible under Code section 162(a) or a nondeductible personal, family,

or living expense.

(5) Cases in which the Court must determine whether amounts paid to a

medical intern or resident are an excludible scholarship or fellowship grant

under Code section 117(a).

(6) Depreciation cases in which the only issue to be resolved is the

useful life of property.

(7) Valuation cases.

Id. at 3.

159

Id. at 4.

160

Id.

161

Id.

162

Id. at 4–5.

163

Id. at 5.

164

Id.

750 The United States Tax Court – An Historical Analysis

E. Memorandum Opinions

Although memorandum opinions were not expressly authorized until

the Revenue Act of 1928,

165

as early as 1924 the suggestion was made that

many decisions published in full in the bound volume reports were of little

value as authority and therefore should be promulgated solely in

mimeographed form for the parties.

166

Notwithstanding the suggestion, the

first use of memorandum opinions was in late 1927.

167

The procedure

consisted of preparing findings of fact and a memorandum opinion, which

would be included in the file, thereby satisfying the requirement of the

Revenue Act of 1924 that the findings of fact and opinion be of public

record.

168

The statutory provision requiring publication “in such form and

manner as may best be adopted for public information and use”

169

was

construed liberally to permit the Board to “publish” memorandum opinions

by mere insertion in the Board’s bound volume of the date decision was

entered, such insertion being considered enough for the limited value such

cases had.

170

Consistent with its position that memorandum opinions were

not worthy of publication, the Board soon adopted the policy of not citing

prior memorandum opinions in its opinions.

171

Use of the memorandum opinion quickly increased, and by the late

1930’s a substantial number of proceedings before the Board were disposed

of in this manner.

172

Such practice reflected a growing number of cases that

were essentially fact driven, involving routine and well-settled questions of

law.

173

The Board had employed this device in an effort to save printing

165

Revenue Act of 1928, ch. 852, § 601, 45 Stat. 872, amending Revenue Act of

1926, ch. 27, § 907(b), 44 Stat. 107; see also 1928 House Hearings, supra note 91, at

189, 523, 540.

166

Memorandum from Charles Gebhardt to Member Sternhagen, c. Jan., 1925,

filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence.”

167

Board Conference Minutes, Nov. 11, 1927.

168

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 107, amending Revenue Act of

1924, ch. 234, § 900(h), 43 Stat. 338 (now codified at I.R.C. § 7461).

169

Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 107, amending Revenue Act of

1924, ch. 234, § 900(h), 43 Stat. 338 (now codified at I.R.C. § 7462).

170

See Memorandum from Judge Murdock to Judges of the Court, Apr. 6,

1950, filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence”

[hereinafter cited as Murdock, 1950].

171

The Tax Court Conference Minutes, Apr. 26, 1946, indicate that prior

Board/Tax Court policy had been not to cite memorandum opinions.

172

See Report of the Joint Committee of Board of Tax Appeals and Chief

Counsel’s Office, Dec. 17, 1937, at 24, filed at the U.S. Tax Court in “Field

Divisions: Memoranda & Correspondence” [hereinafter cited as Joint Committee

Report].

173

Preliminary Committee Report of the Joint Committee of Board and

Treasury Personnel, c. 1937, at 12, filed at the U.S. Tax Court in “Field Divisions:

Opinions, Decisions, and Appeals 751

costs, but members of the tax bar began to urge a more extensive use of

informal memorandum opinions as a panacea for the congestion of cases

on the Board’s calendar.

174

The Board, however, rejected such use of

memorandum opinions.

175

In its experience, the Board had found that little

if any time was saved by their use. Each case, regardless of the form of the

opinion, still required the same study of the record and preparation time.

176

Additionally, because cases involving memorandum opinions frequently

were appealed, the chances for reversal would increase if the quality of

workmanship declined as a result of more summary use of the

memorandum form.

177

The policy of neither citing nor publishing memorandum opinions was

reevaluated in the 1950’s by the court membership.

178

Proponents of

publication believed that numerous cases had been promulgated as

memorandum opinions without sufficient regard to their possible value as

precedent.

179

Such designation had prevented citation in subsequent cases,

creating particular difficulty in situations in which the memorandum

opinion was the only case on point.

180

In addition, the private publishing

services were printing memorandum opinions, the tax bar was buying them,

and parties and other courts often relied on memorandum opinions as

authority.

181

Finally, the amount of money saved by not publishing the

estimated two additional volumes a year did not outweigh the

inconvenience to the judges and the disservice to the tax bar.

182

Despite these criticisms, the court did not change its policy.

183

First,

publication was not as inexpensive as the proponents of publication

Memoranda & Correspondence” [hereinafter cited as Preliminary Committee

Report].

174

Id. at 11.

175

Joint Committee Report, supra note 172, at 24; Preliminary Committee

Report, supra note 173, at 12.

176

Joint Committee Report, supra note 172, at 24.

177

The Joint Committee Report also pointed out that well drafted findings of

fact and a reasonably exhaustive opinion that indicated that the Board had

considered all the arguments would tend to satisfy the losing party with the

soundness of the Board’s decision and, therefore, to reduce the number of appeals.

Preliminary Committee Report, supra note 173, at 13.

178

See Murdock, 1950, supra note 170; see Tax Court Conference Minutes, Feb.

5, 1954 and Mar. 19, 1954.

179

Murdock, 1950, supra note 170; Tax Court Conference Minutes, Feb. 5,

1954.

180

Tax Court Conference Minutes, Feb. 5, 1954.

181

Murdock, 1950, supra note 170, at 1.

182

Id.

183

See Tax Court Conference Minutes, Mar. 19, 1954.

752 The United States Tax Court – An Historical Analysis

believed.

184

Second, if publication of all opinions was not established,

citation of a memorandum opinion could not be allowed as this would

indicate that the court had committed an error in not publishing the

opinion in the first instance.

185

However, in those situations in which a

citation in an opinion was to a higher court decision that affirmed or

reversed a memorandum opinion, it was deemed appropriate to indicate

whether it affirmed or reversed the Tax Court’s memorandum opinion.

186

In any event, the court’s membership agreed to exercise greater care in

determining whether an opinion would be released in memorandum

form.

187

Further discussions among the court’s membership in the early

1970’s resulted in an affirmation of the traditional policy.

188

The Tax Court in more recent times has developed a position with

respect to memorandum opinions that can best be described as more

embracive. Although memorandum opinions still do not have binding

precedential value,

189

the court nonetheless has recognized that

memorandum opinions constitute persuasive authority that aid in the

disposition of present cases. For instance, in the case of Convergent

Technologies, Inc. v. Commissioner,

190

the Tax Court—through a memorandum

opinion—explained the relevance of a prior memorandum opinion

concerning a similar factual scenario as follows:

Sun Microsystems, Inc., being a memorandum opinion of this Court, is

not controlling precedent. Darby v. Commissioner, 97 T.C. 51, 67

(1991). . . . However, given the substantial similarity of the factual

184

The proponents of publication had asserted that the additional cost would

be approximately $10,000, the cost of preparing two additional volumes. Sales of

the volumes, the proponents believed, would cover the Government printing

expenditures. However, critics of the plan did not believe that $10,000 would

cover expenses. Memorandum from Judge Van Fossan, Chairman, Committee on

Memorandum Opinions, to Chief Judge Kern, Feb. 25, 1954, filed at the U.S. Tax

Court in “Decisions: Memoranda & Correspondence.”

185

Tax Court Conference Minutes, Feb. 5, 1954.

186

Administrative Memorandum No. 153 from Chief Judge Murdock to the

Judges of the Court, May 29, 1959, filed at the U.S. Tax Court in “Decisions:

Memoranda & Correspondence.”

187

Memorandum from Judge Van Fossan, Chairman, Committee on

Memorandum Opinions, to Chief Judge Kern, Feb. 25, 1954, filed at the U.S. Tax

Court in “Decisions: Memoranda & Correspondence;” Tax Court Conference

Minutes, Mar. 19, 1954.

188

Tax Court Conference Minutes, May 5, 1970.

189

See Darby v. Commissioner, 97 T.C. 51, 67 (1991) (citing Newman v.

Commissioner, 68 T.C. 494, 502 n.4 (1977)); see also Andrews v. Commissioner, 931

F.2d 132, 137 n.9 (5th Cir. 1991) (“We note that prior memorandum decisions of

the Tax Court are not treated by that court as binding precedent.”).

190

T.C. Memo. 1995-320, 70 T.C.M. (CCH) 87.

Opinions, Decisions, and Appeals 753

foundation of this case and Sun Microsystems, Inc., there is no reason

why we should not follow the same analytical approach.

191

Hence, it is now a common albeit non-universal practice of Tax Court

judges to support their opinions with citations to prior memorandum

opinions. As memorandum opinions are often cited by the court, the court

now permits parties to cite memorandum opinions as part of the briefing

process. Indeed, the court issued a press release in 2012 articulating a

uniform means of spot citing to memorandum opinions given the lack of

publication in an official reporter.

192

The increased citation of memorandum opinions has not eroded the

distinction between memorandum opinions and division opinions, as the

former give rise to persuasive authority only. Because division opinions

make up the body of Tax Court precedent that will be afforded stare decisis

deference in future cases, the judges of the court have a greater interest in

the holding and analysis of a proposed division opinion than that of a

memorandum opinion. Accordingly, the decision of whether an opinion

should be published as a division opinion or issued as a memorandum

opinion continues to carry significance.

That said, emphasizing the technical distinction between the

precedential value of memorandum opinion and a division opinion risks

understating the degree of deference those opinions are afforded by the

court. The Tax Court has a strong institutional interest in maintaining

integrity in its decision-making process, and the institutional integrity of the

court would be undermined if each judge felt free to issue a decision

adopting a holding or analysis that could not be reconciled with that of a

prior memorandum opinion. Thus, the court’s interest in decisional

consistency results in considerable respect being afforded to prior

memorandum decisions as a practical matter. What then is the lasting value

of the distinction between memorandum opinions and division opinions?

Perhaps the best answer is the signaling value of such designations to the

tax bar and the public at large. The court releases hundreds of opinions

each year, many of which are driven by factual determinations that offer

little value to the disposition of future cases. Official publication of an

opinion as a division opinion to be included in the Reports of the United

States Tax Court signals to the public and to the Government that the court

views the opinion as noteworthy in some respect, for reasons described

below. The channeling function performed by the Tax Court in designating

191

Id. at 95.

192

Press Release, United States Tax Court (June 26, 2012), available at

http://www.ustaxcourt.gov/press/062612.pdf. The court announced that it would

commence embedding page markers in the slip opinions published on its website,

anticipating that such pagination would be reproduced by private print and

electronic publishers. Id.

754 The United States Tax Court – An Historical Analysis

opinions as memorandum opinions or division opinions thereby facilitates

more efficient use of the court’s opinion product.

Under current practice, the division that prepares the opinion indicates

on the transmittal to the chief judge whether it recommends that the

opinion be published by the court or issued as a memorandum opinion.

The decision, however, rests within the discretion of the chief judge.

193

Chief Judge Mary Ann Cohen explained the factors that guide the exercise

of the chief judge’s discretion in this regard as follows:

[C]ases involving application of familiar legal principles to routine

factual situations, nonrecurring or enormously complicated factual

situations, obsolete statutes or regulations, straightforward factual

determinations, or arguments patently lacking in merit will be

classified as memorandum opinions. . . . However, an opinion may

be designated for publication if it adopts or rejects a particular

methodology or an unusual argument of one of the parties that may

recur in other cases. On the other hand, an opinion may be so

factually intense that it is not feasible to distill from it useful

precedents even if it is one of many similar cases and, therefore, is

released as a memorandum opinion.

194

Similarly, in its press release announcing the uniform means of spot

citing to memorandum opinions, the court explained that these opinions

“generally address cases which do not involve novel legal issues and in

which the law is settled or the result is factually driven.”

195

Memorandum

opinions therefore carry that designation because the court views these

opinions as not contributing in a meaningful way to the body of Tax Court

precedent.

F. Court Conference

An especially significant feature of Tax Court procedure is the court

conference. During these conferences, the entire court membership of

active judges reviews division reports referred to it by the chief judge. The

chief judge has considerable discretion in selecting reports for court review,

but generally the reports selected are those that either conflict with

precedent or that contain issues not previously addressed by the court.

Since the court as a whole is involved in reviewing such reports and

193

See Report Control Card, United States Tax Court, filed at the U.S. Tax

Court in “Decisions: Memoranda & Correspondence.”

194

Mary Ann Cohen, How to Read Tax Court Opinions, 1 HOUS. BUS. & TAX L.J.

1, 6 (2001).

195

Press Release, United States Tax Court (June 26, 2012), available at

http://www.ustaxcourt.gov/press/062612.pdf.

Opinions, Decisions, and Appeals 755

determining whether a precedent should be followed or overruled, or

determining the proper resolution of issues of first impression, the

consistency of Tax Court decisions is preserved. In large part, the court

conference procedures justify the assertion that the Tax Court is a single,

national court, as opposed to 19 separate courts.

196

Notwithstanding early

misunderstandings on the part of observers as to the nature of conference

review,

197

the conference procedure generally has been praised for its role in

providing uniformity in Tax Court opinions.

198

The selection of a case for court review rests within the discretion of the

chief judge. In a 2001 law review article, then Chief Judge Mary Ann

Cohen provided the following insight regarding the principles that guide the

exercise of this discretion:

We use certain rules of thumb. Court review is directed if the

report proposes to invalidate a regulation, overrule a published Tax

Court case, or reconsider, in a circuit that has not addressed it, an

issue on which we have been reversed by a court of appeals. . . .

Court review is also directed in cases of widespread application

where the result may be controversial, where the Chief Judge is made

aware of differences in opinion among the judges before the opinion

in released, or, occasionally, where a procedural issue suggests the

desirability of obtaining a consensus of the judges. Court review is

not available on motion of the parties, before or after the opinion

has been released.

199

1. Historical Origins

In the early days of the Board, every division opinion was referred to the

entire membership for review.

200

Although such extensive review was not

196

See, e.g. Kern, supra note 1, at 1019; Murdock, supra note 1, at 108–09.

197

Early misunderstandings of the review process involved taxpayers who

considered Board review the equivalent of a de novo hearing on the merits. See

infra notes 217–224 and accompanying text. Such misunderstandings were

eliminated by amendments in the Revenue Act of 1928, which clearly indicated the

internal nature of the review procedure. See Revenue Act of 1928, ch. 852, § 601,

45 Stat. 872, amending Revenue Act of 1926, ch. 27, § 907(a)–(b), 44 Stat. 107.

198

E.g., H.R. REP. NO. 69-1, at 18 (1925), wherein it was stated that “the great

value of the Board lies in its practice in meeting regularly for common discussion

and consideration of opinions prepared and proposed to be issued.”

199

Cohen, supra note 194, at 5–6 (emphasis in original).

200

Korner Letter, supra note 7, at 5–6.

756 The United States Tax Court – An Historical Analysis

mandated by statute,

201

it was believed that establishment of a uniform body

of precedents made such review necessary.

202

In 1926, Chairman Korner

proposed to the Board a plan of reorganization that would take advantage

of the newly authorized one-member divisions and also would provide for a

certain degree of internal review.

203

In the view of the Chairman, the time

burden imposed on members by Board review of every division decision

was out of proportion to the value of such review in assuring uniformity.

204

Accordingly, Chairman Korner proposed a realignment of the Board into

16 divisions of one member each with a grouping of the divisions into five

“parts” composed of three divisions each; the Chairman would not be

assigned to a part.

205

The parts would serve the function of providing

intermediate review of division decisions prior to their referral to the

Chairman.

206

Under the procedure envisioned by Chairman Korner, a

one-member division would initially hear the case, study the record and

make a decision.

207

Thereafter, a second member of the part would review

the record so the fact finding and legal conclusions of the first division be

given a further check.

208

Following such review, the three members of the

part would consider the report, and if in accord, it would generally be

adopted without full Board review.

209

In this manner, consideration by the

entire Board would be necessary in only those few cases in which there was

a difference of opinion in the part, in which the decision of the part

conflicted with an existing precedent of the Board, or in which the

Chairman, for other reasons, concluded that review was desirable.

210

201

The provisions of the Revenue Act of 1924 clearly gave the discretion to

the Board Chairman to order Board review of any division decision. Revenue Act

of 1924, ch. 234, § 900(f), 43 Stat. 337.

202

Korner Letter, supra note 7, at 6.

203

Memorandum from Chairman Korner to members of the Board, June 11,

1926, at 8, filed at the U.S. Tax Court in “Divisions: Memoranda &

Correspondence” [hereinafter cited as Reorganization Memorandum]; Board

Conference Minutes, June 23, 1926.

204

Reorganization Memorandum, supra note 203, at 13.

205

Id. at 11–12. Under the part system, the five parts would be composed of

three members each. Memorandum from Chairman Korner to members of the

Board, June 25, 1926, filed at the U.S. Tax Court in “Decisions: Memoranda &

Correspondence.”

206

Reorganization Memorandum, supra note 203, at 13.

207

Id. at 12.

208

Id.

209

Id.

210

Id. Chairman Korner proposed that the system of circulating mimeographed

opinions among the Board membership continue. This would enable the other

members of the Board to offer criticism on the proposed opinion. Id. at 16.

Opinions, Decisions, and Appeals 757

Although Chairman Korner’s proposal for single-member divisions and

a part system was approved by the Board membership,

211

disagreement

arose with respect to allowing the Chairman to make the decision as to

whether a division report should be reviewed by the entire Board.

212

Rather, the membership felt constrained to continue the policy of Board

review of every division decision, in the interest of uniformity.

213

In an

attempt to effect a compromise between the Chairman’s belief that many

cases did not require Board review and the membership’s fear that

inconsistent decisions would undermine the Board’s theretofore successful

work, the Board required the parts to make specific recommendations to

the Board conferences as to whether a division report merited in-depth

Board review.

214

With such recommendations, substantial time could be

saved at the Board conferences.

215

By 1927, the increased production of cases fostered by the realignment

of the Board into 16 divisions and the realization by the Board membership

that many division decisions could adequately be decided without the

necessity of Board review led to adoption of the current policy that leaves

to the discretion of the chief judge the selection of cases to be reviewed by

the entire membership.

216

Despite the intent of Congress that Board review serve as a collegial,

albeit internal device,

217

early misconceptions by the tax bar and the

judiciary threatened to change its character. Taxpayers, aware that their

cases were undergoing Board review, demanded the right to appear before

the Board.

218

Although no statutory provision expressly denied the

taxpayer the right to appear,

219

the Board adopted a policy that internal

review was not the equivalent of an en banc hearing in the Federal courts of

appeals.

220

Members of the Board believed that an internal review process

was quicker than an en banc hearing that permitted re-argument, and that

211

Memorandum from Chairman Korner to members of the Board, June 25,

1926, filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence;”

Board Conference Minutes, June 23, 1926.

212

Board Conference Minutes, June 23, 1926.

213

Id.

214

Memorandum from Chairman Korner to members of the Board, June 25,

1926, filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence.”

215

Id. at 2.

216

See Board Conference Minutes, May 31 and June 3, 1927.

217

See 69 CONG. REC. 704 (1927).

218

See id.

219

Compare Revenue Act of 1926, ch. 27, § 1000, 44 Stat. 107, amending Revenue

Act of 1924, ch. 234, § 900(e)–(f), 43 Stat. 377 with Revenue Act of 1928, ch. 852,

§ 601, 45 Stat. 872, amending Revenue Act of 1926, ch. 27, § 907(a), 44 Stat. 107.

220

See J. Gilmer Korner, Practice Before The United States Board of Tax Appeals, 3

AT’L INC. TAX MAG. 220, 224 (1925); Board Conference Minutes, Feb. 10, 1933.

758 The United States Tax Court – An Historical Analysis

the taxpayer had the responsibility to present his case adequately in the

course of the initial hearing and decision process.

221

The Board position

provoked some taxpayers to seek writs of mandamus to compel the Board

to adopt division decisions that had been revised at conferences at which

the taxpayer had no right to appear.

222

Sensing that adverse judicial rulings

would create undue confusion and take years to remedy,

223

Congress

enacted specific statutory guidelines in the Revenue Act of 1928 that denied

parties the right to appear at the conference if an opportunity for hearing

was provided in the first instance at the division level.

224

On the other

hand, the Chairman was authorized by statute to permit the parties access

to the conference if deemed necessary.

225

The House Ways and Means Committee adopted another proposal

designed to remedy the same problem. In its report on the 1928 Act, the

Committee recommended that the right of a division to “decide” a case in

the first instance be eliminated and that a preliminary report (containing the

findings of fact and opinion in a case) by the division to the Chairman be

substituted.

226

The preliminary report of the division would become the

Board’s decision either by a lapse of 30 days or by adoption at the Board

conference.

227

Although the differences, real and apparent, between the

words “decision” and “report” appear to be of little significance, members

of the tax bar felt that such a procedure would be contrary to traditional

judicial practices and would breed mistrust of Board action.

228

As a result,

the Senate Finance Committee, in an amendment to the 1928 Revenue Bill,

provided that it would be the duty of the division to “hear and make a

determination upon” a proceeding assigned to the division and to “make a

report of any such determination which constitutes its final disposition of

the proceeding.”

229

This change, the Committee asserted, would ensure a

continuation of the policy that a division determine a case in the first

instance.

230

221

See generally 69 CONG. REC. 704 (1927).

222

See id.

223

Id.

224

Revenue Act of 1928, ch. 852, § 601, 45 Stat. 872 (amending Revenue Act

of 1926, ch. 27, § 907(a), 44 Stat. 107).

225

Id.

226

H.R. REP. NO. 70-2, at 31 (1927).

227

Id.

228

E.g., Letter from E. Prettyman to Chairman Littleton, Dec. 27, 1927, filed at

the U.S. Tax Court in “Decisions: Memoranda & Correspondence.” In this letter,

Prettyman complained that the separation of the decision process from the hearing

process was an alien concept in judicial entities and would not create an

atmosphere of trust on the part of the taxpayer in the actions of the Board.

229

S. REP. NO. 70-960, at 37–38 (1928); H.R. REP. NO. 70-1882, at 21 (1928).

230

S. REP. NO. 70-960, at 37–38 (1928); H.R. REP. NO. 70-1882, at 21 (1928).

Opinions, Decisions, and Appeals 759

Since the statutory changes of 1928, the court conference procedure has

undergone little change.

231

The policy of part review, though formally

dropped in 1932,

232

has continued throughout the court’s history in an

informal manner. Current practice indicates that frequent consultation

between the judges is the rule, rather than the exception.

233

If the chief

judge determines that review is necessary, the division “report”

234

(containing findings of fact and opinion in a case) is placed on the

conference calendar. At least a week in advance of the scheduled

conference, the report is distributed to the court membership for study.

235

At the conference, the report is discussed and voted upon.

236

If the report

is approved, it is released as an opinion of the court. If rejected, the report

is reassigned to the original division or to another division for rewriting in

accordance with the legal analysis of the majority.

237

Reassignment to a

different division usually occurs only if the division that originally wrote the

report declines to accept the majority view.

238

If the report of the division

fails, by statute it will not be included in the record of the case.

239

Under

the court’s procedures, the original division has the right to write a

dissenting opinion setting forth that division’s views.

240

If, however, the

judge who prepared the division report agrees to rewrite the report in

231

Compare Revenue Act of 1928, ch. 852, § 907(a)–(b), 45 Stat. 872 with I.R.C.

§§ 7459, 7460.

232

Board Conference Minutes, Apr. 1, 8, 1932.

233

See generally articles cited in supra note 1.

234

I.R.C. § 7460.

235

Kern, supra note 1, at 1019; Murdock, supra note 1, at 109.

236

It is also possible that the judges of the court may decide to remove a case

from court review. Although no rule has been adopted in this regard, prior practice

has required a majority vote of the conference to override the prerogative of the

chief judge that a case be reviewed. Tax Court Conference Minutes, Oct. 4 and

Nov. 1, 1968.

237

Where a report reviewed by the court fails to be adopted and, as a

consequence, another judge is assigned the task of writing the report to reflect the

views of the majority, the fact that court review was directed, that the report

prepared by the judge who presided at trial failed to be adopted, and that another

judge has been assigned to write the report in accordance with the views of the

majority all constitute confidential matters within the court that are not disclosed to

the parties or the public. Administrative Order No. 96, entitled “Reassignment of a

Court Reviewed Case,” Mar. 23, 1960, filed at the U.S. Tax Court in “Decisions:

Memoranda & Correspondence” [hereinafter cited as Order No. 96].

238

Tax Court Conference Minutes, Nov. 6, 1959.

239

I.R.C. § 7460(b). The provision excluding the report of the division from

being part of the record in any case in which the chief judge directs court review

originally appeared in 1928. Revenue Act of 1928, ch. 852, § 601, 45 Stat. 871

(amending Revenue Act of 1926, ch. 27, § 906(b), 44 Stat. 106).

240

See Order No. 96, supra note 237.

760 The United States Tax Court – An Historical Analysis

accordance with the majority view, the parties cannot determine the original

position of the division.

241

If the division report is adopted by the court, the opinion will be filed,

together with any dissenting or concurring opinions, as a court-reviewed

case. If the division report has been rejected, the rewritten report usually is

filed only if approved by the court.

242

Subsequent to approval, and together

with any dissenting or concurring opinions, the report then is filed as a

court-reviewed opinion.

2. Voting Procedures

a. Threshold to Prevail

In the development of conference procedures, the Board/Tax Court has

formulated rules for the number of members required to be present to take

action on a reviewed case and the number of members required to overrule

precedent.

From the earliest days of the Board, the adoption or rejection of a

division report generally has been based on a majority of those present and

voting.

243

Such is not the case, however, in situations in which adoption of

a report will result in overruling an existing precedent.

244

Such action

requires a majority of the active judges (excluding any judge who has

recused himself or herself from participation in the conference) at the time

of the vote, and is applicable to any precedent, whether or not the

precedent had been reviewed previously by the court.

245

The different

requirements reflect a determination on the part of the court to inhibit any

tendency towards frequent change in established interpretations.

246

b. Participation by Recalled Judges

As a general rule, recalled judges are not permitted to vote at court

conferences.

247

However, a recalled judge may vote at the conference on all

matters relating to a case heard and decided by that judge which has been

241

See Tax Court Conference Minutes, Nov. 6, 1959.

242

See Kern, supra note 1, at 1019. On rare occasion, the court conference will

authorize the chief judge to promulgate the rewritten report as a memorandum or

regular decision without re-referral to the court. Tax Court Conference Minutes,

Sept. 14, 1951.

243

See Board Conference Minutes, Oct. 2, 1931, wherein a reaffirmation of the

longstanding practice occurred.

244

Board Conference Minutes, Nov. 11, 1932.

245

Board Conference Minutes, Nov. 8, 1935.

246

See Kern, supra note 1; Murdock, supra note 1.

247

Tax Court Conference Minutes, Feb. 26, 1954.

Opinions, Decisions, and Appeals 761

referred to the conference by the chief judge.

248

In the court’s view,

prohibiting retired judge participation in this instance would be contrary to

the intent of the statute that gives a recalled judge the powers of a full-time

judge.

249

However, the question of whether a recalled judge may vote to

overrule a prior decision has not been as clearly answered. Although the

recalled judge has the same power as a full-time judge, such power is in the

context of the limited matter for which the judge has been recalled, and in

one view the power to overrule a precedent is broader in scope than merely

deciding an individual case. In addition, the policy of the court has always

been to require a majority of the full-time membership to overrule a prior

decision.

250

If a recalled judge is permitted to vote in situations in which a

precedent might be overruled, this policy could be thwarted in the event of

a deadlock among the full-time membership.

251

On the other hand, it may

be argued that overruling a precedent is no different than establishing a

precedent.

252

A committee established to study the problem recommended

that recalled judges not be permitted to vote to overrule precedents.

253

However, no action was taken on the committee’s recommendation.

254

248

Id.

249

Report of the Committee on Recalled Judges to the Tax Court, Feb. 26,

1954, filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence”

[hereinafter cited as Recalled Judges Report]. Section 7447(c) governs the authority

of a recalled judge and provides as follows:

ECALLING OF RETIRED JUDGES.—At or after his retirement, any

individual who has elected to receive retired pay under subsection (d) may

be called upon by the chief judge of the Tax Court to perform such judicial

duties with the Tax Court as may be requested of him for any period or

periods specified by the chief judge; except that in the case of any such

individual:

(1) the aggregate of such periods in any one calendar year shall not

(without his consent) exceed 90 calendar days; and

(2) he shall be relieved of performing such duties during any period

in which illness or disability precludes the performance of such duties.

Any act, or failure to act, by an individual performing judicial duties

pursuant to this subsection shall have the same force and effect as if it were

the act (or failure to act) of a judge of the Tax Court; but any such

individual shall not be counted as a judge of the Tax Court for purposes of

section 7443(a). Any individual who is performing judicial duties pursuant

to this subsection shall be paid the same compensation (in lieu of retired

pay) and allowances for travel and other expenses as a judge.

250

Id.

251

Such a proposal was advanced in 1958. Tax Court Conference Minutes,

Dec. 19, 1958. No action was taken by the court.

252

Recalled Judges Report, supra note 249.

253

See id.

254

Tax Court Conference Minutes, Feb. 26, 1954.

762 The United States Tax Court – An Historical Analysis

c. Publication of Conference Votes

The publication of conference voting has been the subject of much

discussion among the court’s membership.

255

Although the court has

always indicated in its published reports whether an opinion has been

subject to conference review,

256

full publication of the vote of the members

has not been required.

257

If a judge writes a concurrence or a dissent, that

judge’s position, along with that of the author of the majority opinion,

obviously is known.

258

Moreover, a judge may note in the published report

that judge’s concurrence or dissent with an opinion or result, without the

necessity of writing a separate opinion.

259

Nonetheless, the position of

255

The issue of publication has arisen on several occasions, most notably in

1954 and 1969. See supra notes 261–273 and accompanying text.

256

But see supra note 236.

257

Tax Court Conference Minutes, Dec. 30, 1954.

258

The practice of the Board, from its earliest years, has been to discourage

unpublished dissenting opinions. In 1924, the Board adopted a rule which

provided that if a dissent was not published, it could not be filed in the court

records. Board Conference Minutes, Dec. 13, 1924.

259

The Board has adopted a policy that dissenting and concurring opinions are

to be circulated prior to the promulgation of the report in an effort to familiarize

the membership with the views of their associates. Board Conference Minutes,

Apr. 26, 1935. Each judge who casts a “no” vote on a conference report is given

the opportunity to indicate whether he wishes his name to appear in approval of a

dissenting opinion. See Tax Court Conference Minutes, Mar. 17, 1950. To

eliminate delays that developed in members signifying their decision to be noted as

dissenting, the court in 1950 adopted a procedure of providing a judge with one

week in which to indicate his position on a dissenting opinion. Administrative

Memorandum No. 1, entitled “Establishment of Time Limit in Obtaining

Clearance on Dissenting Opinions,” Mar. 30, 1950, filed at the U.S. Tax Court in

“Decisions: Memoranda & Correspondence.” Finally, consideration has also been

given to the situation in which the author of a majority report is rewriting the

opinion solely in deference to the majority view and not because of his agreement

therewith. Tax Court Conference Minutes, Nov. 6, 1959. Although the court had

established a policy that in cases in which a member wrote the opinion of the court,

no published dissent would be permitted to be filed by him, Tax Court Conference

Minutes, July 31, 1942, a question arose as to whether a judge who rewrote an

opinion in accordance with majority wishes could indicate within the body of the

opinion that he did not agree and in fact retained a view different from that of the

majority, Tax Court Conference Minutes, Nov. 6, 1959. In conference, the court

rejected such a proposition, on the premise that it represented an opportunity to

express a minority view in a majority opinion and would appear to weaken the

presentation of the majority position. Id. Rather, it was believed that the majority

opinion should be written by someone in agreement with the majority position and

that judges who personally disagreed should present their views in dissenting

opinions. Id. But see Haserot v. Commissioner, 46 T.C. 864, 872 (1966) (Judge

Opinions, Decisions, and Appeals 763

those not attending the conference, those who vote “pass,” and those who

concur or dissent without wishing to signify their vote in the published

report is not made known to the public.

260

The first major criticism of these practices occurred in 1954, when Judge

Maris, in Stern v. Commissioner,

261

suggested that the Tax Court “follow

accepted forms of judicial procedure by indicating in some appropriate way

on its record in each case . . . the names of the judges who participate in the

decision ultimately rendered.”

262

Shortly thereafter, in a memorandum to

the court, Chief Judge Kern advocated that the names of those judges not

participating (absent and not voting by proxy) be supplied to those who

request such information and be made a part of the record in each appeal.

Such an approach, Judge Kern believed, would leave undisturbed the court

policy of voting by proxy and permitting pass votes and was preferable to

affirmatively listing the names of all the judges agreeing with the majority

opinion.

263

Because Judge Kern’s approach would lead to the names of

those not participating becoming public as a result of their notation in the

record, it was suggested that publication of those not participating in the

reports also was advisable.

264

An alternative to the Kern proposal was

advanced by Judge Murdock, who suggested that certification be made as to

the number of judges who adopted the position of the court. Such an

approach, he believed, would more nearly answer the criticism of Judge

Maris.

265

None of these proposals was adopted. Rather, the court

concluded that further study of the problem was necessary. A special

committee established for this purpose subsequently reported that no

compelling reasons existed to change prior practices; nonetheless, the

committee recommended a limited form of identification.

266

Under the

recommendation, the only judges to be identified would be those who did

not participate in the discussion, and, in addition, did not vote.

267

For

purposes of the rule, a judge who voted a “pass” would not be identified.

The recommendation was not approved and the prior practice of the court

Tannenwald, author of the majority opinion, wrote a separate opinion “speaking

separately”), aff’d, 399 F.2d 828 (6th Cir. 1968).

260

See Kern, supra note 1.

261

215 F.2d 701 (3d Cir. 1954).

262

Id. at 708.

263

Memorandum from Chief Judge Kern to Judges of the Court, Dec. 17,

1954, filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence.”

264

Tax Court Conference Minutes, Dec. 30, 1954.

265

Id.

266

Tax Court Conference Minutes, Dec. 30, 1954 and Feb. 4, 1955.

267

Memorandum from the Committee on Publication to the Chief Judge, Feb.

9, 1955, filed at the U.S. Tax Court in “Decisions: Memoranda &

Correspondence.”

764 The United States Tax Court – An Historical Analysis

continued.

268

Varying reasons were given for the court’s rejection of the

recommendation. First, objections to exposing the internal operations were

raised, and notwithstanding the interest of the bar and others in the views

of the various judges on questions before the court, it was believed that

practice by the court should not be affected by such interest or

speculation.

269

Second, the problem of judges conducting trial sessions in

the field who did not wish to be identified as non-participating would arise.

Although an absent judge would have been permitted to vote by proxy

under the recommendation, such encouragement of proxy voting was

viewed as potentially dangerous and not within the spirit of the

conference’s purpose.

270

Third, identification of non-participants might

encourage the parties to request reconsideration by the full court if the

number of non-participants was great and the decision close.

271

Reconsideration of the publication issue occurred in 1969.

272

Arguments similar to those raised 15 years earlier were offered in

opposition to any change in pre-existing court policy and continuation of

the prior policy was approved.

273

3. 1985 Amendments to Conference Procedures

In 1985, Chief Judge Samuel Sterrett requested the Tax Court Rules

Committee to consider how a court conference quorum should be

determined when some judges are disqualified.

274

During consideration of

this matter, the Rules Committee undertook to propose internal guidelines

that would resolve this and other questions concerning court conference

procedures.

275

The result was a formulation of the conference procedures

of the Tax Court.

276

268

Id. at 1.

269

Tax Court Conference Minutes, Mar. 11, 1955.

270

Tax Court Conference Minutes, Dec. 30, 1954 and Mar. 11, 1955.

271

Tax Court Conference Minutes, Mar. 11, 1955.

272

Memorandum from Judge Simpson to the judges, Feb. 24, 1969, filed at the

U.S. Tax Court in “Decisions: Memoranda & Correspondence;” Tax Court

Conference Minutes, Feb. 28, and May 2, 1969.

273

Tax Court Conference Minutes, May 2, 1969.

274

See Memorandum from Judge Simpson to Chief Judge Sterrett, Sept. 11,

1985, filed at the U.S. Tax Court in “Rules Committee: Court Conference

Procedures (1985).”

275

Id. The proposed procedures generally formalized existing practices and

provide for some situations in which there was no established practice. Id. at 1.

Judge Simpson’s memorandum stated that “[i]n no case does a proposed procedure

change an established practice.” Id.

276

The procedures, approved by the court conference on October 25, 1985,

were adopted by the court for its internal use and have not been published. A copy

of the procedures are filed at the U.S. Tax Court in “Rules Committee: Court

Opinions, Decisions, and Appeals 765

a. Effect of Disqualification on Quorum

Although the Internal Revenue Code does not directly address the

question,

277

§ 7444(d) provides useful guidance for the formulation of a rule

governing the effect of disqualification on the court conference quorum:

A majority of the judges of the Tax Court or of any division thereof

shall constitute a quorum for the transaction of the business of the

Tax Court or of the division, respectively. A vacancy in the Tax

Court or in any division thereof shall not impair the powers nor

affect the duties of the Tax Court or division nor of the remaining

judges of the Tax Court or division, respectively.

278

The Rules Committee was particularly concerned that disqualification of

members of the court conference could create a situation in which a

minority of the court could adopt a position in conflict with the majority

view.

279

For example, if two of the 19 judges were disqualified from taking

Conference Procedures (1985).” [hereinafter cited as Tax Court Procedures for

Court Conferences].

277

I.R.C. § 7444(d).

278

Section 455(a) of title 28 of the United States Code requires

self-disqualification by a “judge . . . of the United States” in any case “in which his

impartiality might reasonably be questioned.” 28 U.S.C. § 455(a). Section 451

provides that reference to a judge of the United States includes “judges of the

courts of appeals, district courts, Court of International Trade and any court

created by Act of Congress, the judges of which are entitled to hold office during

good behavior.” 28 U.S.C. § 451. Tax Court judges serve 15-year terms. I.R.C.

§ 7443(e). Thus, the disqualification statute is inapplicable to the Tax Court. The

Tax Court, however, has voluntarily adopted the rule that Tax Court judges who

would be disqualified from a particular case under section 455 of title 28, must

disqualify themselves from a case and refrain from engaging in any discussion of

the case with their colleagues. See Tax Court Procedures for Court Conferences,

supra note 13, RULE 276 (quoted infra note 316).

279

The question of how to determine a quorum when some judges are

disqualified arose in anticipation of Dunn Trust v. Commissioner, 86 T.C. 745 (1986)

(involving the tax consequences of the divestiture of AT&T). See Letter from

Judge Simpson to Harold Dubroff, Aug. 27, 1987, at 1–2, filed at the U.S. Tax

Court in “Rules Committee: Court Conference Procedures (1985).” The parties in

Dunn Trust filed a joint motion requesting treatment of the case under the

“expedited procedures that the court had recently announced it was introducing for

handling especially significant cases.” See Eric S. Kracov, AT&T Case Offers Hope

for Swift Resolution of Important Tax Disputes, 31 T

AX NOTES 657 (May 19, 1986). The

Dunn Trust case was assigned to Judge Theodore Tannenwald, Jr., and his report

was referred to the conference for review because of its significance. At the

conference, only ten judges participated, in addition to Judge Tannenwald (then a

766 The United States Tax Court – An Historical Analysis

part in a decision, nine of the remaining 17 judges might vote to overrule

Tax Court precedent that the majority of active judges believed should be

followed. Similarly, were an issue of first impression involved in such a

case, the nine judges might reach a conclusion with which the majority of

Tax Court judges disagreed.

280

The Rules Committee also was concerned that if a majority of the court

membership was required to review division reports, the court would be

unable to do so if ten or more of the 19 judges were disqualified.

281

The

Rules Committee reviewed the different approaches taken by the appellate

courts for the federal circuits in considering the effect of judicial

disqualification on their power to act en banc.

282

After observing a fairly

recalled senior judge). Letter from Judge Simpson to Harold Dubroff, supra note

279, at 1–2. Nine judges disqualified themselves and did not participate. Because

all of the participating judges agreed with Judge Tannenwald’s opinion, the court

was not confronted with a situation in which an opinion was approved by a

minority of the court. Id. at 1–2. Dunn Trust is, however, illustrative of the

problem that might arise when a substantial number of judges are forced to

disqualify themselves from a particular case. Id.

280

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

274, at 4; Memorandum from Joanne Hickcox, Deputy Counsel to the Chief Judge,

to Judge Simpson, May 22, 1985, at 7, filed at the U.S. Tax Court in “Rules

Committee: Court Conference Procedures (1985).”

281

See Memorandum from Joanne Hickcox, Deputy Counsel to the Chief

Judge, to Judge Simpson, supra note 280, at 8.

282

See id. at 4–8; Memorandum from Judge Simpson to Chief Judge Sterrett,

supra note 274, at 2–3.

Rule 35(a) of the Federal Rules of Appellate Procedure provides that “[a]

majority of the circuit judges who are in regular active service and who are not

disqualified may order that an appeal . . . be . . . reheard by the court of appeals in

banc.” F

ED. R. APP. P. 35(a). The purpose of the en banc procedure is to help

assure the uniformity of decisions within a circuit and to enable a majority of the

judges of a circuit to control the resolution of important issues. See United States v.

American-Foreign S.S. Corp., 363 U.S. 685, 689–90, reh’g denied, 364 U.S. 854

(1960); Peter Michael Madden, In Banc Procedures in the United States Courts of Appeals,

43 F

ORDHAM L. REV. 401, 407–08 (1974) (discussing the en banc procedures of the

United States Circuit Courts of Appeals in light of the American-Foreign Steamship

Corp. decision). The court conference procedure is not the equivalent of an en

banc hearing in the courts of appeals. Neither party is entitled to a hearing before

the Tax Court reviewing a division report, except upon order of the chief judge.

Oral arguments have never been presented during the court conference. Moreover,

although the court conference and en banc procedures share a similar major

purpose, assuring uniformity of precedent, the court conference procedure, unlike

the en banc procedure, is not designed to afford parties an opportunity to reargue a

case. 2A L

AURENCE F. CASEY, FEDERAL TAX PRACTICE, § 8.37, at 284 (1981).

In Green Spring Dairy, Inc. v. Commissioner, 208 F.2d 471 (4th Cir. 1953), aff’g

18 T.C. 217 (1952) and 18 T.C. 929 (1952), the court stated:

Opinions, Decisions, and Appeals 767

pronounced split among the circuit courts of appeals,

283

the Tax Court

unanimously agreed to adopt the rule that disqualified judges are to be

disregarded in determining whether a quorum exists for conference

review.

284

The Rules Committee believed that the result of judicial

disqualification was similar to a vacancy on the court

285

and pointed out that

the statute clearly provides “that a vacancy is not to impair the ability of the

Court to function.”

286

If the court were presented with a situation in which

there were ten vacancies, the statute would allow the remaining nine judges

It is of course arguable that when Congress modified the conclusive

effect to be given to a decision of the Tax Court in these cases by the Act of

1941 and provided for a review of decisions by a special division in 1942, it

had in mind the procedure followed by the courts of appeals in reviewing

ordinary decisions of the Tax Court; but it is more reasonable to construe

the statute in the framework of the legislation relating to the taxation of

incomes. In these statutes, as they appear today in the Code, we find [the

predecessor of I.R.C. § 7444], which empowers the Tax Court to designate

a presiding judge who may from time to time divide the court into divisions

of one or more judges; [the predecessor of I.R.C. § 7460] which directs that

a division shall hear and determine any proceeding before the Tax Court

which is assigned to it and shall make a report thereof, and that the report

shall become the report of the Tax Court within thirty days unless the

presiding judge directs that it shall be reviewed by the Tax Court; and [the

predecessor of I.R.C. § 7458] which provides that notice and opportunity to

be heard upon any proceeding instituted before the Tax Court shall be

given to the parties, and that if an opportunity to be heard is given before a

division of the Tax Court, neither party shall be entitled to notice and

opportunity to be heard before the Tax Court upon review, except upon a

specific order of the presiding judge. In our opinion it was this kind of

review without additional opportunity to the parties to be heard which

Congress had in mind in enacting section 732(d). The purpose of the

review was not to secure a reargument of the case but to assure a consistent

and uniform application of the principles of the excess profits tax statute by

a group familiar with the problems involved.

Id. at 475–76. Accord A.B. Frank Co. v. Commissioner, 211 F.2d 497 (5th Cir.

1954).

283

For discussion of the prevailing circuit split, see Harold Dubroff & Charles

M. Greene, Recent Developments in the Business and Procedures of the United States Tax

Court; Part Five: Court Conferences, 52 A

LB. L. REV. 147, 151–53 (1987).

284

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

274, at 3–4.

285

Id. at 4.

286

Id. (stating that when a judge disqualifies himself, it is similar to a vacancy

on the court). Section 7444(d) provides that “[a] vacancy in the Tax Court or in

any division thereof shall not impair the powers nor affect the duties of the Tax

Court or division nor of the remaining judges of the Tax Court or division,

respectively.” I.R.C. § 7444(d).

768 The United States Tax Court – An Historical Analysis

to continue carrying on the business of the court.

287

Similarly, the Rules

Committee believed that the remaining nine judges should have the

authority to carry on the business of the court were it ever faced with a

situation in which ten judges were forced to disqualify themselves.

288

Although five judges could make the decision of the entire court in this

situation, such a possibility was believed better than placing the court in a

position in which it simply could not function.

289

b. Representation by Proxy

Although the Rules Committee unanimously agreed that judges

disqualified from a particular case should be disregarded in determining a

conference quorum, there was disagreement regarding the effect of

representation by proxy at the court conference.

290

Prior Tax Court

practice had permitted unrestricted proxies, and members of the Rules

Committee who favored counting proxies in determining a quorum argued

that court members are often unavoidably absent at conference time due to

their demanding travel schedules.

291

Proxy representation would allow

participation by absent judges and would prevent undue interference with

the operations of the court. The proponents of proxy representation noted

that such a practice would be in accordance with general principles of

corporate governance.

292

Those opposed to counting proxies in determining a conference

quorum, however, believed that a majority of the court’s members who

were not disqualified from a particular case should be present to carry on

the business of the court; otherwise, important decisions could be made

with only a few judges present,

293

and an important purpose of the court

conference would be thwarted. The practices of corporations were argued

287

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

274, at 4.

288

Id.

289

Id.

290

Id.

291

Id. at 4–5.

292

Memorandum from Joanne Hickcox, Deputy Counsel to the Chief Judge,

to Judge Simpson, supra note 280, at 2. The memorandum quoted, as an example,

Delaware law governing shareholder voting standards: “A majority of the shares

entitled to vote, present in person or represented by proxy, shall constitute a

quorum at a meeting of stockholders.” Id. (quoting D

EL. CODE ANN. tit. 8,

§ 216(1) (1983)).

293

Memorandum from Judge Simpson to Chief Judge Sterrett, supra note 274,

at 5.

Opinions, Decisions, and Appeals 769

to be of little relevance to Tax Court procedure.

294

Private corporations

often have thousands of shareholders who may live anywhere in the world,

and because their primary concerns are financial, they may feel no major

need to be physically present at a shareholders’ meeting.

295

The Tax Court,

however, is a governmental body of only 19 members who have a duty to

meet and discuss before acting. Of far more relevance to Tax Court

procedures than corporate practices, it was argued, were the operations of

other governmental bodies whose members are required to travel

extensively.

296

An example of such a body is the United States Congress,

where a majority of committee members must be present for a quorum and

where proxies are not allowed for any purpose during deliberations on the

floor.

297

The question of conference voting had occasioned some controversy.

The Rules Committee considered proposals that would require absent

judges to be precluded from voting, or would provide that conference

debates be transcribed, so that absent judges could be informed of the

various positions at conference before casting their votes.

Those who questioned unrestricted use of proxies also recognized,

however, that often some judges were unavoidably absent at conference

time, and sometimes many judges were unavoidably absent. Nonetheless,

prior research often gave these judges a well-informed opinion of the issues

being discussed at conference. Thus, in fairness to the judges and the

purposes of court review, their votes should not be precluded.

To address the conflicting concerns of the Rules Committee, Judge

Chabot proposed a rule that would require a majority of the judges not

disqualified from a particular case to be present in person to determine a

conference quorum; but once a quorum was established, the votes of

absent members could be cast by proxy.

298

Judge Chabot’s proposal was

adopted by the court.

299

294

Memorandum from Judge Chabot to Judge Simpson, May 23, 1985, filed at

the U.S. Tax Court in “Rules Committee: Court Conference Procedures (1985).”

295

Id.

296

Id.

297

Id.

298

Id.

299

Rule 2 of the Tax Court Procedures for Court Conferences provides:

“Quorum. A majority of the judges entitled to vote on a case, present in person,

shall constitute a quorum for the transaction of business with respect to that case.”

Tax Court Procedures for Court Conferences, supra note 276, R

ULE 2; see also Tax

Court Procedures for Court Conferences, supra note 276, R

ULE 3 (quoted infra note

300).

770 The United States Tax Court – An Historical Analysis

c. Voting Requirement and Votes Cast After Conference

In adopting the Procedures for Court Conference, the Tax Court

continued its established practices with respect to the vote required to

adopt a division report. Generally, a report approved by a majority of the

judges voting by proxy or in person will be considered adopted.

300

If the

report overrules a prior decision of the court, however, the vote of a

majority of the judges entitled to vote on the case is required to adopt it.

301

Judges entitled to vote include all those not disqualified from a particular

case, as well as any senior judge who may have authored the report.

302

Rule

1 of the Procedures for Court Conferences makes it clear that even if the

report of a senior judge is not adopted in conference and the case is

reassigned, the senior judge who authored the report will remain “entitled

to vote on all matters relating to the case.”

303

The significance of the controversy over the use of proxies is somewhat

diminished by Rule 4 of the Procedures for Court Conferences, which

allows judges who are not present at conference to later cast a vote and

which permits those who are present to change their vote within a limited

period.

304

There was concern, however, that Rule 3 of the conference

300

Rule 3 of the Tax Court Procedures for Court Conferences provides:

3. Vote required. A quorum being present, the affirmative vote of the

majority of the judges present in person or represented by proxy at the

Court Conference and entitled to vote on the case shall be sufficient to

adopt the report in that case, except that the affirmative vote of a majority

of the judges entitled to vote on the case shall be required to overrule a

prior Tax Court opinion. If the votes cast at the Court Conference are

sufficient to decide the outcome of a case, the Chief Judge shall have the

authority to declare at the Conference whether the report in the case is

adopted or not adopted, even though votes cast after the Court Conference

could alter the outcome.

Tax Court Procedure for Court Conferences, supra note 276, R

ULE 3.

301

Id.

302

Rule 1 of the Tax Court Procedures for Court Conferences provides:

1. Voting rights. Any active judge who is not disqualified in a particular

case shall be entitled to vote on all matters relating to that case. Any senior

judge shall be entitled to vote on all matters relating to any case in which he

is the author of the report. Where the report of a senior judge is not

adopted by the Court Conference and the case is reassigned, the senior

judge who was the author of the initial report shall continue to be entitled

to vote on all matters relating to the case.

Tax Court Procedures for Court Conferences, supra note 276, R

ULE 1.

303

Id.

304

Rule 4 of the Tax Court Procedures for Court Conferences provides:

4. Submission of Separate Opinions and Voting After Conference. All separate

opinions, including concurring and dissenting opinions concerning a

Opinions, Decisions, and Appeals 771

procedures (authorizing the chief judge to declare at the time of the

conference whether a report is adopted or not) might reverse the pre-

existing Tax Court practice requiring the chief judge to resubmit to

conference any case the outcome of which is altered by votes cast after the

conference.

305

Rule 4 of the conference procedures, however, clarifies that

the case must again be scheduled for conference consideration in all

situations in which the outcome of the case is changed, including changes

resulting from votes by absent judges.

306

Allowing absent judges to vote was believed necessary because some

cases may involve issues so thoroughly familiar to a judge that the

conference discussion may be of little importance to that judge in deciding

how to vote.

307

Whether a judge will vote with or without the benefit of

conference discussion is, therefore, left to the discretion of each individual

judge.

The court was concerned that conference cases be processed as

expeditiously as possible.

308

Accordingly, rules were adopted setting forth

conference case, shall be submitted to the Chief Judge’s office within 14

days after the conference at which such case was acted upon. Any judge

entitled to vote on the case may vote, or may change his vote, within 14

days after such conference, or within 7 days after the distribution of a

separate opinion, whichever period expires later. However, if the votes by

absent Judges or the changes in votes would result in a change in the

outcome of a case, the case will again be scheduled for conference

consideration. The Chief Judge may, for good cause, extend the period for

the submission of separate opinions and the period for voting, and he may,

for cause, shorten such periods on giving the Judges adequate notice of his

intention to do so.

Tax Court Procedures for Court Conferences, supra note 276, R

ULE 4.

305

See Tax Court Procedures for Court Conferences, supra note 276, RULE 3

(quoted supra note 300); see also Memorandum from Judge Whitaker to Chief Judge

Sterrett , Oct. 1, 1985, filed at the U.S. Tax Court in “Rules Committee: Court

Conference Procedures (1985)” (expressing his understanding that under Rule 4

“any judge, whether attending a conference or absent, [could] join in any separate

opinion within 7 days after distribution and . . . could change his or her vote

without consent of the conference”); Memorandum from Judge Chabot to Judge

Simpson, June 25, 1985, filed at the U.S. Tax Court in “Rules Committee: Court

Conference Procedures (1985)” (stating that he was troubled by the proposed

changes to Rule 4 that would allow the chief judge to poll conference absentees to

reach a result inconsistent with a majority of those who voted at conference).

306

See Tax Court Procedures for Court Conferences, supra note 276, RULE 4

(quoted supra note 304).

307

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

274.

308

See Memorandum from Judge Simpson to Judges and Senior Judges, Sept.

26, 1985, filed at the U.S. Tax Court in “Rules Committee: Court Conference

Procedures (1985).”

772 The United States Tax Court – An Historical Analysis

reasonably definite limits with respect to voting on and adoption of

conference cases. If the number of votes at conference are enough to

decide a case, the chief judge is authorized to declare that the report has

been adopted, even though votes cast after the conference could alter the

outcome.

309

Absent judges, or judges who voted in conference and wish to

change their vote, generally must cast their vote within 14 days after the

conference, or within seven days after the distribution of a separate

opinion, whichever period expires later.

310

The chief judge is given

discretion, for cause, to extend the period for voting or shorten the period

within which a late vote may be cast, provided the judges are given adequate

notice of the shortened time period.

311

d. Participation by Disqualified Judges

As stated previously, judges of the United States subject to title 28 are

required to disqualify themselves from any case in which their “impartiality

might reasonably be questioned.”

312

The extent to which a disqualified

judge is allowed to participate in the discussion of a case with his colleagues,

however, was not totally clear.

313

An opinion of the Advisory Committee on the Code of Judicial

Conduct

314

deals with a situation in which a panel of three judges have

discussed but not decided a case, and one judge subsequently finds it

necessary to disqualify himself. The question presented is whether the

other two judges should also disqualify themselves. In concluding that the

other two judges are not disqualified, the opinion notes that judges often

must disregard important facts of which they are aware, as in the case of

evidence inadmissible at trial.

315

The mere fact that a judge is recused after

oral argument or conference on the case is not, according to the opinion, a

309

See Tax Court Procedures for Court Conferences, supra note 276, RULE 3

(quoted supra note 300).

310

See Tax Court Procedures for Court Conferences, supra note 276, RULE 4

(quoted supra note 304).

311

Id.

312

See supra note 278; 28 U.S.C. § 455(a); MODEL CODE OF JUDICIAL

CONDUCT, Canon 3, Rule 2.11(A) (2011).

313

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

274.

314

GUIDE TO JUDICIARY POLICY, vol. 2, pt. B, Adv. Opinion 71 (July 20,

2012); see also Memorandum from Joanne Hickcox, Deputy Counsel to the Chief

Judge, to Judge Simpson, supra note 280. The language of 28 U.S.C. § 455 is largely

repeated in the Model Code of Judicial Conduct. M

ODEL CODE OF JUDICIAL

CONDUCT, Canon 3, Rule 2.11(A) (2011).

315

GUIDE TO JUDICIARY POLICY, vol. 2, pt. B, Adv. Opinion 71 (July 20,

2012).

Opinions, Decisions, and Appeals 773

sufficient basis to question the impartiality of the remaining judges. A clear

inference from the opinion is that the remaining judges should disregard

potentially prejudicial statements made by the judge who is recused. As a

further refinement of this issue, the Tax Court conference procedures

provide that disqualified judges shall refrain from participating in any

discussion of the case from which they are disqualified.

316

e. Motions for Court Review

In 1985, the Tax Court considered the feasibility of adopting a rule that

would authorize the chief judge to consider and grant motions for court

review.

317

Historically, the efforts of taxpayers to appear before the Board

of Tax Appeals when their cases were undergoing review and to compel the

adoption of division reports revised in conference had been denied, first by

the Board, and later by statute.

318

Tax Court conference procedures and

applicable statutes have undergone little change since 1928.

319

Still, it

appears that the court has regularly received motions, usually after the

expiration of the 30-day period referred to in § 7460(b), for the chief judge

to direct court review of a division report.

320

Accordingly, Chief Judge

Sterrett suggested that the Chairman of the Rules Committee, Judge

Simpson, examine the possibility of authorizing the chief judge to order

316

Rule 5 of the Tax Court Procedures for Court Conferences provides: “5.

Participation by disqualified judge. A judge who is disqualified in a particular case shall

not participate in the discussion of that case. See 28 U.S.C. sec. 455 and Canon

3(C) of the Code of Judicial Conduct, relating to the reasons for a judge to

disqualify himself.” Tax Court Procedures for Court Conferences, supra note 276,

ULE 5.

317

Two internal memoranda of the Tax Court address the adoption of a rule

allowing the chief judge to grant motions for court review: Memorandum from

Judge Simpson to Chief Judge Sterrett, Nov. 4, 1985, and Memorandum from

Joanne Hickcox to Judge Simpson, Oct. 31, 1985, both filed at the U.S. Tax Court

in “Rules Committee: Court Conference Procedures (1985).”

318

Revenue Act of 1928, ch. 852, § 601, 45 Stat. 791, 872 (amending Revenue

Act of 1926, ch. 27, § 907(a), 44 Stat. 9, 107).

319

See I.R.C. §§ 7458–7460. Two post-trial motions are available to bring a

case before the Tax Court for a second hearing: the motion for reconsideration and

the motion to vacate. See T

AX CT. R. 161 (July 6, 2012 ed.) (motion for

reconsideration of opinion); T

AX CT. R. 162 (July 6, 2012 ed.) (motion to vacate or

revise decision).

320

See Memorandum from Joanne Hickcox to Judge Simpson, supra note 317

(stating that the purpose of the memorandum was to address the court’s concern

with motions for review after the 30-day period under § 7460(b) had expired).

774 The United States Tax Court – An Historical Analysis

court review in appropriate cases, even though the statutory period has

expired.

321

The first question to be resolved in considering the adoption of a rule

authorizing the chief judge to grant motions for review of opinions after

expiration of the 30-day period was whether such a rule would be contrary

to § 7460(b), which formed the basis of the court’s historic position that the

chief judge does not have the authority to order review of a report more

than 30 days after its submission:

(b) Effect of Action by a Division.—The report of the division

shall become the report of the Tax Court within 30 days after such

report by the division, unless within such period the chief judge has

directed that such report shall be reviewed by the Tax Court. Any

preliminary action by a division which does not form the basis for

the entry of the final decision shall not be subject to review by the

Tax Court except in accordance with such rules as the Tax Court

may prescribe. The report of a division shall not be a part of the

record in any case in which the chief judge directs that such report

shall be reviewed by the Tax Court.

322

An internal Tax Court memorandum on this issue concludes that the

statutory language does not appear to preclude the court from adopting a

rule that would grant the chief judge the power to direct review after the

30-day period expires.

323

Closely analogous to this situation, the

memorandum notes, is the undisputed authority of a judge to vacate an

opinion which the judge has authored.

324

Presumably, Tax Court judges

acting collectively could adopt a rule authorizing the chief judge to vacate

an opinion and direct that the report in the case be reviewed by the court.

325

321

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

317, at 1; Memorandum from Joanne Hickcox to Judge Simpson, supra note 317, at

322

I.R.C. § 7460(b).

323

See Memorandum from Joanne Hickcox to Judge Simpson, supra note 317,

at 2–3.

324

Id.

325

On occasion, the Tax Court has withdrawn a published opinion and

published a superseding revised opinion. In Larson v. Commissioner, 66 T.C. 159

(1976), the court stated: “[P]etitioners filed a ‘Motion for Reconsideration by the

Full Court’ which was denied. The motion was referred to the trial judge as a

motion for reconsideration of the opinion. The trial judge granted this motion and

the Court’s opinion was withdrawn . . . .” Id. at 160; see also Cruttenden v.

Commissioner, 70 T.C. 191 (1978), superseding T.C. Memo. 1978-4, aff’d, 644 F.2d

1368 (9th Cir. 1981); Estate of Henning v. Commissioner, 68 T.C. 374 (1977),

opinion withdrawn Dec. 27, 1977.

Opinions, Decisions, and Appeals 775

An argument against the authority of the Tax Court to adopt a rule

allowing review of an opinion after the expiration of the 30-day period can

be found in the second sentence of § 7460(b), which provides that

preliminary action of a division shall not be subject to court review “except

in accordance with such rules as the Tax Court may prescribe.”

326

Based on

the fact that Congress has, in some circumstances, provided explicitly for

court-made exceptions to statutory general rules, it may be inferred that in

the absence of such an express grant of rule-making authority, the court is

left without the power to prescribe rules. Thus, since Congress was silent

as to post-adoption action by the Tax Court, it may be argued that the Tax

Court does not have the authority to prescribe rules that would extend the

power beyond the statutory period.

Nevertheless, those on the court who considered the question

apparently concluded that, although the 30-day rule might implicitly

preclude the chief judge from ordering review of an opinion after the 30

days has expired, nothing in the statute precludes the court from conferring

this authority, by rule, upon the chief judge.

327

The legislative history of the

predecessor to § 7460(b) is not at odds with this conclusion. The 30-day

rule was originally enacted, it appears, to thwart taxpayer efforts to

personally appear at court conferences or to alter the results of conference

consideration.

328

Thus, although a rule authorizing the chief judge to vacate

an opinion to grant review after the 30-day period has expired is not entirely

consistent with the statute’s legislative history, it would not seem to conflict

with its principal purpose of precluding taxpayer interference with the Tax

Court’s procedures for review. Despite the fact that court members

reviewing the situation apparently concluded that the chief judge could, by

the promulgation of a court rule, be given the authority to direct review of

an opinion after the 30-day period, problems implicit in such a rule

precluded its adoption.

The third sentence of § 7460(b) states that “[t]he report of a division

shall not be a part of the record in any case in which the chief judge directs

that such report shall be reviewed by the Tax Court.”

329

In Estate of Varian

v. Commissioner,

330

the United States Court of Appeals for the Ninth Circuit

rejected petitioner’s claims that the court-reviewed case should include the

findings of fact and opinion of the division that originally issued the report,

and held that the purpose of the third sentence of § 7460(b) “is to preclude

326

I.R.C. § 7460(b).

327

See Memorandum from Judge Simpson to Chief Judge Sterrett, supra note

317; Memorandum from Joanne Hickcox to Judge Simpson, supra note 317, at 3.

328

See I.R.C. § 7458 (parties not entitled to notice and opportunity to be heard

upon Tax Court review except as so ordered by chief judge).

329

I.R.C. § 7460(b).

330

396 F.2d 753 (9th Cir. 1968), aff’g per curiam 47 T.C. 34 (1966); see also

Memorandum from Joanne Hickcox to Judge Simpson, supra note 317.

776 The United States Tax Court – An Historical Analysis

a two-tier ‘appellate’ relationship between the full court and its divisions.”

331

At least to some extent, a rule authorizing the chief judge to consider and

grant motions for court review would establish an appellate-type

relationship because, in effect, parties making such a motion would be

appealing the opinion of a division to the full court.

332

Additionally, adoption of such a rule could undermine the authority of

the chief judge to direct court review. Currently, this power rests solely

with the chief judge and is not subject to appellate review.

333

A rule

authorizing motions for court review might set forth the circumstances in

which such motions should be granted. Appellate courts could then review

the decision of the chief judge under such a rule and determine whether it

had been applied correctly. This could lead to an unexpected and undesired

interpretation of the rule, thus restricting the Tax Court’s flexibility under

its own rules of procedure.

Finally, allowing parties to file motions for court review would

undoubtedly increase the number of motions received by the Tax Court,

since a non-prevailing party would have little to lose by filing a motion for

review.

334

Although the court currently may deny such motions without

explanation, if the circumstances in which the motions might be granted

were established by a rule, summary disposition of these motions might

become impossible. Thus, the court would be faced with an unwarranted

increase in its workload.

As an alternative to a rule authorizing motions for court review, it was

suggested that the court might wish to adopt an internal procedure for

disposing of the motions it continues to receive.

335

For example, the judge

conducting the trial in a particular case could agree to vacate a report in a

case in which the court has received what appears to be a meritorious

motion for review and resubmit it to the chief judge as a new report of the

division.

336

Although such a procedure would enable the court to avoid the

problems it might face in adopting a rule, the chief judge would be forced

to rely on the power of persuasion to convince the author of the opinion of

the merits of the motion for court review. Chief Judge Sterrett, after

hearing the various arguments, was convinced that the matter was “not

331

396 F.2d at 755 n.2.

332

See Memorandum from Joanne Hickcox to Judge Simpson, supra note 317.

333

Sisto Fin. Corp. v. Commissioner, 149 F.2d 268, 269–70 (2d Cir. 1945).

334

See Memorandum from Joanne Hickcox to Judge Simpson, supra note 317.

335

Id.

336

See Memorandum from Judge Simpson to Judges and Senior Judges, supra

note 308.

Opinions, Decisions, and Appeals 777

worth pursuing,”

337

and, apparently, the policy of denying such motions for

court review without explanation continues.

G. Rule 155

The promulgation of a “report,”

338

containing the findings of fact

and/or opinion in a case, whether by division or conference, does not

necessarily complete all Tax Court action. The report only decides the legal

and factual questions that have been placed in issue by the parties.

339

The

statutory responsibility of the court, however, is to redetermine deficiency

assertions by the Commissioner.

340

Since its inception as the Board of Tax

Appeals, the court has interpreted this responsibility to require a decision

expressed in monetary terms.

341

In some cases, quantifying the decision involves no additional action.

This occurs in those cases in which the court finds that the deficiency

notice is entirely correct, or, alternatively, that it is completely erroneous.

In those situations, the court in its report simply directs entry of a decision

for the full deficiency claimed or for no deficiency.

342

In many cases, however, multiple issues are raised by the parties, and the

court may find for the Commissioner on some and the taxpayer on

others.

343

Even in cases in which a single issue is involved, the court may

337

Memorandum from Chief Judge Sterrett to Judge Simpson, Nov 18, 1985,

filed at the U.S. Tax Court in “Rules Committee: Court Conference Procedures

(1985).”

338

Section 7459 provides that

[A] report upon any proceedings instituted before the Tax Court and a

decision thereon shall be made as quickly as practicable. . . . It shall be the

duty of the Tax Court and of each division to include in its report upon any

proceedings its findings of fact or opinion or memorandum opinion.

I.R.C. § 7459(a).

339

MARVIN JOSEPH GARBIS & ROBERT L. FROME, PROCEDURES IN FEDERAL

TAX CONTROVERSIES § 9 (1968) [hereinafter cited as GARBIS & FROME].

340

I.R.C. § 6213(a).

341

See generally 2 LAURENCE F. CASEY, FEDERAL TAX PRACTICE § 8.40 (1955)

[hereinafter cited as L.

CASEY]; HAMEL, supra note 1, at 160; Laurence F. Casey,

Tax Court Procedure: Some Current Problems, 5 T

AX L. REV. 57, 58–63 (1949)

[hereinafter cited as Casey]; Greenberger, Scope of Rule 50 Computations, 12 N.Y.U.

NN. INST. ON FED. TAX’N 963 (1954) [hereinafter cited as Greenberger]; Kern,

supra note 1, at 1020; Robert N. Miller, Tax Court Pleadings and Rule 50 Settlements:

Points to be Considered in the Petitioner’s Behalf, 5 N.Y.U. A

NN. INST. ON FED. TAX’N

158, 178 (1946) [hereinafter cited as Miller].

342

E.g., Florida Publishing Co. v. Commissioner, 64 T.C. 269, 282 (1976);

Leslie Co. v. Commissioner, 64 T.C. 247, 255 (1976).

343

E.g., Estate of Fawcett v. Commissioner, 64 T.C. 889, 901 (1976).

778 The United States Tax Court – An Historical Analysis

conclude that neither party is entirely correct.

344

Finally, although the court

may find the Commissioner’s determination of a deficiency entirely

erroneous, difficulties in quantifying the decision may arise if the court

concludes that the taxpayer overpaid his taxes for the applicable year.

345

These findings require the court to recompute tax liability on corrections to

gross income, taxable income, or credits necessitated by the findings of fact

and opinion to formulate a monetary decision.

346

In some instances, this

procedure may be time consuming, as one adjustment may require changes

in seemingly unrelated items. For example, the disallowance of a taxpayer’s

business deduction may result in an increased adjusted gross income, which

in turn may require an adjustment in those deductions based on, or limited

by, adjusted gross income, as is the case with medical and charitable

deductions.

347

In its earliest reports, the Board frequently incorporated a monetary

decision on tax liability in its findings on substantive issues.

348

The early

days of the Board were among its busiest, and the burden of making these

ministerial, though involved, computations must have been immediately

felt.

349

Apparently for this reason some of the early reports of the Board

did not include a monetary decision but rather required the decision to be

settled by “consent or on seven days’ notice.”

350

Soon the Board concluded

that a formal rule of practice would be desirable to handle cases in which

the decision of the Board was neither completely in favor of the taxpayer

nor the Commissioner. In December 1924, four months after the Board

issued its first report, it promulgated Rule 50 of its rules of practice.

351

Entitled “Settlement of Final Determination,” the rule placed the principal

burden of quantifying the decision on the parties.

352

Among the most

recognizable of rules to readers of the Board/Tax Court reports, the most

noticeable change in the rule did not appear until 1974, when, as part of a

major rules revision, it was renumbered Rule 155.

353

344

E.g., Wolman v. Commissioner, 64 T.C. 883, 889 (1976).

345

I.R.C. § 6512(b); Huntington Nat’l Bank, 13 T.C. 760, 774 (1949).

346

L. CASEY, supra note 341; GARBIS & FROME, supra note 339; Greenberger,

supra note 341.

347

I.R.C. §§ 213, 170.

348

E.g., The Hotel De France Co., 1 B.T.A. 28, 32 (1924).

349

See generally J.S.Y. Ivins, What Should Congress Do with the Board of Tax

Appeals?, 3 N

AT’L INC. TAX MAG. 391, 394 (1925).

350

E.g., Robert P. Hyaims Coal Co., 1 B.T.A. 217, 220 (1924).

351

Press release from U.S. Board of Tax Appeals, Dec. 17, 1924, filed at the

U.S. Tax Court in “Rule 155: Memoranda & Correspondence.”

352

B.T.A. RULE 50 (Jan. 1, 1925 ed.).

353

TAX CT. R. 155 (Jan. 1, 1974 ed.). Although the rule was renumbered, there

were no major changes in the substance or form of the rule. Compare T

AX CT. R.

155 (Jan. 1, 1974 ed.) with T

AX CT. R. 50 (Jan. 25, 1971 ed.).

Opinions, Decisions, and Appeals 779

The original rule provided for recomputation by either stipulation, if the

parties were in agreement, or by submission of alternative proposals to the

Board, if the parties did not agree.

354

If disagreement occurred, either party

could file a proposed computation, and the opposing party would be

required to show cause before the Board, either by personal appearance or

by filing an alternative proposal, as to why the initial proposal was incorrect.

Upon the opposing party’s appearance or his submission of an alternative

proposal, the Board would assign the contested computation proposals to

an available division for either a hearing or a disposition on the papers filed.

The Board’s early experience with the rule yielded two substantive

modifications to the provision.

355

The first, an amendment promulgated in

November 1925, required all contested computation arguments to be heard

by the division that had issued the report in the particular case involved.

356

The purpose of this revision was to ensure that the determination of tax

liability would be in conformity with the intent of the division from which

the report originated.

357

Early experience with the rule presaged what was to be the principal

problem in its application and resulted in the second modification. In cases

in which the computation was contested, one party was usually heard to

complain that his adversary was attempting in the computation proceeding

either to relitigate substantive issues that the Board had already decided or

to raise new issues of law or fact.

358

The early versions of the rule did not

expressly indicate the position of the Board on this question, but the Board

soon adopted the view that the computation proceeding could not be

employed for any purpose other than the quantification of tax liability based

solely on issues properly raised and decided in its prior report.

359

This

policy was recognized explicitly in 1928 by an amendment which provided

that

[a]ny hearing under this rule will be confined strictly to the

consideration of the correct computation . . . resulting from the

determination already made. . . . [T]his rule is not to be regarded as

affording an opportunity for rehearing or reconsideration.

360

354

B.T.A. RULE 50 (Jan. 1, 1925 ed.).

355

Compare B.T.A. RULE 50 (Jan. 1, 1925 ed.) with B.T.A. RULE 50 (Nov. 1,

1925 ed.) and B.T.A.

RULE 50 (May 1, 1928 ed.).

356

B.T.A. RULE 50 (Nov. 1, 1925 ed.).

357

See Memorandum from Chairman Hamel to members of the Board, Feb.

25, 1925, filed at the U.S. Tax Court in “Rule 155: Memoranda &

Correspondence.”

358

See Forest D. Siefkin, Procedural Methods of the Board of Tax Appeals, 6 NAT’L

INC. TAX MAG. 334, 337, 349 (1928) [hereinafter cited as Siefkin].

359

Automatic Sprinkler Co. v. Commissioner, 7 B.T.A. 674, 675–76 (1927).

360

B.T.A. RULE 50 (May 1, 1928 ed.).

780 The United States Tax Court – An Historical Analysis

Since 1928, the rule has been renamed,

361

renumbered,

362

and broken

down into component paragraphs.

363

Nonetheless, the procedural

guidelines under the rule and the usual practices followed thereunder have

remained essentially unchanged.

364

Customary practice under the rule is for

the Commissioner to prepare a computation in accordance with the court’s

report and submit it to the taxpayer or his counsel.

365

If the petitioner

agrees with the computation, it is signed by the taxpayer and filed with the

Tax Court whereupon decision is entered.

366

If the parties are in

disagreement over the amount of the computation and stipulation is not

possible, the rule provides that the parties may submit alternative proposals

that they believe to be in accordance with the court’s report.

367

Because the

court experienced “inordinate delay” in the parties’ filing their

computations, the court amended Rule 155 in 2011 to require the parties to

submit their proposed computations within 90 days of service of the

opinion in the case, unless otherwise directed by the court.

368

In cases where the parties fail to agree on the computation, the

procedure for resolving the disagreement is initiated when one of the

361

B.T.A. RULE 50 (Jan. 1, 1938 ed.). The rule was renamed “Computation by

Parties for Entry of Decision.” It was believed that such a name would further

clarify the purpose of the rule. Memorandum from Rules Committee to Members

of the Board, Nov. 12, 1937, at 35, filed at the U.S. Tax Court in “Rule 155:

Memoranda & Correspondence.”

362

TAX CT. R. 155 (Jan. 1, 1974 ed.).

363

TAX CT. R. 50 (Aug. 15. 1955 ed.); Memorandum from Judge Harron to V.

Mersh, Clerk of the Court, May 6, 1955, filed at the U.S. Tax Court in “Rule 155:

Memoranda & Correspondence.”

364

Compare HAMEL, supra note 1 with GARBIS & FROME, supra note 339. The

amendments to Rule 155 since its introduction have been minor in scope. The

discussion below notes the subsequent amendments that are of most import.

365

GARBIS & FROME, supra note 339; Greenberger, supra note 341, at 964–65.

366

The agreement by the taxpayer to the computation figure submitted by the

Commissioner, in accordance with the Tax Court’s report, does not bar further

appeal by the taxpayer. The merits of the case are not fixed by such agreement.

The taxpayer is merely agreeing that if, upon appeal, the opinion of the Tax Court

is sustained, then the computation figure submitted by the Commissioner is proper.

ARBIS & FROME, supra note 339; Miller, supra note 341, at 179.

367

TAX CT. R. 155(b) (July 6, 2012 ed.).

368

See Rules Comm. Note, TAX CT. R. 155(a), (b), 136 T.C. 635–36 (2011).

Additionally, if the computation concerns an overpayment, every computation for

entry of decision is required to include the amount and date of each payment of tax

by the taxpayer. T

AX CT. R. 155(a), (b), 93 T.C. 963–64 (1989). This information

is required to supply the court with the requisite factual record to resolve any later

dispute concerning the Commissioner’s failure to refund the determined

overpayment with interest. Rules Comm. Note, T

AX CT. R. 155(a), (b), 93 T.C. at

964.

Opinions, Decisions, and Appeals 781

parties submits a computation to the court. In its original form, Rule 155

required the clerk of court to serve a copy of the computation on the

opposing party and to place the matter on the motion calendar for

argument. Over time, the court relaxed these requirements. The clerk no

longer is obligated to serve the computation on the opposing party; rather,

the clerk need only serve notice of the computation’s filing.

369

significantly, unagreed cases are no longer automatically calendared for

argument.

370

Fairly early in the operation of the rule, the court noted that

the opposing party failed to make an appearance at the automatically

calendared motion “in the overwhelming majority of cases.”

371

Seeking to

avoid this inefficiency, the court amended the rule to retain discretion to

schedule a hearing only in those instances in which the differing

computations appeared to involve a genuine dispute.

372

If the opposing party fails to file an objection or an alternative

computation within the period specified in the notice from the clerk, the

court has the discretion to accept the submitted computation as correct. If

computations have been submitted by both parties, the matter will be

resolved by the division that issued the report.

373

Any permitted argument

on the matter does not constitute a retrial of the underlying issue, and, as

stated in the express prohibition contained in the rule, the court will not

reconsider the determination of facts and law contained in the report.

374

Notwithstanding the express prohibition against relitigation of issues,

contested computations under the rule have usually involved the question

of whether an issue included in the computation properly was raised and

resolved at trial.

375

The court has adopted a very restrictive view as to what

constitutes a proper computation issue and has held that issues raised in a

petition but not proven,

376

issues raised in a brief for the first time,

377

and

369

The Tax Court amended Rule 155(b) in 2010 to eliminate the requirement

that the Clerk serve an unagreed computation on the opposite party. T

AX CT. R.

155(b), 134 T.C. 367–68 (2010). The Rules Committee did not provide an

explanation for this change. Rules Comm. Note, T

AX CT. R. 155(b), 134 T.C. at

368.

370

See TAX CT. R. 155(b), 71 T.C. 1209 (1979).

371

Rules Comm. Note, TAX CT. R. 155(b), 71 T.C. at 1209–10.

372

Id.

373

TAX CT. R. 155(b) (July 6, 2012 ed.).

374

TAX CT. R. 155(c) (July 6, 2012 ed.).

375

E.g., Nemmo v. Commissioner, 24 T.C. 583, 592 (1955), rev’d and rem’d sub

nom. Polizzi v. Commissioner, 247 F.2d 875 (6th Cir. 1957); Zimmermann v.

Commissioner, 36 B.T.A. 618, 620 (1937), rev’d on other grounds, 100 F.2d 1023 (3d

Cir. 1939); Great N. Ry. v. Commissioner, 10 B.T.A. 1347, 1356 (1928), aff’d, 40

F.2d 372 (8th Cir. 1930).

376

See Hens & Kelly, Inc. v. Commissioner, 19 T.C. 305, 328 (1952).

377

Sussman v. Commissioner, 34 B.T.A. 1314 (1936), aff’d, 102 F.2d 919 (2d

Cir. 1939).

782 The United States Tax Court – An Historical Analysis

issues not in the petition or answer but raised at trial

378

have not been

properly raised and disposed of and therefore cannot be considered in the

computation process.

379

Additionally, a finding of fact by the court that is

neither in issue nor material to the conclusions of law cannot be raised in

the computation.

380

In more recent times, the court has explained that the

prohibition against raising a “new issue” in the Rule 155 computation

setting generally precludes consideration of issues that would require the

introduction of evidence not already contained in the record.

381

On the

other hand, the new issue prohibition does not apply to an adjustment,

which, although not specifically dealt with in the report, necessarily results

from the application of such report.

382

Thus, an adjustment of the

taxpayer’s charitable contribution, the allowance of which is limited by

adjusted gross income, is not a new issue, although the necessity of such an

adjustment was not raised at trial.

383

Although a decision in a case may be entered only after the computation

has been arrived at, the findings of fact and the opinion that precede the

computation process conclude all judicial consideration of the legal and

factual issues in the case.

384

The underlying policy for the court’s restrictive

view has been to prevent the computation procedure from becoming an

extension of trial.

385

The court’s rigid limitation on the function of the

recomputation procedure derives from the view that the trial and decision

process that precedes that procedure is the only appropriate forum in which

to decide contested issues, and that the credibility of the court would

378

See, e.g., John Gerber Co. v. Commissioner, 44 B.T.A. 26, 31 (1941).

379

Bankers Pocahantas Coal v. Commissioner, 287 U.S. 308, 312–13 (1932),

aff’g 55 F.2d 626 (4th Cir. 1930), aff’g 18 B.T.A. 901 (1929); Welsh Homes, Inc. v.

Commissioner, 279 F.2d 391 (4th Cir. 1960), aff’g 32 T.C. 239 (1959); Polizzi v.

Commissioner, 247 F.2d 875, 877 (6th Cir. 1957), rev’g and rem’g Nemmo v.

Commissioner, 24 T.C. 583 (1955); see also Estate of Stein v. Commissioner, 40 T.C.

275, 277–80 (1963); Baird v. Commissioner, 43 B.T.A. 415, 416 (1941); Fifth Ave.

Bank of New York v. Commissioner, 32 B.T.A. 701, 705 (1935), aff’d, 84 F.2d 787

(3d Cir. 1936).

380

Meyers v. Commissioner, 12 T.C. 648, 649 (1949).

381

See Harris v. Commissioner, 99 T.C. 121, 124 (1992); Cloes v.

Commissioner, 79 T.C. 933, 935 (1982); Rubenstein v. Commissioner, T.C. Memo.

2010-274, 100 T.C.M. (CCH) 542.

382

Zimmermann Commissioner, 36 B.T.A. 618, 620 (1937), rev’d on other

grounds, 100 F.2d 1023 (3d Cir. 1939).

383

Id. at 620.

384

George Craven, Pre-Trial and Post-Trial Tax Court Practice, 4 N.Y.U. ANN.

INST. ON FED. TAX’N 260, 268 (1946).

385

See Bankers Pocahantas Coal Co. v. Commissioner, 287 U.S. 308 (1932),

aff’g 55 F.2d 626 (4th Cir. 1930), aff’g 18 B.T.A. 901 (1929); Estate of Stein v.

Commissioner, 40 T.C. 275, 277–80 (1963).

Opinions, Decisions, and Appeals 783

seriously be diminished if its published reports could not be relied upon

with certainty.

386

An interesting assault on the relitigation prohibition came in

Commissioner v. Erie Forge,

387

in which the Commissioner argued that he

should be privileged to assert additional deficiencies or penalties at any time

prior to formal entry of decision by the court.

388

The Commissioner’s

argument was predicated on a jurisdictional provision according power to

the court to allow such increases when claim for the increase was advanced

by the Commissioner “at or before the hearing or rehearing.”

389

In the

Commissioner’s view, the statutory provision barred the Tax Court from

refusing to consider an asserted increase at any time, up to and including

the recomputation procedure, and provisions in the court’s rules to the

contrary had to yield to the express language of the statute.

390

Had the

Commissioner’s position been accepted, a serious threat would have been

posed to the procedural protections afforded the taxpayer. Cases that had

been fully tried would have been subject to retrial at the wish of the

Commissioner any time before entry of decision.

391

The Commissioner’s

position, although based on ostensible statutory authority, was rejected on

appeal.

392

In the view of the Third Circuit, the right of the Commissioner

to claim an increased deficiency was subject to the Tax Court’s Rules of

Practice and Procedure, themselves based on statutory authority,

393

which

reserved to the court discretion to reject a party’s attempt to change his

litigating position during the course of the proceedings.

394

Despite the difficulties the Tax Court has encountered concerning the

prohibition against relitigation within the framework of the computation

procedure, most applications of the procedure are concluded without

controversy. Accordingly, the court has had no reason to alter the basic

requirements of the rule since its promulgation in 1924. Designed to afford

386

Siefkin, supra note 358, at 338. If a party is concerned that a matter may not

be properly raised in the Rule 155 context, a conservative approach is to move for

leave to amend the pleadings in the underlying case and to seek reconsideration of

the court’s opinion. See, e.g., Pinson v. Commissioner, T.C. Memo. 2000-393, 80

T.C.M. (CCH) 393 (following opinion disallowing claimed foreign tax credits,

taxpayers amended pleadings to claim deductions for foreign tax payments in lieu

of credits; court granted leave to amend).

387

167 F.2d 71 (3d Cir. 1948), aff’g 4 T.C.M. (CCH) 1127 (1945).

388

Id. at 76.

389

Int. Rev. Code of 1939, ch. 1, § 272(e), 53 Stat. 83 (now codified at I.R.C.

§ 6214(a)).

390

See TAX CT. R. 17, 19 (Jan. 1, 1944 ed.).

391

Casey, supra note 341, at 58–63.

392

167 F.2d 71 (3d Cir. 1948).

393

Int. Rev. Code of 1939, ch. 1, § 1111, 53 Stat. 160 (now codified at I.R.C.

§ 7453).

394

167 F.2d at 76.

784 The United States Tax Court – An Historical Analysis

the court relief from the time-consuming process of converting its legal

conclusions into a precise monetary equivalent, the rule has served its

intended purpose well.

395

H. Appeals

Since 1926, decisions of the Board/Tax Court have been reviewable

initially by the Federal courts of appeals.

396

Either party may invoke such

review as a matter of right.

397

Appeal from the courts of appeals to the

Supreme Court is available either on certiorari or certification.

398

Treatment

of the formulation of this review structure in the Revenue Act of 1926

appears in Part III of the text.

399

The present discussion will focus on some

of the more significant formal aspects of the appeal procedure, such as time

to appeal and venue, and some of the special policy problems associated

with the unusual appellate structure for tax cases, such as scope of review

on appeal and whether a national trial court should follow the precedents of

the several courts of appeals.

1. Federal Rules of Appellate Procedure

The Revenue Act of 1926 authorized the court of appeals for each

circuit to adopt rules governing the procedure for appellate review of Board

decisions.

400

Soon after the enactment of the 1926 legislation, however, the

Board urged the adoption of uniform rules applicable to all appeals from its

decisions.

401

Although there existed considerable support for this goal,

402

the appellate rules that were adopted by each of the courts of appeals, while

similar in many respects, were not identical.

403

395

See generally CHARLES D. HAMEL, PRACTICE AND EVIDENCE BEFORE THE

U.S. BOARD OF TAX APPEALS 168 (1938); Greenberger, supra note 341, at 963;

Miller, supra note 341, at 158.

396

Revenue Act of 1926, ch. 27, §§ 1001(a), 1003(a), 44 Stat. 109 (now codified

at I.R.C. § 7482(a)).

397

Id. § 1001(a), 44 Stat. 109 (now codified at I.R.C. § 7482(a)).

398

Id. § 1003(a), 44 Stat. 109 (now codified at I.R.C. § 7482(a)).

399

See Part III, notes 57–87 and accompanying text.

400

Revenue Act of 1926, ch. 27, § 1001(b), 44 Stat. 109.

401

See U.S. Board of Tax Appeals, Proposed Rules Governing Appeals to the

United States Circuit Courts of Appeals (1926), filed at the U.S. Tax Court in

“Appeals: Rules of Procedure.”

402

Memorandum entitled “Rules Governing Appeals from the Board of Tax

Appeals to the U.S. Circuit Courts of Appeals,” Oct. 8, 1926, filed at the U.S. Tax

Court in “Appeals: Rules of Procedure.”

403

See Memorandum to members of the Board describing the appellate rules of

practice theretofore adopted, Dec. 7, 1927, filed at the U.S. Tax Court in “Appeals:

Rules of Procedure.”

Opinions, Decisions, and Appeals 785

Some years later, after the successful adoption of various uniform rules

governing procedure in the Federal district courts, Congress concluded that

the cause of judicial administration also would be furthered if the

procedural rules governing appeals from the Tax Court were uniform

throughout the circuits.

404

Accordingly in 1954, section 2074 was added to

title 28 authorizing the Supreme Court to prescribe such uniform rules of

appellate procedure.

405

Before any rules were promulgated pursuant to this

authority, the movement for uniform appellate rules was broadened to

encompass appellate procedure in general, and legislation was adopted

authorizing the drafting and adoption of rules of appellate procedure

applicable to all civil actions in the courts of appeals.

406

These rules, known

as the Federal Rules of Appellate Procedure, were drafted over a seven-year

period by the Advisory Committee on Appellate Rules of the United States

Judicial Conference. The rules were promulgated by the Supreme Court on

December 4, 1967, with a prospective effective date of July 1, 1968.

407

Under these rules, appeals from decisions of the Tax Court are treated

similarly with appeals from civil actions in the district courts.

408

2. Time for Filing Appeal

Prior to July 1, 1968, when the Federal Rules of Appellate Procedure

became effective, statutory rules had governed the time within which a

petition for review of a Tax Court decision had to be filed. Under the 1926

Act, this period was set at six months from the time the Board’s decision

was rendered.

409

In 1932, the period was reduced to three months to

conform to the practice governing appeals from decisions of Federal

district courts.

410

In 1954, the provision again was amended to provide a

404

See H.R. REP. NO. 83-1262, at 2 (1954); S. REP. NO. 83-1074, at 1 (1954).

405

Act of July 27, 1954, ch. 583, 68 Stat. 567. The Supreme Court opposed

enactment of § 2074 since it felt the courts of appeals were “better adapted to

determine, upon the basis of actual experience, the particular procedural problems

in this field, and to fashion rules designed to meet those problems.” Letter from

Chief Justice Fred M. Vinson to Chauncey W. Reed, Apr. 28, 1953, reprinted in H.R.

REP. NO. 83-1262, at 4 (1954).

406

Act of Nov. 6, 1966, Pub. L. No. 89-733, §§ 1–2, 80 Stat. 1323, amending 28

U.S.C. § 2072 (1948) and repealing 28 U.S.C. § 2074 (1954).

407

The history of the development of the Federal Rules of Appellate

Procedure is described in 9 J

AMES WILLIAM MOORE, FEDERAL PRACTICE ¶ 201.05

(2d ed. 1948) [hereinafter cited as J.

MOORE].

408

FED. R. APP. P. 14.

409

Revenue Act of 1926, ch. 27, § 1001(a), 44 Stat. 109.

410

Revenue Act of 1932, ch. 209, § 1101, 47 Stat. 286; H.R. REP. NO. 72-708,

at 52 (1932); S.

REP. NO. 72-665, at 56 (1932).

786 The United States Tax Court – An Historical Analysis

party with an appeal period of four months when another party to the

proceeding filed a timely appeal within the three-month period.

411

As amended in 1966 to authorize the promulgation of the appellate

rules, section 2072 of title 28 provided as follows:

The Supreme Court shall have the power to prescribe by general

rules, the forms of process, writs, pleadings, and motions, and the

practice and procedure of the district courts and courts of appeals of

the United States in civil actions, including admiralty and maritime

cases, and appeals therein, and the practice and procedure in proceedings for

the review by the courts of appeals of decisions of the Tax Court of the United

States and for the judicial review or enforcement of orders of

administrative agencies, boards, commissions, and officers.

. . .

Such rules shall not take effect until they have been reported to

Congress by the Chief Justice at or after the beginning of a regular

session thereof but not later than the first day of May, and until the

expiration of ninety days after they have been thus reported.

All laws in conflict with such rules shall be of no further force or effect after

such rules have taken effect. Nothing in this title, anything therein to the

contrary notwithstanding, shall in any way limit, supersede, or repeal

any such rules heretofore prescribed by the Supreme Court.

412

Thus, applicable statutory authority empowered the Supreme Court,

with certain limitations, to promulgate appellate rules that would supersede

conflicting statutes. Although Congress substantially modified section 2072

of title 28 in 1988,

413

the ability of the Supreme Court to override an

otherwise governing statute through the rules enabling process remains

intact.

414

Pursuant to this authority, the rules of appellate procedure

provide that a petition for review of a Tax Court decision must be filed with

the clerk of the Tax Court within 90 days of the entry of the Tax Court

decision, or within 120 days of such entry when a timely notice of appeal

has been filed by another party.

415

That the power to promulgate these rules

was seen as permitting the modification of statutory restrictions on appeal

time is indicated by the fact that at the time of their adoption, these rules

changed existing practice which theretofore had been prescribed by statute.

Under the statute, appeals were commenced by a petition for review rather

411

I.R.C. § 7483, as amended by Tax Reform Act of 1969, Pub. L. No. 91-172,

§ 959(a), 83 Stat. 734.

412

Act of Nov. 6, 1966, Pub. L. No. 89-773, § 1, 80 Stat. 1323 (emphasis

added).

413

See Pub. L. No. 100-702, §§ 401(a), 407, (1988), 102 Stat. 4648, 4652.

414

See 28 U.S.C. § 2072(c).

415

FED. R. APP. P. 13(a).

Opinions, Decisions, and Appeals 787

than a notice of appeal and the time limits for filing were three months and

four months from entry of decision, rather than 90 days and 120 days.

416

The statute subsequently was amended to conform to the Federal Rules of

Appellate Procedure,

417

but presumably this was unnecessary to validate the

change and should not preclude future changes in the court-made rules that

will supersede currently existing statutes.

418

3. Effect of Motion to Vacate

The period for filing a notice of appeal is deferred if a party files a

motion to vacate or revise the Tax Court’s decision.

419

In that case, the 90-

day period runs from the entry of the order denying the motion or from the

entry of the revised decision.

420

Such a motion must be filed within 30 days

after the decision has been entered, unless the court permits otherwise.

421

However, the Tax Court may allow a motion to vacate to be filed after the

30-day period only if the party files for leave to file the motion before the

decision becomes final as a result of the expiration of the 90-day period for

filing a notice of appeal.

422

With respect to an untimely motion to vacate,

the 90-day period for appealing the Tax Court’s decision is extended only if

the court grant’s the motion for leave to file the motion.

423

416

I.R.C. § 7483, as amended by Tax Reform Act of 1969, Pub. L. No. 91-172,

§ 959(a), 83 Stat. 734.

417

Tax Reform Act of 1969, Pub. L. No. 91-172, § 959(a), 83 Stat. 734

(amending I.R.C. § 7483); see also T

AX CT. R. 190(a) (July 6, 2012 ed.) (reflecting

conditions for filing appeal contained in Federal Rule of Appellate procedure 13(a)

and § 7483).

418

See Advisory Committee Note, FED. R. APP. P. 13.

419

See FED. R. APP. P. 13(a)(2) (“If, under Tax Court rules, a party makes a

timely motion to vacate or revise the Tax Court’s decision, the time to file a notice

of appeal runs from the entry of the order disposing of the motion or from the

entry of a new decision, whichever is later.”); see also T

AX CT. R. 162 (July 6, 2012

ed.) (governing motions to vacate or revise).

420

FED. R. APP. P. 13(a)(2). A subsequent motion with respect to an original

motion to vacate, however, does not commence a 90-day period for filing the

notice of appeal. See Okon v. Commissioner, 26 F.3d 1025, 1026 (10th Cir. 1994)

(noting general principle that “tolling motions may not be tacked together to

perpetuate the prescribed time for appeal”).

421

Id.

422

See Manchester Group v. Commissioner, 113 F.3d 1087 (9th Cir. 1997).

423

See Nordvik v. Commissioner, 67 F.3d 1489, 1492 (9th Cir. 1995); Simon v.

Commissioner, 176 F.2d 230, 232 (2d Cir. 1949). But see Denholm and McKay Co.

v. Commissioner, 132 F.2d 243, 248 (1st Cir. 1942) (concluding that the Tax Court

retains jurisdiction to consider an untimely motion to vacation only if the court acts

on the motion before the end of the 90-day period for filing an appeal).

788 The United States Tax Court – An Historical Analysis

A motion for reconsideration of the court’s opinion or findings of

fact

424

typically is filed prior to the entry of the court’s decision, and the

motion likely will be acted upon prior to the decision being entered as well.

The effect of a motion to reconsideration filed after the entry of the Tax

Court’s decision is not entirely clear. Such motions do not enjoy the

express tolling effect afforded to motions to vacate provided in the Federal

Rules of Appellate Procedure. Nonetheless, the Ninth Circuit in Nordvick v.

Commissioner

425

overturned prior precedent to hold that such a motion fell

within the broad category of motions that challenge the substance of the

Tax Court’s decision and that are entitled to the tolling effect provided

under the federal appellate procedure rules.

426

However, the safer and more

certain approach is to properly style the motion as one to vacate or revise

the court’s decision.

4. Finality of Tax Court Decisions

Because the time limits for seeking review of a Tax Court decision are

established by statute and therefore could be considered jurisdictional, it is

arguable that no circumstance would permit review of a Tax Court decision

after the statutory period had elapsed and the decision had, under the

statute, become final.

427

Although this interpretation originally reflected the

conventional wisdom,

428

some decisions prior to 1957 had indicated that

under certain circumstances such as mutual mistake or excusable neglect in

filing an appeal, a final decision of the Tax Court might be reopened.

429

The reopened case, in turn, would permit a second appeal period to

commence when a subsequent decision of the Tax Court was rendered.

However, the Supreme Court in 1957 affirmed per curiam the Ninth Circuit

424

See TAX CT. R. 161 (July 6, 2012 ed.) (governing motions for

reconsideration).

425

67 F.3d 1489 (9th Cir. 1995) (overruling Trohimovich v. Commissioner,

776 F.2d 873 (9th Cir. 1985)).

426

Id. at 1493–94 (relying in part on the advisory committee notes to Rule

13(a) of the Federal Rules of Appellate Procedure).

427

Revenue Act of 1926, ch. 27, § l005(a), 44 Stat. 110 (now codified at I.R.C.

§ 7481(a)(1)), provided that Board decisions became final upon the expiration of

the statutory time for appeal if no timely appeal was filed.

428

See White’s Will v. Commissioner, 142 F.2d 746 (3d Cir. 1944); Monjar v.

Commissioner, 140 F.2d 263 (2d Cir. 1944); Denholm & McKay Co. v.

Commissioner, 132 F.2d 243 (1st Cir. 1942); Swall v. Commissioner, 122 F.2d 324

(9th Cir. 1941); Sweet v. Commissioner, 120 F.2d 77 (1st Cir. 1941); Commissioner

v. Realty Operators, Inc., 118 F.2d 286 (5th Cir. 1941).

429

Reo Motors, Inc. v. Commissioner, 219 F.2d 610 (6th Cir. 1955); La

Floridienne J. Buttgenbach & Co. v. Commissioner, 63 F.2d 630 (5th Cir. 1933); see

also Lentin v. Commissioner, 237 F.2d 5 (7th Cir. 1956).

Opinions, Decisions, and Appeals 789

decision in Lasky v. Commissioner,

430

which held that the Tax Court (then an

independent agency in the executive branch of Government) had no

inherent power to vacate a decision that had become final under the statute

on the ground of excusable neglect. Such a power, the Ninth Circuit stated,

could be exercised only by a federal court and not by a body that was

“merely an administrative agency.”

431

The Supreme Court did not issue an

opinion in Lasky; thus it was not clear whether the case was affirmed on the

ground of the Tax Court’s technical status as an agency in the executive

branch (a ground which figured in the decision of the Ninth Circuit), or the

ground that the statute provided a definite period in which the petition for

review had to be filed, and, in the absence thereof, the decision of the Tax

Court became final (the position of the Government in urging affirmance

of the Ninth Circuit

432

). In any event, it appears settled that a decision of

the Tax Court becomes final after the statutory period for appeal has

elapsed with no review sought.

433

Only two narrow exceptions exist to this

rule. The Tax Court may vacate an otherwise final decision if the decision

was procured by a fraud on the court

434

or if the court lacked jurisdiction to

enter the decision in the first instance.

435

5. Reviewable Decisions

The “decision” of the Tax Court that may be reviewed on appeal

pursuant to § 7482(a) is interpreted more broadly than the definition of the

term contained in § 7459.

436

Rather, a decision for purposes of § 7482

includes, among other things, an order resolving a motion for the Tax

430

352 U.S. 1027 (1957), aff’g 235 F.2d 97 (9th Cir. 1956).

431

235 F.2d at 98.

432

Brief for Respondent at 15, Lasky v. Commissioner, 352 U.S. 1027 (1957).

433

See e.g., Harbold v. Commissioner, 51 F.3d 618, 621–22 (6th Cir. 1995)

(following the Ninth Circuit’s decision in Lasky); Tascano v. Commissioner, 441

F.2d 930, 932–33 (9th Cir. 1971) (same).

434

See Drobny v. Commissioner, 113 F.3d 670 (7th Cir. 1997) (detailing fraud

on the court as the single narrow instance in which an otherwise final decision of

the Tax Court could be set aside); Dixon v. Commissioner, 316 F.3d 1041 (9th Cir.

2003) (affirming Tax Court’s decision to modify otherwise final decision based on

intentional fraud perpetrated on court); see also Flood v. Commissioner, 468 F.2d

904 (9th Cir. 1972); Toscano v. Commissioner, 441 F.2d 930 (9th Cir. 1971);

Kenner v. Commissioner, 387 F.2d 689 (7th Cir. 1968).

435

See Billingsley v. Commissioner, 868 F.2d 1081 (9th Cir. 1989); Abeles v.

Commissioner, 90 T.C. 103 (1988); Brannon’s of Shawnee, Inc. v. Commissioner,

69 T.C. 999 (1978).

436

See Louisville Builders Supply Co. v. Commissioner, 294 F.2d 333, 337 (6th

Cir. 1961) (explaining that “the words ‘decisions of the Tax Court’ as contained in

Section 7482(a) should not be construed to have meaning only as such meaning

may be found within the narrow confines of Section 7459(c)”).

790 The United States Tax Court – An Historical Analysis

Court to restrain assessment pursuant to § 6213(a),

437

an order resolving a

motion to review a proposed sale of seized property pursuant to

§ 6863(b)(3)(C),

438

an order denying a motion to intervene,

439

and any other

order disposing of the proceeding before the court.

440

Prior to 1986, interlocutory orders of the Tax Court were not subject to

appeal.

441

Congress reversed this prohibition through the enactment of

§ 7482(a)(2) in connection with the Tax Reform Act of 1986.

442

This

provision, appearing in neither the House nor Senate versions of the

legislation but instead first appearing in the conference agreement,

authorizes an appeal from an interlocutory order of the Tax Court provided

the presiding Tax Court judge includes in an interlocutory order (1) a

statement that the order involves a controlling question of law, (2) a

substantial ground for difference of opinion exists with respect to the

question of law, and (3) an immediate appeal from the order might

materially advance the ultimate termination of the litigation.

443

application for an appeal of the order must be made within ten days of the

court issuing this statement, and the court of appeals may take the appeal in

its discretion.

444

The appeal is made to the court of appeals that would hear

the appeal from a final decision in the matter,

445

and if the appellate court

accepts the appeal, it will have jurisdiction over any subsequent appeal of a

decision by the Tax Court in the matter.

446

The Tax Court proceeding generally does not pause as a result of an

appeal of an interlocutory order. Neither the application of an appeal nor

its acceptance by the appellate court operates to stay the Tax Court

437

See I.R.C. § 7482(a)(3); Tax Ct. R. 190(b) (July 6, 2012 ed.).

438

Tax Ct. R. 190(b) (July 6, 2012 ed.).

439

See Sampson v. Commissioner, 710 F.2d 262, 263–64 (6th Cir. 1983)

(following Estate of Smith v. Commissioner, 638 F.2d 665 (3d Cir. 1981), and

Dixon v. Commissioner, 666 F.2d 386 (9th Cir. 1982)).

440

Louisville Builders Supply Co. v. Commissioner, 294 F.2d 333, 339 (6th Cir.

1961) (Tax Court order requiring the taking of a deposition reviewable as a decision

of the court on grounds that the order “granted all relief sought and disposed of

the entire proceeding pending before it”); Ryan v. Commissioner, 680 F.2d 324,

326 (3d Cir. 1982) (noting that “a court of appeals may consider an appeal as long

as it arises out of a final decision of the Tax Court”).

441

See Shapiro v. Commissioner, 632 F.2d 170 (2d Cir. 1980) (cited in H.R.

REP. NO. 99-841, at 80 (1986)); see also Ryan v. Commissioner, 680 F.2d 324, 327

(3d Cir. 1982).

442

Pub. L. No. 99-514 (1986), § 1558(a), 98 Stat. 494.

443

I.R.C. § 7482(a)(2)(A); TAX CT. R. 193(a) (July 6, 2012 ed.); see also H.R. REP.

NO. 99-841, at 80 (1986).

444

I.R.C. § 7482(a)(2)(A).

445

I.R.C. § 7482(a)(2)(B); TAX CT. R. 193(b) (July 6, 2012 ed.).

446

I.R.C. § 7482(a)(2)(C).

Opinions, Decisions, and Appeals 791

proceeding unless ordered by the Tax Court or the Court of Appeals

accepting the appeal.

447

A particular issue concerning the ripeness of Tax Court decisions for

appellate review arises in the context of proceedings relating to multiple tax

years. Specifically, if an order of the Tax Court dismisses some, but not all,

of the disputed tax years at issue in a petition for redetermination, can the

appellate court entertain an appeal concerning the tax years that have been

disposed of by the Tax Court? The issue has created an interesting split

among the circuit courts of appeals. As explained by the Third Circuit in

N.Y. Football Giants v. Commissioner,

448

three approaches exist. The

permissive approach, endorsed only by the D.C. Circuit, is to allow the

appeal of orders that finally dispose of particular claims.

449

The middle

ground, adopted by the Fifth, Seventh, and Ninth Circuits, is to permit the

appeal to go forward only if the Tax Court makes a Rule 54(b)

determination that its judgment pertaining to those claims is final and

immediately appealable.

450

This approach may appear curious at first

glance, as there exists no Rule 54 in the Tax Court Rules of Practice and

Procedure. Rather, Rule 54 appears in the Federal Rules of Civil Procedure,

and it permits a court to direct entry of a judgment as to fewer than all

claims raised if the court determines that there exists “no just reason for

delay.”

451

Despite the absence of this provision in the Tax Court rules, the

court may prescribe its own procedure in the absence of a governing rule,

giving particular weight to the Federal Rules of Civil Procedure to the

extent they are suitable.

452

In this manner, the Tax Court can issue a Rule

54(b) determination in the same manner as a Federal district court. The

third approach, endorsed by the Second and Sixth Circuits, is to not permit

appellate review of an order that does not dispose of the entire case,

notwithstanding any Rule 54(b) certification.

453

For its part, the Third

Circuit in N.Y. Football Giants endorsed the middle ground permitting an

appeal provided the Tax Court issues a Rule 54(b) statement, finding this

approach to be more in keeping with the statutory directive under

447

I.R.C. § 7482(a)(2)(A); TAX CT. R. 193(c) (July 6, 2012 ed.).

448

349 F.3d 102 (3d Cir. 2003).

449

InverWorld v. Commissioner, 979 F.2d 868 (D.C. Cir. 1992).

450

Nixon v. Commissioner, 167 F.3d 920 (5th Cir. 1999); Brookes v.

Commissioner, 163 F.3d 1124 (9th Cir. 1998); Shepherd v. Commissioner, 147 F.3d

633 (7th Cir. 1998).

451

FED. R. CIV. P. 54(b).

452

TAX CT. R. 1(b) (July 6, 2012 ed.).

453

Schrader v. Commissioner, 916 F.2d 361 (6th Cir. 1990); Estate of Yaeger v.

Commissioner, 801 F.2d 96 (2d Cir. 1986).

792 The United States Tax Court – An Historical Analysis

§ 7482(a)(1) to review decisions of the Tax Court in the same manner and

the to the same extent as those of Federal district courts.

454

6. Venue

From 1926 until the present, appeals from Board of Tax Appeals and

Tax Court decisions have gone to the Federal circuit courts of appeals.

This structure, which can be graphically conceptualized as an inverted

pyramid, as opposed to the standard court structure in which lower court

decisions are funneled into less numerous appellate courts, has been

described as “an anomalous and topsy-turvy appellate system.”

455

One of

the complexities created by this unusual format

456

has involved venue, the

question of the location of the proper court to hear a litigation.

Although venue is not strictly a jurisdictional matter,

457

a faulty venue

choice by an appealing party may have drastic results. Thus, if a party

choosing to appeal a Tax Court decision files a notice of appeal to the

wrong court of appeals and the appeal is dismissed for that reason, it may

be too late to appeal to the proper court inasmuch as the time for filing a

notice of appeal may have expired.

458

Nonetheless, courts have generally

proven forgiving in permitting transfer of venue when the taxpayer files the

appeal with an improper court.

459

Since 1926, proper venue for appeals

from the Board/Tax Court has been determined under statutory rules

contained in the tax laws.

460

The rules have undergone changes in 1934

461

454

N.Y. Football Giants v. Commissioner, 349 F.3d 102, 106–07 (3d Cir.

2003).

455

James Craig Peacock, An Anomalous and Topsy-Turvy Appellate System, 19

A.B.A. J. 11 (1933) [hereinafter cited as Peacock].

456

Although unusual, the structure is not unique. Judicial review of

administrative determinations generally involve appeals fanning out across the

country from the findings of a single agency. See 9 J.

MOORE, supra note 407, at

¶ 215.03.

457

1 J. MOORE, supra note 407, at ¶¶ 0.140[1.-1], [1.-2]. Nonetheless, the courts

sometimes refer to incorrect venue as a jurisdictional deficiency. Compare

Nash-Breyer Motor Co. v. Burnet, 283 U.S. 483 (1931) with Industrial Addition

Ass’n v. Commissioner, 323 U.S. 310 (1945).

458

For example, under the 1926 Act, unless a petition for review was “duly”

filed within six months after the Board decision was rendered, the Board decision

became final, and therefore unreviewable. Revenue Act of 1926, ch. 27, §§ l001(a),

1005(a), 44 Stat. 109 (now codified at I.R.C. § 7481(a)(1)).

459

See, e.g., Dornbusch v. Commissioner, 860 F.2d 611 (5th Cir. 1988).

460

For the venue rules enacted in 1926, see Revenue Act of 1926, ch. 27,

§ 1002, 44 Stat. 110.

461

Revenue Act of 1934, ch. 277, § 519, 48 Stat. 760, amending Revenue Act of

1926, ch. 27, § 1002. 44 Stat. 110.

Opinions, Decisions, and Appeals 793

and 1966,

462

but whether an ideal has been achieved is subject to some

question.

The 1926 Act provided, in effect, four separate venue rules depending

principally on the nature of the taxpayer. First, in the case of an individual,

proper venue was in the court of appeals for the circuit in which the

individual was an inhabitant, or if the individual was not an inhabitant of

any circuit, in the Court of Appeals for the District of Columbia.

463

Second, in the case of a person other than an individual or a corporation,

i.e., a trust or estate, proper venue was in the circuit court for the circuit in

which was located the collector of the tax to whom such person made the

return, or, if no return were made, in the Court of Appeals for the District

of Columbia.

464

Third, in the case of a corporation, venue was determined

according to a three-tier rule: if the corporation had no principal place of

business or principal office or agency in the United States, venue was in the

Court of Appeals for the District of Columbia; if the corporation had such

a place of business, office or agency, venue was determined under the same

two-tier rule applicable to trusts and estates.

465

Finally, the statute provided

that “in the case of an agreement between the Commissioner and the

taxpayer, [proper venue would be in] . . . the Circuit Court of Appeals for

the circuit, or the Court of Appeals of the District of Columbia, as

stipulated in such agreement.”

466

Although these rules may, at first impression, have appeared both

comprehensive and comprehensible, problems soon emerged in their

interpretation. For example, in the case of the venue by agreement

provision, the question arose whether the parties could stipulate a venue in

any court of appeals. While some thought this was the clear import of the

statutory language,

467

the Supreme Court held that an agreement was

improper if it stipulated a venue other than the Court of Appeals for the

District of Columbia, or alternatively, a circuit that would otherwise be

proper under the general venue rules.

468

In addition, a more troublesome question arose as to what venue would

be proper in a case involving the liability of a transferee of assets for a tax

462

Act of Nov. 2, 1966, Pub. L. No. 89-713, § 3(c), 80 Stat. 1109 (amending

I.R.C. § 7482(b)).

463

Revenue Act of 1926, ch. 27, § 1002(a), 44 Stat. 110.

464

Id. § 1002(b).

465

Id. § 1002(b)–(c).

466

Id. § 1002(d).

467

E.g., Peacock, supra note 455, at 14.

468

Nash-Breyer Motor Co. v. Burnet, 283 U.S. 483 (1931). Evidently,

Congress also disagreed with the Supreme Court’s interpretation, for in the

Revenue Act of 1934, the law was changed to make clear that any court of appeals

could be the stipulated venue. Revenue Act of 1934, ch. 277, § 519(a), 48 Stat. 760

(now codified at I.R.C. § 7482(b)(2)).

794 The United States Tax Court – An Historical Analysis

deficiency of his transferor. The rules worked reasonably well if the

transferee was an individual—venue would depend on his inhabitance. But

if the transferee was not an individual, venue could depend on where the

“person made the return.”

469

There not being any such thing as a transferee

return, it might be argued that venue would depend on where the transferor

made his return. But if the transferor was not a party to the litigation, why

should the venue rules, which are essentially rules for the convenience of

the litigants,

470

force a party to litigate in a circuit with which he has no

nexus?

471

The most serious venue questions under the 1926 Act involved

individuals. Where was an individual an inhabitant? Was it his residence,

his domicile, or did some other rule govern? When was inhabitance to be

tested if the individual was an inhabitant of different circuits when he filed

the disputed return, the petition to the Board, and the petition for review of

the Board’s decision? Problems also existed with respect to parties who

were representatives of an individual. Thus, in the case of a deficiency

asserted against a taxpayer who had died before the applicable date for

determining inhabitance, would venue be determined by reference to the

decedent’s last inhabitance, the inhabitance (if any) of his estate, or the

inhabitance of the executor(s) of the estate?

In the years following the enactment of the Revenue Act of 1926, courts

and commentators began to explore these and other venue questions.

472

469

Revenue Act of 1926, ch. 27, § 1002(b)–(c), 44 Stat. 110. If the corporate

transferee had no principal place of business or principal office or agency within

the United States, there was no problem—venue was in the Court of Appeals of

the District of Columbia. Id. § 1002(c).

470

1 J. MOORE, supra note 407, at ¶ 0.140[1.-1].

471

According to Peacock, supra note 455, at 13, such a case actually occurred.

The appellant filed a petition for review in the circuit where the transferor made its

return and also filed a petition in the circuit where the transferee made its return.

In Peacock’s view, neither venue was proper and the petition should have been

filed to the Court of Appeals for the District of Columbia, since the “person” to

whom the venue statute referred was the transferee and no return relative to the tax

in dispute had been filed by such person.

472

Nash-Breyer Motor Co. v. Burnet, 283 U.S. 483 (1931) (stipulation of venue

limited to either Court of Appeals of District of Columbia or circuit court

otherwise proper under general venue rules); Turner’s Estate v. Helvering, 68 F.2d

759 (D.C. Cir. 1934) (taxpayer, an inhabitant of the Third Circuit, died the day

before the Board hearing and his estate was substituted as party; Court of Appeals

of District of Columbia held to be improper venue—appeal (in absence of

stipulation) could only be taken to the Third Circuit since that was decedent’s

inhabitance); Ayer v. Commissioner, 63 F.2d 231 (2d Cir. 1933); Burnet v. White

Eagle Oil & Refining Co., 58 F.2d 141 (8th Cir. 1932) (in transferee liability case in

which both transferor and transferee were corporations, appellate venue depends

on location where transferor, not transferee, filed return); Rusk v. Commissioner,

Opinions, Decisions, and Appeals 795

appeared that the determination of proper venue, which ideally should be

mechanical and result in the choice of a convenient forum,

473

should not

present as many difficulties as were encountered.

In testimony before the Senate Finance Committee in connection with

the Revenue Act of 1934, a representative of the American Bar Association

Committee on Federal Taxation criticized the situation:

In at least nine cases, appeals have been improperly taken because of

the existing confusion in the statutes. In at least 100 cases or more,

now, it has been necessary to appeal to 2 circuit courts at the same

time, in order to be protected against a misconstruction or against

the construction of the court to which you first appeal. . . .

474

With this prompting from the ABA, and with the support of the Treasury,

the venue rules were amended by Congress in the 1934 Act to provide a

simplified rule for appeals from decisions of the Board.

475

The revised

rule,

476

which was to stand until revised in 1966, provided that venue should

be in the “Circuit Court of Appeals for the circuit in which is located the

collector’s office to which was made the return of the tax in respect of

which the liability arises, or if no return was made, then [in] the Court of

Appeals of the District of Columbia.” The Act also amended the venue by

stipulation provision to make clear that the parties on appeal could validly

agree to venue in any court of appeals they chose.

477

Thus, the rule that formerly had been applied to trusts and estates was

applied to all appeals. The new provision eliminated much of the old

uncertainty, and the most significant controversies that arose under the new

provision were whether a “return” was “made,”

478

and whether the

Government would be deemed to have waived its objections to the venue

53 F.2d 428 (7th Cir. 1931); Matheson v. Commissioner, 54 F.2d 537 (2d Cir. 1931)

(executors of taxpayer decedent were real parties in interest and their inhabitance

determines venue, even though they were substituted as parties after petition was

filed with Board); see also Peacock, supra note 455.

473

1 J. MOORE, supra note 407, at ¶ 0.140[1.-1].

474

Hearings on H.R. 7835 Before the Senate Comm. on Finance, 73d Cong., 2d Sess.

67 (1934).

475

78 CONG. REC. 6325 (1934).

476

Revenue Act of 1934, ch. 277, § 519(a), 48 Stat. 760.

477

Id. § 519(b).

478

Commissioner v. Roosevelt & Son Inv. Fund, 89 F.2d 706, 708 (2d Cir.

1937); see also Commissioner v. Clarion Oil Co., 148 F.2d 671, 673 (D.C. Cir. 1945);

Commissioner v. Germantown Trust Co., 106 F.2d 139, 140 (3d Cir. 1939), rev’d,

309 U.S. 304 (1940).

796 The United States Tax Court – An Historical Analysis

selection of the taxpayer.

479

It may be observed that the 1934 rules,

although fairly certain, did not always result in a forum that was convenient.

Thus, if the taxpayer moved after filing his return, or if the party to the

litigation was contesting transferee liability in respect of a transferor who

had filed his return in a distant collector’s office, proper venue might be

geographically distant from the location of the party or his attorney at the

time the appeal was taken.

480

Nonetheless, these rules did not arouse any

noticeable dissatisfaction. First, the rules were easily applied. Moreover, in

those cases in which application of the rule resulted in genuine hardship to

the taxpayer, the Government generally would agree to a satisfactory

change in venue.

481

As a result of the increasing use of computers in tax collection,

Congress, in 1966, authorized the Internal Revenue Service to divide the

country into broad geographical regions for return filing purposes, and to

require residents of each of these regions to file their return in one central

location.

482

The legislation contemplated that there would be seven filing

regions.

483

Since some judicial circuits included more than one regional

filing center and other circuits included no regional centers, a change in the

venue rules enacted in 1934 was necessary if disproportionate

concentrations of appeals in some of the circuits were to be avoided.

484

Accordingly, as part of the same 1966 legislation, Congress adopted new

venue rules that in some respects are similar to those contained in the

479

In Lamb v. Commissioner, 374 F.2d 256 (2d Cir. 1967), the court held that the

Commissioner had waived his objections to an improper venue selection by the

taxpayer. The waiver was found in the Commissioner’s action in transferring the

audit to, and issuing the deficiency notice from, the District Director’s office

located in the circuit to which the taxpayer ultimately appealed; see also Industrial

Addition Ass’n v. Commissioner, 323 U.S. 310 (1945); Wegener v. Commissioner,

119 F.2d 49 (5th Cir. 1941).

480

Under the 1934 rules, it was apparent that an appeal in a transferee liability

case should be venued, absent an agreement or a waiver, in the circuit in which the

transferor filed his return, since that was the return involving the “tax in respect of

which the liability arises.” Revenue Act of 1934, ch. 277, § 519, 48 Stat. 760.

481

See Peacock, supra note 455, at 16, wherein he states: “It is only right to say,

however, that the General Counsel of the Bureau of Internal Revenue has been

very reasonable and obliging in entering into . . . a stipulation when requested by a

taxpayer.” Nothing indicates that this policy has changed in any significant respect

since the time it was noted by Peacock in 1933. However, a taxpayer would

probably be excessively optimistic to request a stipulation for a venue that has

already ruled in accordance with the position he is maintaining.

482

Act of Nov. 2, 1966, Pub. L. No. 89-713, § 1, 80 Stat. 1107 (amending

I.R.C. §§ 6091(b), 6151(a)).

483

H.R. REP. NO. 89-1915, at 1 (1966); S. REP. NO. 89-1625, at 1 (1966).

484

H.R. REP. No. 89-1915, at 1 (1966); S. REP. NO. 89-1625, at 1 (1966).

Opinions, Decisions, and Appeals 797

Revenue Act of 1926.

485

The 1966 rules determine venue in the case of any

person, other than a corporation, on the basis of his residence, with venue

being provided in the circuit court of appeals for the circuit in which such

person resided at the time his petition was filed with the Tax Court. If the

person does not have a residence within any circuit, venue is provided in

the Court of Appeals for the District of Columbia. In the case of a

corporation, venue is to be in the circuit court of appeals for the circuit in

which the corporation has its principal place of business or principal office

or agency, or if it has no principal place of business or principal office or

agency within a judicial circuit, appellate venue is in the circuit court for the

circuit in which is located the office to which the corporation made the

disputed return. If the corporation has no principal place of business,

office or agency within a judicial circuit and has not filed a return with

respect to the disputed tax, venue is in the Court of Appeals for the District

of Columbia. The revised rules made no change in the venue by agreement

provision as modified by the 1934 Act.

486

It should be apparent that some of the same problems which existed

under the 1926 venue rules were reintroduced with the 1966 amendments.

Thus, the mechanical rule based on return filing was almost completely

abandoned, and inquiry must now be made to such decidedly

non-mechanical concepts as “residence,” (in the case of persons other than

corporations) and “principal place of business or principal agency or office”

(in the case of corporations). Moreover, some of the same issues that arose

with respect to fiduciary representatives of the taxpayer also arise under the

new provisions. For example, if the taxpayer dies before the filing of the

petition to the Tax Court, will appellate venue vary depending on whether

his estate or his executor is the named party in the Tax Court petition?

487

485

Act of Nov. 2, 1966, Pub. L. No. 89-713, § 3(c), 80 Stat. 1109 (amending

I.R.C. § 7482(b)(1)).

486

See supra note 477 and accompanying text.

487

Cf. Turner’s Estate v. Helvering, 68 F.2d 759 (D.C. Cir. 1934) (for purposes

of 1926 Act venue rules, the executors and not the estate would be regarded as the

real party in interest). The Tax Court periodically faces this question in

determining the circuit court precedent that governs the proceeding before it under

the Golsen rule (discussed in Section H.9 below), but the court has not yet

definitively resolved the matter. The most extensive treatment is found in separate

opinions in the court-reviewed opinion in Estate of Clack v. Commissioner, 106 T.C.

131 (1996). Drawing on the § 7482 and the legislative history accompanying the

1966 amendments thereto, as well as cases addressing the venue for refunds suits

brought by estates, Judge Parr concluded that the determination of appellate venue

should be based on the residence of the executor (or the principal place of business

of a corporate executor). Id. at 167 (Parker, J., dissenting). Judge Parker’s separate

opinion was joined by Judge Cohen. This approach was endorsed by the D.C.

Circuit Court of Appeals in Estate of Israel v. Commissioner, 159 F.3d 593, 595 (D.C.

Cir. 1998), which characterized the conclusion that the executor, rather than the

798 The United States Tax Court – An Historical Analysis

In addition to these uncertainties, the new rules introduced more

opportunity for discretionary forum selection than existed under the filing

location standard. Thus, if the principal place of business of a corporation

is located in a different judicial circuit than its principal office or agency,

presumably the corporation could file its appeal petition with either circuit.

Additionally, if the same decision involves more than one petitioner, the

possibility for forum selection also will exist. Thus, if the petitioners in a

case involving an estate are fiduciaries residing in different circuits, an

appeal to the circuit in which any fiduciary resides probably would be

proper.

488

Since different substantive rules may obtain in different

circuits,

489

appellate venue selection occasionally can be determinative of

the outcome of the controversy.

490

Congress has periodically updated the venue provisions of § 7482(b) in

an attempt to keep up with the expanded range of matters over which the

Tax Court possesses jurisdiction. Appellate venue for review of a

declaratory judgment relating to the qualification of retirement plans under

§ 7476 is determined by reference to the principal place of business of the

employer;

491

appellate venue for review of a declaratory judgment

concerning the tax-exempt status of an organization under § 7428 is

determined by reference to the location of the organization’s principal

office or agency;

492

appellate venue for review of decisions arising under the

TEFRA partnership proceedings is determined by reference to the principal

place of business of the partnership;

493

and a declaratory judgment relating

to an over-sheltered return pursuant to § 6234 is determined by the legal

estate, should be viewed as the petitioner for purposes of § 7842(b) as “hardly open

to dispute.”

Judge Gerber, in a concurring opinion in Estate of Clack, addressed the issue

raised by Judge Parker, and came to the opposite conclusion. He found it more

logical to regard the estate as the petitioner in the proceeding, and he noted that

this approach minimized the prospect of forum shopping because a decedent’s

domicile becomes fixed at death. 106 T.C. at 146–47 (Gerber, J., concurring). [On

the other hand, fiduciaries could move to or perhaps be selected in a jurisdiction

with favorable circuit court precedent.] Judge Gerber’s concurring opinion was

joined by five other judges of the court.

In light of the uncertainty regarding the venue for appeals in cases involving an

estate, the court has adopted a policy to avoid identifying the petitioner as the

estate.

488

See discussion in supra note 487.

489

See infra notes 573–574 and accompanying text.

490

See Peacock, supra note 455, at 15–16.

491

I.R.C. § 7482(b)(1)(C).

492

I.R.C. § 7482(b)(1)(D).

493

I.R.C. § 7482(b)(1)(E)

Opinions, Decisions, and Appeals 799

residence of a non-corporate petitioner or the principal place of business of

a corporate taxpayer.

494

However, § 7482(b) does not address every type of case the Tax Court

has jurisdiction to hear. In cases not expressly addressed by the

enumerated provisions of § 7482(b), which include decisions emanating

from a variety of areas of the Tax Court’s expanded jurisdiction, the D.C.

Circuit Court of Appeals serves as the default appellate venue.

495

As one

example, an appeal of a Tax Court decision concerning a petitioner’s right

to a whistleblower award pursuant to § 7623 would rest with the D.C.

Circuit under the default provision. The Tax Court, however, has not been

overly exacting in its reference to appellate venue in cases arising under its

expanded jurisdiction. For instance, in Murphy v. Commissioner,

496

the

taxpayer petitioned for review of an adverse collection due process hearing

pursuant to § 6330(d). In addressing the controlling precedent in the case,

the Tax Court observed by footnote that an appeal of the case would lie

with the First Circuit Court of Appeals—apparently based on the residence

of the taxpayer.

497

However, § 7482(b)(1)(A) references the individual

appellant’s residence only in cases involving a “redetermination of a

deficiency.” As the validity of the underlying tax liability often is not at

issue in a collection due process proceeding and was not at issue in Murphy,

the Tax Court’s determination of appellate venue appeared incorrect.

498

Nonetheless, the case was appealed to the First Circuit, which accepted the

appeal and affirmed the Tax Court’s decision with no discussion of its

appellate jurisdiction.

499

The apparent imprecision in the determination of appellate venue for

cases arising under aspects of the Tax Court’s jurisdiction of more recent

vintage may be characterized as harmless error if no party objects to the

broad use of an individual’s residence as the determining factor for

appellate venue in a wide variety of cases. On the other hand, one can

expect the issue to be analyzed in greater detail as commentary increasingly

highlights the matter. An appropriate response would be for Congress to

expand § 7482(b)(1)(A) to encompass cases other than redeterminations of

deficiencies.

494

I.R.C. § 7482(b)(1)(F).

495

I.R.C. § 7482(b)(1) (flush language); see also James Bamberg, A Different Point

of Venue: The Plainer Meaning of Section 7482(b)(1), 61 T

AX LAW. 445 (2008) (detailing

how many cases arising under the Tax Court’s expanded jurisdiction are not

specifically addressed in § 7482(b) and that, as a result, the D.C. Circuit Court of

Appeals provides the venue for appeal).

496

125 T.C. 301 (2005).

497

Id. at 313 n.6.

498

See Bamberg, supra note 495, at 467 (making this point).

499

469 F.3d 27 (1st Cir. 2006).

800 The United States Tax Court – An Historical Analysis

7. The Appellate Process in Operation—Problems and Controversies

Under the appellate structure established in 1926 (and still applicable

today), appeals can be taken from a forum of national jurisdiction, the Tax

Court, to one of 12 different intermediate courts of appeals, and finally to

the Supreme Court. Given the complexity of the tax laws and the

multiplicity of approaches that can be taken in the judicial resolution of

many tax problems, this appellate system occasionally has created

conflicting rules at the intermediate appellate level.

Most would agree that geographic uniformity is a desirable goal in tax

administration and that the particular tax rule applied should not vary with

appellate venue. However, under the existing system, the prevailing rule in

a tax controversy may be determined by the taxpayer’s residence or place of

business.

Besides creating a lack of geographic uniformity, the appellate system as

it has evolved in tax cases may also tend to encourage litigation in tax

matters. Thus, even though the Service, the Tax Court, and one or more

courts of appeals may have ruled unfavorably on an issue, taxpayers often

continue to litigate the question in the hope of securing a favorable ruling in

their particular circuit or from the Supreme Court.

500

This same

phenomenon may also work in reverse with the Government being

reluctant to give up on an issue until the weight of authority is

overwhelming.

501

For these reasons, the Supreme Court traditionally has been under

significant pressure to pass on many more tax cases than it would like to

and to pass on cases solely for the purpose of achieving a uniform rule,

even though the issues involved may be trivial and not otherwise deserving

of consideration at the ultimate appellate level.

502

In fact, the primary

reason for the grant of certiorari in tax cases is to resolve conflicts among

the courts of appeals.

503

It may be argued that a genius of our judicial system is that it affords the

opportunity for a full ventilation of a particular issue by several courts

before its ultimate resolution by the Supreme Court. It also may be argued

500

See, e.g., examples cited in Erwin N. Griswold, The Need for a Court of Tax

Appeals, 57 H

ARV. L. REV. 1153, 1156–57 (1944) [hereinafter cited as Griswold].

501

The experience under the former entity-classification regulations (the

so-called Kintner regulations) in determining the tax status of professional

corporations provides one such historic example. See B

ORIS I. BITTKER & JAMES S.

EUSTICE, FEDERAL INCOME TAXATION OF CORPORATIONS AND SHAREHOLDERS

¶ 2.06 (3d ed. 1971).

502

See Griswold, supra note 500, at 1163–64; see also Laing v. United States, 423

U.S. 161 (1976) (example of the Supreme Court hearing a tax controversy in which

a conflict existed between the circuits).

503

Griswold, supra note 500, at 1163.

Opinions, Decisions, and Appeals 801

that any law, tax or otherwise, is subject to the same vagaries of divergent

interpretation by different courts, yet the Republic has managed to survive.

Nevertheless, it is beyond dispute that the issue of multiple jurisdiction of

tax appeals has aroused a good deal of comment—much of it critical of the

existing system.

504

With respect to the role of the Tax Court, the issue has surfaced in two

different contexts. First, with reference to the role of appellate courts in tax

litigation, there was a brief period of time in which the Supreme Court

504

“If we were seeking to secure a state of complete uncertainty in tax

jurisprudence, we could hardly do better than to provide for 87 courts with original

jurisdiction, 11 appellate bodies of coordinate rank, and only a discretionary review

of relatively few cases by the Supreme Court.” R

OSWELL FOSTER MAGILL, THE

IMPACT OF FEDERAL TAXES 209 (1934).

“Few tax questions are ever put at rest until they have been interred in the

United States Supreme Court Reports. . . . In the meantime, the issue is usually

obscured by a mass of conflicting decisions.” Robert B. Eichholz, Should the Federal

Income Tax be Simplified?, 48 Y

ALE L.J. 1200, 1216 (1939).

“We are getting too much law, and too many kinds of law, and from too many

sources, for tax administration to be simple, or the law clear. Should we reserve to

the Supreme Court only constitutional questions in tax matters? Should matters of

statutory construction be settled by a tax court, instead of by the twelve Circuit

Courts of Appeals, with their frequent conflict of viewpoint?” Robert H. Jackson,

Equity in the Administration of Federal Taxes, 13 T

AXES 641, 686 (1935); see also

Montgomery B. Angell, Procedural Reform in the Judicial Review of Controversies Under the

Internal Revenue Statutes: An Answer to a Proposal, 34 I

LL. L. REV. 151 (1939); Paul D.

Carrington, Crowded Dockets and the Courts of Appeals: The Threat to the Function of

Review and the National Law, 82 H

ARV. L. REV. 542 (1969); Griswold, supra note 500;

John M. Maguire, Federal Revenue

Internal or Infernal?, 21 TAXES 77 (1943); Federick

L. Pearce, Trends in Federal Tax Procedure, 69 J. A

CCOUNTANCY 369 (1940); Program

and Committee Reports, ABA

TAXATION SECTION 64 (1940); Sidney I. Roberts,

Wilbur H. Friedman, Martin D. Ginsburg & Carter T. Louthan, A Report on

Complexity and the Income Tax, 27 T

AX L. REV. 325 (1972); J.S. Seidman, Proposed

Procedural Changes in Federal Tax Practice, 67 J.

ACCOUNTANCY 221 (1939); Stanley S.

Surrey, Some Suggested Topics in the Field of Tax Administration, 25 W

ASH. U. L.Q. 399

(1940); Stanley S. Surrey, The Traynor Plan–What It Is?, 17 T

AXES 393 (1939);

William A. Sutherland, New Roads to the Settlement of Tax Controversies: A Critical

Comment, 7 L

AW & CONTEMP. PROB. 359 (1940); Roger John Traynor, Administrative

and Judicial Procedure for Federal Income, Estate, and Gift Taxes–A Criticism and A

Proposal, 38 C

OLUM. L. REV. 1393 (1938); Roger John Traynor & Stanley S. Surrey,

New Roads Toward the Settlement of Federal Income, Estate, and Gift Tax Controversies, 7

AW & CONTEMP. PROB. 336 (1940); G. Aaron Younquist, Proposed Radical Changes

in the Federal Tax Machinery, 25 A.B.A.

J. 291 (1939); Comment, The National Court of

Appeals: Composition, Constitutionality and Desirability, 41 F

ORDHAM L. REV. 863

(1973); Note, Controversy Between the Tax Court and Court of Appeals: Is the Tax Court

Bound by the Precedent of Reviewing Courts?, 7 D

UKE L.J. 45 (1957); Note, The Old Tax

Court Blues: The Need for Uniformity in Tax Litigation, 46 N.Y.U.

L. REV. 970 (1971).

802 The United States Tax Court – An Historical Analysis

believed it had found at least a partial answer to the vexing problems of lack

of uniformity and burgeoning tax litigation. This answer proceeded from a

special interpretation of the scope of appellate review to be accorded

decisions of the Tax Court. This period of judicial history is related in the

following section.

Second, from the vantage point of the Tax Court, the appellate review

structure also has produced an unusual problem with respect to the court's

perception of its own role as a national trial court, the decisions of which

are subject to review by multiple appellate courts. This problem is traced in

the section following discussion of the scope and standard of appellate

review.

8. Scope and Standard of Review

Historically, the factual findings of a federal equity court, and more

recently the findings of a law court sitting without a jury, have been

reviewable under the “clearly erroneous” standard,

505

which permits reversal

on the facts, even if evidence exists to support the trial court’s findings, “if

the reviewing court on the entire evidence is left with the definite and firm

conviction that a mistake has been committed.”

506

On the other hand, in

cases tried before a jury, courts generally have only asserted power to

modify factual determinations of the jury if not supported by “substantial

evidence,” which has been construed as “such relevant evidence as a

reasonable mind might accept as adequate to support a conclusion.”

507

These standards have been recognized as being quite different, with the

former permitting greater flexibility to the reviewing court than the latter.

Thus, in District of Columbia v. Pace,

508

which involved a statute providing that

findings of the Board of Tax Appeals of the District of Columbia “shall

have the same effect as a finding of fact by an equity court or a verdict of a

jury,”

509

the Supreme Court stated that “findings of fact by an equity court

and the verdict of a jury have from time immemorial been subject to

different rules of finality in that findings of a judge are accepted unless

505

5A J. MOORE, supra note 407, at ¶ 52.03[1]; see also FED. R. CIV. P. 52(a).

506

United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948).

507

Consolidated Edison Co. v. N.L.R.B., 305 U.S. 197, 229 (1938); see also

N.L.R.B.

v. Columbian Enameling & Stamping Co., 306 U.S. 292 (1939);

ENNETH CULP DAVIS, ADMINISTRATIVE LAW TEXT § 29.02 (3d ed. 1972)

[hereinafter cited as K.

DAVIS]; LOUIS L. JAFFE, JUDICIAL CONTROL OF

ADMINISTRATIVE ACTION 596 (1965) [hereinafter cited as L. JAFFE]; 5A J. MOORE,

supra note 407, at ¶¶ 50.02[1], 50.07[2]; Robert L. Stern, Review of Findings of

Administrators, Judges and Juries: A Comparative Analysis, 58 H

ARV. L. REV. 70, 73

(1944).

508

320 U.S. 698 (1944).

509

Act of May 16, 1938, ch. 223, § 4(a), 52 Stat. 371.

Opinions, Decisions, and Appeals 803

‘clearly wrong’ and that the review of a jury verdict is much more

restricted.”

510

Although the extent to which factual determinations of agencies of the

executive branch can be reviewed is largely a matter of legislative

discretion

511

(for example, in the case of the Tax Court’s former

renegotiation jurisdiction, the statute specifically precluded appellate review

of Tax Court findings

512

), the general practice and the common law view

have been that such action should be reviewable under the same standard

applicable to jury verdicts.

513

The feeling seems to be that the expertise of

the agency and the interest of uniform administration dictate a more limited

judicial review of administrative action than in the case of the factual

finding of a judge sitting without a jury.

514

The only provision in the 1926 Act dealing with the scope of appellate

review of Board determinations, § 1003(b), provided: “Upon . . . review . . .

[of Board decisions, the appellate] courts shall have power to affirm or, if

the decision of the Board is not in accordance with law, to modify or to

reverse the decision of the Board, with or without remanding the case for a

rehearing, as justice may require.”

515

A strict textual analysis of this language does not indicate clearly the

scope of review to be accorded factual determinations of the Board. By not

providing for any review of factual matters, the provision could be

interpreted as precluding such review entirely; on the other hand, the

absence of a specific standard could be viewed as leaving the matter to the

courts as guided by the common law experience.

516

Nevertheless, the 1926

committee reports indicate that a restrictive appellate review was

contemplated. The report states that “[i]n view of the grant of exclusive

power to the Board finally to determine the facts upon which tax liability is

based, subdivision (b) of section 1003 limits the review on appeal to what

510

320 U.S. at 701; see also Robert L. Stern, Review of Findings of Administrators,

Judges and Juries: A Comparative Analysis, 58 H

ARV. L. REV. 70, 88–89 (1944). Contra,

Arthur T. Vanderbilt, Introduction, 30 N.Y.U.

L. REV. 1267, 1268 (1955).

511

K. DAVIS, supra note 507, at § 29.01.

512

Renegotiation Act of 1951, ch. 15, § 108, 65 Stat. 21.

513

N.L.R.B. v. Columbian Enameling & Stamping Co., 306 U.S. 292, 300

(1939); K.

DAVIS, supra note 507, at § 29.02.

514

N.L.R.B. v. Southland Mfg. Co., 201 F.2d 244, 246 (4th Cir. 1952).

515

Revenue Act of 1926, ch. 27, § 1003(b), 44 Stat. 110 (now codified at I.R.C.

§ 7482(c)(1)).

516

That this language is not inconsistent with review of factual determinations

is indicated by the fact that this provision still appears in the statute, see I.R.C.

§ 7482(c)(1), even though it is now clear that appellate courts can review factual

determinations of the Tax Court, see I.R.C. § 7482(a). General statutory standards

of the scope of review of administrative determinations were not provided until the

enactment of the Administrative Procedure Act in 1946. Administrative Procedure

Act, ch. 324, § l0(e), 60 Stat. 243 (1946) (now codified at 5 U.S.C. § 706).

804 The United States Tax Court – An Historical Analysis

are commonly known as questions of law.”

517

The reports, however,

moderate this apparent bar on review of factual determinations by including

within the definition of “questions of law” the issue of “the existence of at

least some evidence to support the findings of fact.”

518

In the years following 1926, the appellate courts were faced with the

problem of giving effect to the restricted appellate review of Board factual

determinations. Inasmuch as no precise line defines the boundary between

questions of law and those of fact, the results of the cases were not always

consistent.

519

Moreover, in the view of the Supreme Court in the 1943

landmark decision in Dobson v. Commissioner,

520

many courts were simply

ignoring the limitations on appellate review of Board decisions. “[E]ven a

casual survey of decisions in tax cases, now over 5,000 in number, will

demonstrate that courts, including this Court, have not paid the scrupulous

deference to the tax laws’ admonitions of finality which they have to similar

provisions in statutes relating to other tribunals.”

521

Although this practice, the Court believed, was erroneous, it was

understandable in view of the history of appellate tax practice.

522

Prior to

1926, most tax cases came up to the appellate courts from district court

proceedings either at common law against the collector of the tax, or under

the Tucker Act against the United States.

523

Traditional notions of scope of

review applied to these appeals, and the reviewing court could review

factual as well as legal determinations of the court below.

524

Moreover,

litigation originating in the Board during the 1924–26 period that ultimately

found its way to the appellate courts by way of a trial de novo in district

court or the Court of Claims was also subject to this scope of review.

525

For these reasons, according to the Supreme Court, the appellate courts had

grown accustomed to treating tax cases in the same manner as other

appeals.

526

Dobson represented an effort by the Supreme Court to require appellate

courts to observe more closely the statutory limitation on the scope of

517

S. REP. NO. 69-52, at 36 (926); see also H.R. REP. NO. 69-1, at 19 (1925).

518

H.R. REP. NO. 69-1, at 20 (1925); S. REP. NO. 69-52, at 36 (1926).

519

See Wm. Cutler Thompson, Comments Upon the Nature and Scope of Appellate

Review of Cases Originating in the U.S. Board of Tax Appeals, 9 T

EMP. L.Q. 25 (1934).

520

320 U.S. 489 (1943).

521

Id. at 494.

522

Id. at 495–98.

523

Id. at 495–96

524

Id.

525

Id. at 496–97.

526

Id. at 497–98. This reasoning seems specious since the federal appellate

courts when reviewing factual findings of juries were presumably doing so on the

substantial evidence rule—the same scope of review generally applicable to

administrative determinations.

Opinions, Decisions, and Appeals 805

review. The case involved taxpayers who, some years after selling stock at a

loss, successfully sued the persons from whom they originally had

purchased the stock on the grounds of fraud and securities act violations.

The main question was whether the taxpayers’ recoveries should be

excluded from income, because the recoveries plus the proceeds from the

sale of the stock were less than the purchase price of the stock, and because

the taxpayers had obtained no tax reduction from their losses on the stock

sale as their deductions exceeded their income for the years of sale.

The Dobson case was submitted to the Board for decision on stipulated

facts;

527

the arguments of the parties before the Board, the Court of

Appeals for the Eighth Circuit, and the Supreme Court centered on

whether the total economic effect of all the transactions relating to the

stock purchase and sale should be given determinative weight for tax

purposes. The Board ruled on this question in the affirmative, in favor of

the taxpayers, by applying the “tax benefit” doctrine.

528

The circuit court

reversed the Board, holding that each tax year must stand on its own and

reasoning that a subversion of the statute of limitations would result unless

the taxpayers were required to treat their recoveries as income in the year of

receipt.

529

In reversing the Eighth Circuit and approving the Tax Court decision

(by the time Dobson reached the Supreme Court, the Board had been

renamed the Tax Court), the Supreme Court evidenced its exasperation

with the volume and nature of the tax cases it was called on to decide, the

growing complexity of tax laws, the substantial volume of tax litigation

generally, and the delays and lack of uniformity in such litigation.

530

In its

view, the Tax Court was constituted as a panel of experts and was equipped

by virtue of the qualifications of its judges and staff to deal competently and

independently with questions of tax law.

531

The Court perceived the 1926

Act and its legislative history as clearly limiting the scope of review of Tax

Court decisions to questions of law. So long as there was “warrant in the

record” for the findings of the Tax Court, the finality of its decisions should

not be disturbed.

532

According to the Supreme Court, a strict observance

of these principles would substantially ease the regrettable state into which

the administration of the tax laws had fallen.

533

527

Estate of Collins v. Commissioner, 46 B.T.A. 765, 765–66 (1942).

528

Id. at 769–70.

529

Harwick v. Commissioner, 133 F.2d 732, 735–37 (8th Cir. 1943).

530

320 U.S. at 494–95, 499–500 ¶ n.25.

531

Id. at 498–99.

532

Id. at 501.

533

Id. at 494–95, 499–502. The Court was later to state that “Congress has

plainly designed . . . [the Tax Court] to serve, as it were, as the exchequer court of

the country.” McDonald v. Commissioner, 323 U.S. 57, 64 (1944).

806 The United States Tax Court – An Historical Analysis

The difficult problem that had to be faced by the Court in Dobson was

how to separate questions of law from fact.

534

The distinction had been

given some meaning in other contexts, but always had been somewhat

obscure.

535

Some help was offered by the committee reports on the 1926

Act which stated that the reviewing court could consider

the constitutionality of the substantive law applied, the

constitutionality of the procedure used, failure to observe the

procedure required by law, the proper interpretation and application

of the statute or any regulation having the force of law, the existence

of at least some evidence to support the findings of fact, and the

validity of any ruling upon the admissibility of evidence. . . .

536

However, the helpfulness of this language in distinguishing fact from law

was more apparent than real, and the Supreme Court conceded that the

distinction was a difficult one, especially in cases involving mixed questions

of fact and law.

537

A close reading of Dobson does not reveal any specific tests that the

Supreme Court believed should be applied in making the distinction.

Rather, the Court concluded that the application of the tax benefit doctrine

was essentially an accounting question of whether related transactions

should be integrated. Since the Tax Court had found as a matter of fact

that the taxpayers had no economic or tax gain on the integrated

transaction, and since no statute or regulation explicitly required a different

result, the Supreme Court held that it was error for the court of appeals to

reverse the Tax Court’s decision.

538

Although the fact that the Supreme Court implied that accounting

matters were factual questions was of some significance, the truly startling

aspect of the case was the promulgation by the Court of what amounted to

a rule of construction in applying the fact-law distinction. Recognizing the

difficulties inherent in categorizing the tax benefit rule as a question of fact,

and the general difficulties in distinguishing legal questions from factual

matters, the Court stated, “when the [reviewing] court cannot separate the

534

320 U.S. at 500–0l.

535

Id. Compare N.L.R.B. v. Marcus Trucking Co., 286 F.2d 583 (2d Cir. 1961)

with L.

JAFFE, supra note 507, at 549–50; see also Kenneth Culp Davis, Judicial Control

of Administrative Action; A Review, 66 C

OLUM. L. REV. 635, 669–72 (1966).

536

H.R. REP. NO. 69-1, at 20 (1925); S. REP. NO. 69-52, at 36 (1926).

537

320 U.S. at 499–500.

538

Id. at 501–03, 506–07. The Court had, in the past, noted the special

expertise of the Board of Tax Appeals in accounting matters. Lucas v. American

Code Co., 280 U.S. 445, 449–50 (1930).

Opinions, Decisions, and Appeals 807

elements of a decision so as to identify a clear-cut mistake of law, the

decision of the Tax Court must stand.”

539

The Dobson rule was not well received by commentators

540

or the bar.

541

In the first place, the applicable statute provided that a reviewing court had

power to modify or reverse a Tax Court decision if it were “not in

accordance with law.”

542

Dobson, however, forbade appellate review of legal

matters in the absence of a “clear-cut mistake of law.”

543

Although this rule

may have been suited to according finality to Tax Court decisions and

avoiding the necessity of prolonged inquiry into whether a question was

one of law or fact, there were those who believed that the rule represented a

short cut wholly unauthorized by governing law.

544

Another remarkable aspect of Dobson was its strong inference that

accounting matters were questions of fact. Many provisions of the tax laws

deal with accounting matters; did Dobson require that all these matters be

treated as questions of fact?

545

There was some indication that the Court

was influenced in categorizing the question as one of fact by reason of the

nonexistence of specific statutory or regulatory authority on the point in

issue. However, to distinguish law from fact using this criteria was certainly

a novel approach.

546

539

320 U.S. at 502.

540

George T. Altman, The Dobson Rule, 21 TUL. L. REV. 527 (1947); Louis

Eisenstein, Some Iconoclastic Reflections on Tax Administration, 58 H

ARV. L. REV. 477,

539–43 (1945); Griswold, supra note 500, at 1170–73; Robert E. Nelson, The

“Dobson” Rule Reaffirmed by the “Kelley” Case, 24 T

AXES 104 (1946); Randolph E. Paul,

Dobson v. Commissioner, 23 T

AXES 83 (1945); Randolph E. Paul, Dobson v.

Commissioner: The Strange Ways of Law and Fact, 57 H

ARV. L. REV. 753 (1944)

[hereinafter cited as Paul]; Note, The Dobson Rule in the Circuit Courts, 60 H

ARV. L.

REV. 448 (1947); Judicial Review of Tax Court Decisions, 94 U. PA. L. REV. 339 (1946).

541

Hearings on H.R. 3214 Before a Subcomm. of the Senate Comm. on the Judiciary,

80th Cong., 2d Sess. 167–73 (1948).

542

Revenue Act of 1926, ch. 27, § l003(b), 44 Stat. 110.

543

320 U.S. at 502.

544

In a statement supporting legislative overruling of Dobson, the American Bar

Association complained that:

In our opinion the Dobson decision represents an utterly unwarranted

invasion by the United States Supreme Court of the legislative field, and in

addition, as legislation it is thoroughly unsound. . . . [I]t is our hope that the

committee will see fit to call attention to the great damage and confusion

which always results from the invasion by the courts of the fields of policy

which have been entrusted by the Constitution solely to the legislative

branch of the Government.

Hearings on H.R. 3214 Before a Subcomm. of the Senate Comm. on the Judiciary, 80th

Cong., 2d Sess. 171 (1948).

545

Paul, supra note 540; see also L. JAFFE, supra note 507, at 579–82.

546

320 U.S. at 502–03.

808 The United States Tax Court – An Historical Analysis

Moreover, although the impact that Dobson had on the volume of tax

litigation is subject to some question,

547

it seems clear that the decision in

547

Set forth below is a table detailing the number of tax cases decided by the

federal courts (including the Board/Tax Court) for the period 1935–1953.

Year

Supreme

Court

Court of

Appeals

Court of

Claims

District

Courts

Tax

Court

1935

382

240

1,405

1936

382

128

1,496

1937

232

222

965

1938

U N A V A I L A B L E

1,113

1939

137

125

203

1,312

1940

351

405

1,322

1941

531

447

1,328

1942

522

469

1,418

1943

443

335

1,317

1944

416

242

1,013

1945

340

242

928

1946

273

281

801

1947

242

207

827

1948

243

183

807

1949

264

315

838

1950

261

226

868

1951

289

324

1,040

1952

292

501

956

1953

339

439

996

Number of dockets disposed of by decisions in which there was written opinion.

These figures indicate a general decrease in tax litigation starting in the early 1940’s

and extending into the early 1950’s. A Dobson defender might well argue that this

decrease was a result of that case’s limitation on the scope of appellate review.

However, problems exist with such an argument. In the first place, one would

expect Dobson to have its major impact in the appellate courts. Yet the most

dramatic decrease in cases occurred in the district courts where decisions declined

from 469 in 1942 to 183 in 1948, a decrease of 61 percent. It is true that courts of

appeals decisions also declined dramatically, from 531 in 1941 to 242 in 1947, a

drop of 54 percent, but so did Tax Court cases, which declined from 1,418 in 1942

to 807 in 1948, a drop of 43 percent. Decline in Supreme Court cases, although

relatively the greatest of all from 58 in 1941 to six in 1948, a drop of 90 percent, are

not very meaningful since the Court can control the number of tax cases it hears.

If Dobson accounted for a decrease in tax litigation, one would expect the

smallest decline (or even an increase) in district court cases, since taxpayers would

Opinions, Decisions, and Appeals 809

that case did not have a salutary effect on the complexity of tax law. If

anything, appellate cases became further complicated by the requirement of

considering whether the Tax Court decision was reviewable.

548

The Supreme Court was called upon several times to determine the

applicability of Dobson, and the resulting decisions did not seem wholly

consistent. In a leading debt-equity decision, John Kelley Co. v.

Commissioner,

549

the Court refused to review the arguably contradictory

conclusions of the Tax Court on whether certain purported interest

payments should be treated as such for purposes of the tax laws, or whether

they should be treated as distributions with respect to stock. Since the case

dealt with the meaning of the “well understood words . . . ‘interest’ and

“dividends,’” the Court concluded, over three dissents, that the

determination of the Tax Court must be dispositive. Yet in Trust of Bingham

v. Commissioner,

550

the Court refused to apply Dobson in a case involving the

question of whether certain legal fees were deductible because paid in

connection with “property held for the production of income.”

551

The Tax

Court had ruled that the fees qualified for deduction under this test;

552

the

Court of Appeals for the Second Circuit reversed on the ground that the

Tax Court had erred in application of the law.

553

Observing that decision

turned on “the meaning of the words . . . ‘property held for the production

of income,’”

554

the Supreme Court concluded that the Second Circuit was

tend to increase their appearances in those courts in order to preserve their rights

of appellate review. Paul, supra note 540, at 798.

Rather, it seems probable that the general decline in tax litigation during this

period was due to a combination of two factors. First, it is at least arguable that

World War II contributed to the decline by attracting manpower that might

otherwise have been engaged in tax disputes. Additionally, taxpayers may have

been less inclined to contest a tax that was helping to support a popular war. A

second possible cause for the decrease can be traced to 1938 when the Bureau

“inaugurated a definite program looking to the decentralization of the appellate

procedure for the administrative settlement of income, profits, estate, and gift tax

controversies.” 1939 C

OMM’R OF INT. REV. ANN. REP. 39 (1939). Writing in 1942,

the Chief Counsel for the Bureau asserted that the decentralization program was

the reason for the decline in tax disputes. John Philip Wenchell, 13 P

A. BAR

ASSOC. Q. 110, 110–16 (1942); see also Milton E. Carter, Decentralization of the Bureau

of Internal Revenue, 17 T

AXES 403 (1939).

548

See Paul, supra note 540, at 798–801; 93 CONG. REC. A3281 (1947) (remarks

of Mr. Hobbs).

549

326 U.S. 521 (1946).

550

325 U.S. 365 (1945).

551

Int. Rev. Code of 1939, ch. 1, § 23(a)(2), 53 Stat. 12 (now codified at I.R.C.

§ 212(1)).

552

2 T.C. 853 (1943).

553

Commissioner v. Kenan, 145 F.2d 568 (2d Cir. 1944).

554

325 U.S. 365, 371 (1945).

810 The United States Tax Court – An Historical Analysis

correct in not applying Dobson as a bar to appellate review.

555

Thus, the

meaning of “interest” and “dividend” were questions of fact, but the

meaning of “property held for the production of income” was a question of

law.

556

As distinctions necessary for the application of Dobson became finer, and

the doctrine of limited review became sometimes as difficult of application

as the solution of the underlying case, some members of the Court sought

refinements of Dobson in the hope that the original purpose of the decision

could be preserved. In Bingham’s Trust, Justice Frankfurter in a concurrence

joined by Justices Roberts and Jackson (the latter being the author of

Dobson), argued that the Dobson principle would be subverted if appellate

courts were required to “make an independent examination of the meaning

of every word in tax legislation.”

557

In his view, the thorny distinction

between mixed questions of fact and law and pure questions of law should

be discarded; if the decision of the Tax Court were reasonable, it must

stand, even if the appellate court disagreed either on the law or the facts.

558

In view of the not wholly consistent interpretation given to Dobson by the

Supreme Court, it is not surprising that many concluded that the doctrine, if

anything, spawned rather than subdued litigation.

559

Finally, Dobson was criticized as creating multiple standards of appellate

review in tax cases. Since tax cases originating in the district courts and the

Court of Claims remained fully subject to appellate review for legal error, it

was possible that the same appellate court might be required to apply

different substantive rules of law depending on the court in which the case

was commenced. One can easily detect a note of frustration in the

following excerpt from an opinion of Judge Learned Hand:

555

Nevertheless, the Court concluded that on the merits the Tax Court

decision was correct. 325 U.S. 365 (1945), rev’g 145 F.2d 568 (2d Cir. 1944).

556

In Helvering v. American Dental Co., 318 U.S. 322 (1943), decided in the same

term as Dobson and nine months prior thereto, the Court held that the meaning of

the word “gift” was a legal question and that the Board of Tax Appeals had erred in

finding that donative intent was a requisite element of the definition. In Dobson v.

Commissioner, 320 U.S. 489 (1943), there was some intimation that the Court

considered the application of the phrase “sale or exchange” to be a nonreviewable

question of fact.

In Commissioner v. Scottish American Inv. Co., 323 U.S. 119 (1944), the Court held

that the existence of an “office or place of business” within the United States was a

question of fact the determination of which by the Tax Court was unreviewable if

supported by substantial evidence.

557

325 U.S. 365, 380 (1945).

558

Id. at 381–82.

559

For a discussion of the interpretative problems that arose following Dobson,

see Note, The Dobson Rule in the Circuit Courts, 60 H

ARV. L. REV. 448 (1947)

Opinions, Decisions, and Appeals 811

[I]f the case were an appeal from a district court, we should have no

alternative but to reverse. But the Supreme Court has repeatedly

admonished us (in so many decisions that it would be idle to repeat

them), that our power to review a ruling of the Tax Court is very

much more limited than in the case of a district court. As we

understand it, before we may substitute our own interpretation of a

provision of the Revenue Act, not only must a naked question of law

detach itself from the nexus of law and fact in the record as a whole;

but we must conclude that the Tax Court has been indubitably

wrong in its decision of the question which emerges: reasonable

differences in legal opinion we are to resolve in its favor. . . .

That finality depends, as we understand, upon the added competency

which inevitably follows from concentration in a special field. Why,

if that be so, we—or indeed even the Supreme Court itself—should

be competent to fix the measure of the Tax Court’s competence, and

why we should ever declare that it is wrong, is indeed an interesting

inquiry, which happily it is not necessary for us to pursue.

560

As a result of these deficiencies, the Dobson doctrine had few adherents.

In 1948, it died an apparent quiet death as a result of efforts of the

American Bar Association.

561

The overruling of Dobson was, at that point,

so uncontroversial that it was accomplished in a bill, the movement of

which through Congress depended on its acceptability to all.

562

Since then,

560

Brooklyn Nat’l Corp. v. Commissioner, 157 F.2d 450, 452–53 (2d Cir.

1946). For other cases in which the Second Circuit indicated it would apply

different substantive rules depending on whether the trial was in the Tax Court or a

district court, see Kirschenbaum v. Commissioner, 155 F.2d 23 (2d Cir. 1946);

Kohnstamm v. Pedrick, 153 F.2d 506 (2d Cir. 1946).

Adherents of the Dobson doctrine recognized this difficulty, but their suggestion

was to repose all tax jurisdiction in the Tax Court. See Trust of Bingham v.

Commissioner, 325 U.S. 365, 378 n.l (1945) (Frankfurter, J., concurring).

561

Act of June 25, 1948, ch. 646, § 36, 62 Stat. 991 (now codified at I.R.C.

§ 7482(a)). Curiously, although this provision specifically made the scope of review

in appeals from Tax Court decisions the same as in the case of appeals from district

court decisions, no modification was made in the original statutory language of the

1926 Act into which the Supreme Court read the Dobson rule. This language still

appears in § 7482(c)(1), and provides as follows:

Upon such review, such courts shall have power to affirm or, if the decision

of the Tax Court is not in accordance with law, to modify or to reverse the

decision of the Tax Court, with or without remanding the case for a

rehearing, as justice may require.

562

The primary purpose of the legislation was to codify and enact into positive

law title 28 of the United States Code. The bill, H.R. 3214, as passed by the House

provided for the removal of the Tax Court from title 26 to title 28 and would have

clarified the status of the court as a legislative court. This proved to be

812 The United States Tax Court – An Historical Analysis

controversial in that it raised the question whether non-lawyers would or should be

permitted to continue to practice before the court, and whether legislative

jurisdiction over the court should be in the tax committees or the judiciary

committees. See Hearings on H.R. 3214 Before a Subcomm. of the Senate Comm. on the

Judiciary, 80th Cong., 2d Sess. (1948); 93 C

ONG. REC. A3279-8l (1947) (remarks of

Mr. Hobbs); id. 8384–93 (1947); Part IV, notes 140–258 and accompanying text.

To eliminate this controversy, and thus insure the passage of the bill that was

otherwise universally supported, all provisions relating to the Tax Court were

eliminated save the overruling of Dobson. S.

REP. NO. 80-1559, at 2 (1948); 94

ONG. REC. 7927–31, 8498–501 (1948).

The passing of Dobson was not completely unlamented. Witness the following

ditty performed at the twenty-fifth anniversary dinner in honor of the Tax Court,

on June 3, 1949. Lyrics by Edgar J. Goodrich, Esq., who had been a member of the

Board of Tax Appeals from 1931 to 1935.

AIR: MY BONNIE LIES OVER THE OCEAN

There once was a time on the Tax Court

When the loser would sadly give up,

But Congress has ruined our standing

Now every decision goes up!

Chorus:

Bring back, bring back,

Oh, bring back dear Dobson, T.C., T.C.,

(Repeat).

Old Dobson tied up all appeal courts,

They had to accept what we found

But now each one does as it pleases

Turns our facts and figures around.

Chorus:

Bring back, etc.

Sing, HO, for the Wisdom of Jackson,

Who gave us that beautiful rule,

Sing, FIE, on a troublesome Congress

That throws us all back in the pool.

Additionally, it is clear that at least some Justices of the Supreme Court were not

happily reconciled to the 1948 legislation:

In spite of the gelding of Dobson . . . by the recent revision of the Judicial

Code . . . I still think the Tax Court is a more competent and steady

influence toward a systematic body of tax law than our sporadic

omnipotence in a field beset with invisible boomerangs. I should reverse in

reliance upon the Tax Court’s judgment more, perhaps, than my own.

Arrowsmith v. Commissioner, 344 U.S. 6, 12 (1952) (Jackson, J., dissenting).

That Dobson may be gone but not forgotten is further illustrated by Lustman v.

Commissioner, 322 F.2d 253 (3d Cir. 1963), a 1963 case in which the Dobson rule

evidently was applied.

Opinions, Decisions, and Appeals 813

the scope of review in appeals from Tax Court decisions has been the same

as in the case of appeals from district court decisions tried without a jury.

563

Although the death of Dobson as a result of the enactment of § 7482(a)

was well understood with respect to the scope of appellate review of Tax

Court decisions, this is not to say that Dobson was universally understood to

have no lasting value. Rather, the ghost of Dobson continued to hover in

cases suggesting that the Tax Court’s conclusions of law were entitled to a

heightened measure of deference above the standard de novo review. In

Vukasovich, Inc. v. Commissioner,

564

the Ninth Circuit Court of Appeals

observed the existence of these cases and explained that the source of

confusion appeared to rest in an internal inconsistency in § 7482.

565

Section

7482(a), requiring Tax Court decisions to be reviewed in the same manner

as decisions from Federal district courts, suggests de novo review.

566

the other hand, § 7482(c)(1), the predecessor of which the Supreme Court

interpreted in Dobson, allows a reviewing court to modify or reverse a Tax

Court decision “not in accordance with law.” This provision, suggests a

heighted standard of review applied to decisions of administrative

agencies.

567

Because Congress failed to alter this standard as part of the

1948 legislation, an argument can be made that a heightened standard of

review for the Tax Court’s jurisdiction remained appropriate. Although this

interpretation enjoyed support among some commentators,

568

it has not

taken hold to date. For instance, after noting the varying interpretations of

§ 7482 with respect to the standard of review to be afforded to Tax Court

563

I.R.C. § 7482(a); see also Banks v. Commissioner, 322 F.2d 530 (8th Cir.

1963); Hirsch v. Commissioner, 315 F.2d 731 (9th Cir. 1963).

564

790 F.2d 1409 (9th Cir. 1986).

565

Id. at 1412.

566

See id.

567

See id. (citing 5 U.S.C. § 706(2)(A)).

568

See David F. Shores, Deferential Review of Tax Court Decisions: Dobson

Revisited, 49 T

AX LAW. 629, 646–53 (1996) (detailing the legislative history of the

1948 statutory revision and arguing that the legislation did not overturn the

deferential standard of review to be afforded to Tax Court decisions pursuant to

Dobson). Professor Shores contended that deferential review of Tax Court

decisions not only was warranted under § 7482, but also desirable as a matter of

policy. See id. at 671–73; see also Andre L. Smith, Deferential Review of Tax Court

Decisions of Law: Promoting Expertise, Uniformity, and Impartiality, 58 T

AX LAW. 361

(2005) (concluding that deferential review of Tax Court decisions provides the best

option for the future of tax adjudication). But see Leandra Lederman, (Un)Appealing

Deference to the Tax Court, 64 D

UKE L.J. 1835 (2014) (contending that Dobson has

been legislatively abrogated as a doctrinal matter, and that this interpretation

comports with sound policy); Steve R. Johnson, The Phoenix and the Perils of the Second

Best: Why Heightened Appellate Deference to Tax Court Decisions is Undesirable, 77 O

R. L.

REV. 235 (1998) (exploring adverse consequences of heightened deference to the

Tax Court’s legal conclusions).

814 The United States Tax Court – An Historical Analysis

decisions, the Ninth Circuit in Vukasovich concluded that affording a special

level of deference to Tax Court decisions was inappropriate.

569

9. Precedential Value of Decisions of Other Courts

Very shortly after the enactment of the Revenue Act of 1926, the Board

became aware that its status as a national trial tribunal presented it with an

unusual problem regarding the role of precedent in its decisions. On

October 13, 1926, A. W. Gregg, General Counsel for the Bureau of Internal

Revenue met with Chairman Korner of the Board to discuss several recent

decisions of the Board involving a specific point in the excess profits tax.

570

Although the Board had accepted the Government’s position in each of

these cases,

571

several decisions of other courts had adopted a contrary

view.

572

The situation of the Treasury in these circumstances was difficult.

It could adhere to the position that it had taken in the past, but the choice

of the litigating forum was largely discretionary with the taxpayer and it

seemed that further defeats were inevitable because sensible taxpayers

simply would avoid taking their cases upon this point to the Board. On the

other hand, it did not seem to be an entirely satisfactory solution to the

problem for Treasury to change its position in reliance on the court

decisions. In its view, the decisions of the Board were technically correct

and ought to be followed by Treasury in the administration of the tax laws

absent a contrary determination by the Supreme Court. At his meeting with

Chairman Korner, Mr. Gregg requested an indication from the Board as to

whether it would continue to adhere to its original position; if so, Treasury

also would adhere to that position in the hope of ultimately obtaining a

conflict among the circuit court decisions thereby gaining entry to the

Supreme Court. That the problem was sorely troubling to the Treasury is

indicated by the mere fact of the ex parte communication from the General

Counsel to the Chairman of the Board. The matter was raised three days

later at a Board conference, but the Board, quite properly, did not take any

action with respect to Mr. Gregg’s request.

573

569

Vukasovich, 790 F.2d at 1413. However, the court did note that Tax Court

judgments “in its field of expertise are always accorded a presumption that they

correctly apply the law.” Id.

570

The circumstances and scope of the meeting are described in a

memorandum from Chairman Korner, Oct. 14, 1926, filed at the U.S. Tax Court in

“Appeals: Precedent of Appellate Courts.”

571

Phoenix Seed & Feed Co., 2 B.T.A. 909 (1925); Mesa Milling Co., 2 B.T.A.

770 (1925); St. Louis Screw Co., 2 B.T.A. 649 (1925); F. J. Thompson, Inc., 1

B.T.A. 535 (1925).

572

Curtis Mfg. Co. v. United States, 62 Ct. Cl. 115 (1926); John B. Semple &

Co. v. Lewellyn, 1 F.2d 745 (W.D. Pa. 1924), aff’d, 10 F.2d 1023 (3d Cir. 1926).

573

Board Conference Minutes, Oct. 16, 1926.

Opinions, Decisions, and Appeals 815

Most tribunals have little difficulty in identifying governing precedent.

In the case of a trial court, for example, controlling precedent generally

includes the pronouncements of courts having appellate jurisdiction over its

decisions. On the other hand, courts do not regard themselves bound by

the rulings of other courts of equal rank, or even by the rulings of courts of

higher rank if such courts do not have jurisdiction to review the decisions

of the lower court.

The position of the Tax Court with respect to the courts of appeals has

always been anomalous. Since the courts of appeals have jurisdiction to

review Tax Court decisions, it can be argued that the Tax Court is not free

to ignore the precedents of these appellate courts. Yet each of the circuit

courts is of coordinate rank and is therefore free not to follow the

precedents of the others. Thus, the Tax Court has 12 overseers who may,

and sometimes do, differ among themselves. The question necessarily

presented in these circumstances is when, if at all, the Tax Court should be

bound by the precedent of a court of appeals ruling.

Until 1970, the Tax Court consistently had taken the position that it was

not bound to follow the precedent of any of the courts of appeals.

Although this was the policy of the court since its inception, it was neither

explicitly stated nor rationalized until the 1957 decision in Lawrence v.

Commissioner,

574

a court-reviewed opinion in which no dissents were noted.

In Lawrence, the taxpayers had filed their return for the year in issue with a

collector of internal revenue located in the Ninth Circuit. Under the rules

then applicable, appellate venue would be in that circuit unless the parties

stipulated otherwise.

575

Such a stipulation was unlikely since a previously

decided Ninth Circuit decision seemed to favor the position adopted by the

taxpayers.

576

Nevertheless, the Tax Court refused to follow that precedent

and instead held for the Government. The court recognized that it had the

obligation to consider seriously all adverse precedents in the appellate

courts and to follow such precedents if it concluded that they were correct,

even if such a conclusion would require the overruling of previously

decided Tax Court decisions.

577

However, principally for three reasons, the

court believed itself justified, and indeed obligated, to refuse to follow

decisions of the courts of appeals that in the view of the Tax Court were

decided wrongly.

First, it was clear that Congress perceived one of the functions of the

Tax Court to be the creation of a uniform body of precedents to govern the

574

Lawrence v. Commissioner, 27 T.C. 713 (1957), rev’d per curiam, 258 F.2d

562 (9th Cir. 1958).

575

See supra notes 485–487 and accompanying text.

576

Slaff v. Commissioner, 220 F.2d 65 (9th Cir. 1955).

577

27 T.C. 713, 716 (1957).

816 The United States Tax Court – An Historical Analysis

interpretation of the tax laws.

578

For this reason, Congress placed

considerable emphasis on the importance of the court conferences at which

the judges could exchange views and prevent the promulgation of

conflicting decisions.

579

In the opinion of the court, uniformity of

application of the tax laws was of prime concern in its creation, and it

believed that this objective would be compromised if it were constrained to

adhere to authority with which it disagreed simply because of the vagaries

of appellate venue.

580

Second, the court in Lawrence found support for its conclusion in the

problems that could arise with respect to identifying the applicable circuit.

Under venue rules, the parties could stipulate venue in any court of appeals

they desired.

581

Additionally, even though at the time Lawrence was decided

appellate venue generally was determined under the objective standard of

where the disputed return was filed,

582

in some cases appellate venue might

lie in multiple circuits with respect to identical issues. Such multiple venue

problems could exist in the case of partners in the same partnership who

filed their returns in different circuits.

583

The cases might be heard together

in the Tax Court but could be appealed to different appellate courts.

Moreover, a similar venue problem could exist with respect to the same

taxpayer if the Tax Court proceeding involved a single issue spanning more

than one tax year and the returns for those years were filed in different

circuits.

584

Finally, the Tax Court also believed its result in Lawrence was demanded

by the difficulty sometimes encountered in determining precisely what rule

of law applied in a particular circuit.

585

Sometimes precedents were not as

clearly stated as might be hoped and other times seemingly conflicting lines

of authority existed within the same circuit.

For these reasons, the Tax Court concluded that the cause of tax

administration would best be served by its continuing to apply its own view

578

Hearings on Revenue Revision, 1925, before the House Comm. on Ways and Means,

69th Cong., 1st Sess. 953 (1925) (testimony of A. W. Gregg, Solicitor of Internal

Revenue).

579

H.R. REP. NO. 69-1, at 18 (1925); S. REP. NO. 69-52, at 35 (1926).

580

27 T.C. at 718. Unquestionably, some legislators did regard the promotion

of uniformity as a vital function of the Board. 65 C

ONG. REC. 2621 (1924) (remarks

of Mr. Young). Nevertheless, it is difficult to understand how this uniformity was

to be achieved under either the 1924 or the 1926 legislation, in view of the fact that

the Board was not the final arbiter of tax disputes.

581

I.R.C. § 7482(b)(2).

582

See supra notes 482–499 and accompanying text.

583

27 T.C. at 719.

584

Id.

585

Id.

Opinions, Decisions, and Appeals 817

of the law regardless of adverse precedents in the courts of appeals, even in

circuits that would most likely hear an appeal from the Tax Court decision.

The Lawrence and Dobson rules were similar in at least one respect—the

particular court promulgating each rule was virtually alone in perceiving its

merits. The Lawrence rule attracted almost unanimous unfavorable

criticism,

586

and a serious, although unsuccessful, effort was made to have it

legislatively overruled.

587

Additionally, three circuit courts that addressed

the issue manifested varying degrees of displeasure with the Tax Court’s

practice of not following applicable precedent of higher courts.

588

Perhaps

for these reasons Lawrence was applied sparingly,

589

at least explicitly, and

few were surprised when, in 1970, the Tax Court announced in Golsen v.

Commissioner that “[n]otwithstanding a number of considerations which

originally led [to Lawrence] . . . it is our best judgment that better judicial

administration requires us to follow a Court of Appeals decision which is

squarely in point where appeal from our decision lies to that Court of

Appeals and to that court alone.”

590

586

Louis A. Del Cotto, The Need for a Court of Tax Appeals: An Argument and a

Study, 12 B

UFFALO L. REV. 5, 8–10 (1962); Jack Lee Orkin, The Finality of the Court of

Appeals Decisions in the Tax Court: A Dichotomy of Opinion, 43 A.B.A. J. 945 (1957); F.

Trowbridge Vom Baur & George M. Coburn, Tax Court Wrong in Denying Taxpayer

the Rule Laid Down in His Circuit, 8 J.

TAX’N 228 (1958); Note, Status of a Controversy:

The Tax Court, the Courts of Appeals and Judicial Review, 32 O

HIO ST. L.J. 164 (1971);

57 C

OLUM. L. REV. 717 (1957); 7 DUKE L.J. 45 (1957); 70 HARV. L. REV. 1313,

1315 (1957). The Lawrence opinion did, however, have at least one defender: the

Commissioner of Internal Revenue, who believed the decision to be sound as

encouraging uniformity. Hearings on S. 2041 Before the Subcomm. on Improvements in

Judicial Machinery of the Senate Comm. on the Judiciary, 90th Cong., 2d Sess., pt. 2, 158

(1968) (testimony of Sheldon Cohen).

587

H.R. 11450, 89th Cong., 2d Sess. (1966), introduced by Chairman Mills of

the Ways and Means Committee, at the request of the American Bar Association,

would have added I.R.C. § 7459(g):

A decision of a United States Court of Appeals shall be given effect by the

Tax Court in the same manner and to the same extent in all cases

reviewable by such United States Court of Appeals under section 7482(b)(1)

as it would be given effect by a district court in such circuit.

588

Sullivan v. Commissioner, 241 F.2d 46, 47 (7th Cir. 1957) (“a decision by

one judge of the Tax Court, which, in effect, overrules a decision of the court of

appeals in the circuit in which both cases arose, is not consonant with the

responsibilities of the respective tribunals involved”); Stacey Mfg. Co. v.

Commissioner, 237 F.2d 605, 606 (6th Cir. 1956) (“the Tax Court . . . is not

lawfully privileged to disregard and refuse to follow . . . the settled law of the

circuit”); Holt v. Commissioner, 226 F.2d 757, 758 (2d Cir. 1955) (“We seem to

play at hide-and-go-seek with the Tax Court in these cases.”).

589

See John J. Charles, Status of a Controversy: The Tax Court, the Courts of Appeals,

and Judicial Review, 32 O

HIO ST. L.J. 164, 168 (l971).

590

54 T.C. 742, 757 (l970), aff’d, 445 F.2d 985 (10th Cir. 1971).

818 The United States Tax Court – An Historical Analysis

The Lawrence rule was not only defensible but clearly correct when the

appeal from the Tax Court reasonably could be considered to be taken to a

circuit that had not had occasion to consider the particular issue involved.

In such circumstances, more harm than good would be done by requiring

the Tax Court to adopt a view with which it did not agree simply because

authority for such view existed in one or more other circuits. Since courts

of appeals are free to disagree with each other, reversal by the appellate

court would be just as likely whether the Tax Court adopted its own view or

the view of another circuit. Accordingly, Golsen has no application to cases

involving questions on which there is no precedent in the appropriate court

of appeals.

591

In this regard, the Tax Court has held that a circuit court

bench decision, not having precedential value within the circuit, will not be

regarded as precedent for purposes of Golsen.

592

In addition to those cases in which the question has not been addressed

properly by the appropriate court of appeals, Golsen is inapplicable in at least

two other situations. First, a seemingly controlling circuit decision may not

be followed if the court believes that decision to be distinguishable on its

facts

593

or in the issues presented.

594

In addition, the court may refuse to

adhere to a precedent if it views the precedent as stale because of some

intervening event, such as new enactments, new regulations or a well-

considered line of cases in other circuits.

595

In both instances, the

precedential value of the earlier decision is dubious and the teaching of

Golsen that decisions “squarely in point” must be given effect is not

offended.

596

591

Webb v. Commissioner, 67 T.C. 1008 (l977); Lewis v. Commissioner, 65

T.C. 625 (l975); Patman, Young & Kirk, P.C. v. Commissioner, T.C. Memo. 1975-

185, 34 T.C.M. (CCH) 798, aff’d, 536 F.2d 142 (6th Cir. 1976).

592

Ruegsegger v. Commissioner, 68 T.C. 463 (1977).

593

E.g., Focht v. Commissioner, 68 T.C. 223 (1977); Allen v. Commissioner, 66

T.C. 340 (1976); Bridges v. Commissioner, 64 T.C. 968 (1974).

594

Thompson v. Commissioner, 66 T.C. 737 (1976); Richmond,

Fredericksburg & Potomac R.R. v. Commissioner, 62 T.C. 174 (1974), aff’d, 528

F.2d 917 (4th Cir. 1975); Page v. Commissioner, 33 T.C.M. (CCH) 64 (1974), aff’d,

524 F.2d 1149 (9th Cir. 1975).

595

Kent v. Commissioner, 61 T.C. 133 (1973); see also Kowalski v.

Commissioner, 65 T.C. 44 (1975) (finding Golsen not controlling with regard to a

Third Circuit decision as that case had been decided under the 1939 Code).

596

See Thompson v. Commissioner, 66 T.C. 737, 742 n.6 (1976); Spalding v.

Commissioner, T.C. Memo. 1975-250, 34 T.C.M. (CCH) 1074, 1076; Page v.

Commissioner, T.C. Memo. 1975-15, 33 T.C.M. (CCH) 64, 65, aff’d, 524 F.2d 1149

(9th Cir. 1975).

Opinions, Decisions, and Appeals 819

Within these limitations, Golsen has been applied consistently.

597

If the

venue for an appeal is in a court that has clearly expressed an opinion on

the issue involved, good reason exists for requiring the Tax Court to follow

the applicable precedent whether it is in agreement. The appellate court

presumably would follow its own precedent on an appeal from a Tax Court

decision and a contrary ruling by the Tax Court would simply put the losing

party in the Tax Court to the hardship of appealing to gain a reversal.

Moreover, as a matter of sound judicial administration it would seem that a

lower court should not have discretion to refuse to follow the precedent of

a court to which its cases must be appealed, and in this regard, it seems

reasonable that the Tax Court should be viewed as a lower court in relation

to the appellate court to which a particular decision is appealable.

The reasons given in Lawrence for not applying these policies were not

compelling. The fact that the applicable precedent within a particular

circuit may be hard to discern either because of cryptic or conflicting

decisions should not obviate a lower court’s duty to apply such precedent.

Certainly such a problem would not relieve a district court from following

precedent within its circuit, nor, even under Lawrence, would it relieve the

Tax Court from following Supreme Court precedent. The problem is a

routine one for any court.

The second justification for Lawrence, that appellate venue may be in

doubt in some cases, also was not weighty. In the great bulk of cases there

is no problem in determining the court to which an appeal will lie. This was

particularly true at the time Lawrence was decided when venue was

determined by the location of the return filing.

598

Although the parties

theoretically had (and still have) the option of jointly stipulating any venue

they desire,

599

the possibility of the exercise of such an option would be

remote if the court that would hear the appeal in the absence of a

stipulation had ruled in favor of one of the parties.

600

Moreover, even at

the present time, when appellate venue is predicated principally on either

the residence of the taxpayer or its principal place of business,

601

the

determination of proper venue will not present a problem in most cases; in

those few cases in which it does, the Tax Court need not feel constrained to

follow the precedent of any particular court of appeals. As to those cases in

which multiple appellate venues exist because there are multiple taxpayers

597

E.g., McCormac v. Commissioner, 67 T.C. 955 (1977); Collins Electrical Co.

v. Commissioner, 67 T.C. 91l (1977); Capri, Inc. v. Commissioner, 65 T.C. 162

(1975).

598

See supra notes 485–487 and accompanying text.

599

I.R.C. § 7482(b)(2).

600

This fact was taken into account in Golsen. 54 T.C. at 757 n.15.

601

I.R.C. § 7482(b)(1).

820 The United States Tax Court – An Historical Analysis

involved,

602

there may be more than one reasonable policy that could be

pursued by the Tax Court.

603

However, the fact that these cases may

present difficulties or that appellate venue may not be determinable in a few

cases, is not justification for refusing to follow applicable precedent in a

circuit when it is virtually certain that the appeal, if any, will be venued

there.

Finally, Lawrence was not defensible on the ground that the Tax Court is

a national court, the formation of which was intended to promote

uniformity of tax decisions. It is true that the Tax Court’s jurisdiction is

national, and it is also true that an important purpose of the Tax Court is

the promulgation of precedents to aid in the administration of the tax

laws.

604

But it does not follow that these considerations justify ignoring

applicable precedent in the courts of appeals. The courts of appeals are

legally free to refuse to follow Tax Court precedents, and it thus can be

concluded that Congress, although it may have regarded uniformity as

desirable, did not view the Tax Court as the instrument for accomplishing

this goal. If it did, it would have provided for no review of Tax Court

decisions (except possibly by the Supreme Court) or, less drastically, it

would have provided review in only a single appellate court instead of 12

602

At the time Lawrence was decided, multiple appellate venues as to the same

taxpayer could exist because different tax years were involved and the taxpayer filed

returns for those years within different circuits. However, under present law,

appellate venue is based on the residence or principal place of business of the

taxpayer at the time the petition to the Tax Court was filed. I.R.C. § 7482(b)(1).

Thus, it will be unusual for a single Tax Court case, involving a single taxpayer, to

be appealable to more than one court of appeals. Such a situation could arise if a

single taxpayer files multiple petitions which are later consolidated in a single case,

and the taxpayer was a resident in different circuits when the petitions were filed.

Compare Fausner v. Commissioner, T.C. Memo. 1971-277, 30 T.C.M. (CCH) 1187,

aff’d, 472 F.2d 561 (5th Cir.), aff’d per curiam, 413 U.S. 838 (1973) with Fausner v.

Commissioner, 55 T.C. 620 (1971).

603

If, for example, a single Tax Court case involves several shareholders of the

same corporation who reside in different circuits, it might seem unfair for the Tax

Court to treat the taxpayers differently depending on their residence. Nevertheless,

although it would be reasonable to reach a uniform result in such a case, it is

believed that the sounder result would be to apply Golsen. The uneven application

of the law in such a case would be dramatic, but not essentially any more illogical

than that reached in separate cases involving different taxpayers but the same issue.

Compare Fausner v. Commissioner, T.C. Memo. 1971-277, 30 T.C.M. (CCH) 1187,

aff’d, 472 F.2d 561 (5th Cir.), aff’d per curiam, 413 U.S. 838 (1973) with Fausner v.

Commissioner, 55 T.C. 620 (1971) (applying different rules to the identical taxpayer

on the basis of Golsen).

604

See supra note 578.

Opinions, Decisions, and Appeals 821

courts of appeals.

605

Moreover, even if it is accepted that uniformity is an

important and congressionally desired goal, it cannot be said that the

Lawrence rule did anything to further this end. Lawrence did not and could

not bind the courts of appeals to follow a uniform precedent espoused by

the Tax Court. Nothing was accomplished by the Tax Court’s adhering to

its views except requiring the losing party in the Tax Court to take an

appeal to achieve a more or less forgone result. The Tax Court could

exercise the same persuasive authority by deciding its cases in accordance

with controlling precedent while at the same time expressing any

reservations that it might have about the correctness of such precedent. In

fact, that is now the practice under Golsen.

606

It has been suggested that the decision in Golsen was a consequence of

the Tax Court’s 1969 change in status from an independent agency of the

executive branch to a court of record established under article I of the

Constitution.

607

In this view, prior to the 1969 changes the Tax Court saw

its administrative role as preeminent and therefore strove to promote

uniformity through the Lawrence rule; however, in Golsen, the court

recognized its new judicial status and thereby subordinated its opinions to

those of a reviewing court in the interest of efficient dispute adjudication.

The fact that Golsen was announced less than a year after the 1969 legislative

changes lends some support to this theory, and it is not unlikely that some

Tax Court judges were led to their decision in Golsen by their heightened

sensitivity to the Tax Court’s judicial role. Nevertheless, since the effect of

the 1969 Act on the function and powers of the court were minimal, it

probably would be erroneous to place a great deal of emphasis on this

explanation of Golsen. Rather, the decision seems primarily explainable in

terms of a recognition that, regardless of the benefits of uniform

application of the tax laws, an adjudicative body must realistically take

account of its power to achieve such a goal. Even the Service, an

administrative agency responsible for uniform administration of the tax

laws, has recognized this fact in a ruling in which it states that it will follow

precedent within a particular circuit even though it disagrees with the

decision, while following a different rule in other areas of the country.

608

605

An illustration of such a technique may be found in the Emergency Price

Control Act of 1942, under which judicial review of determinations of the Price

Administrator could only be had in a single Emergency Court of Appeals and the

Supreme Court. Act of Jan. 30, 1942, ch. 26, § 204(c)–(d), 56 Stat. 32.

606

See Of Course, Inc. v. Commissioner, 59 T.C. 146, 148 (1972); Smith v.

Commissioner, 55 T.C. 260, 269–70 (1970), vacated and rem’d, 457 F.2d 797 (5th Cir.

1972).

607

John J. Charles, Status of a Controversy: The Tax Court, the Courts of Appeals, and

Judicial Review, 32 O

HIO ST. L.J. 164, 170 (1971).

608

Rev. Rul. 72-583, 1972-2 C.B. 534 (dealing with the gift taxation

consequences of political contributions). The similarity of the ruling to Golsen was

822 The United States Tax Court – An Historical Analysis

noted in RICHARD B. STEPHENS, GUY B. MAXFIELD & STEPHEN A. LIND,

FEDERAL ESTATE AND GIFT TAXATION § 9-5 n.21 (3d ed. 1974).

Special Trial Judges 823

ART XII

SPECIAL TRIAL JUDGES

A. Historical Origins

A persistent problem in the development of the Board/Tax Court has

been the management of its heavy workload. Its division structure and

many of its procedures, such as pleadings and stipulations, have been

shaped largely by the statutory directive that decisions “be made as quickly

as practicable.”

Soon after the creation of the Board, a controversy

developed with regard to the use of personnel, other than members of the

Board, to assist in the hearing and decision process. In connection with the

Revenue Act of 1928, the American Bar Association, concerned over the

Board’s developing backlog of cases, recommended to Congress that

special masters similar to those then employed in the Court of Claims be

used to relieve the divisions of the necessity of taking evidence in cases in

which lengthy evidentiary hearings would be likely.

As part of their duties,

the masters would prepare detailed findings of fact, thereby reducing the

burden on the divisions.

Although the recommendation of the ABA was not incorporated into

the provisions of the 1928 Revenue Act, renewed support for the use of

such commissioners was advanced in the report of a joint committee of

Board and Treasury personnel in 1937.

The committee proposed that use

of commissioners should be limited to cases that were likely to involve

lengthy hearings and voluminous records.

Although it was suggested that

the broad language of the 1926 Act permitted the use of commissioners

I.R.C. § 7459(a).

Hearings on Revenue Revision, 1928, Before the House Comm. on Ways and Means,

70th Cong., 1st Sess. at 539–41 (1928) (statement of ABA) [hereinafter cited as

1928 House Hearings]; see also Phillips, supra note 242; American Bar Association Tax

Revision Recommendations, 3 N

AT’L INC. TAX MAG. 403 (1925).

1928 House Hearings, supra note 2, at 540.

Report of the Joint Committee of Board of Tax Appeals and Chief Counsel’s

Office, Dec. 17, 1937, at 28, filed at the U.S. Tax Court in “Field Divisions:

Memoranda & Correspondence” [hereinafter cited as Joint Committee Report]. In

the Joint Committee Report, the commissioner was referred to as an “examiner.”

The purpose of such an examiner was to assist the Board in the taking of

testimony, receiving other evidence and preparing proposed findings of fact.

Id.

824 The United States Tax Court – An Historical Analysis

without the necessity of a statutory amendment,

the committee felt

otherwise and stated that legislation would be necessary to permit the

Chairman of the Board to appoint, use, and remove such commissioners.

Subsequently, in the Revenue Act of 1943, the Tax Court’s Presiding Judge

was given the authority to designate attorneys from the legal staff of the

court to act as commissioners in particular cases.

In response to the newly

authorized power, the court promulgated a procedure under which the

commissioner would conduct the hearing in accordance with the court’s

rules of practice, the parties would have 30 days in which to file proposed

findings of fact, and the commissioner would prepare and submit to the

court or division a report of such findings with service made on both

parties.

The parties could then file exceptions to the commissioner’s

findings within 20 days.

Thus, the parties would have an opportunity to

express views on the proposed findings of fact in advance of the issuance

of the opinion, an opportunity that was not available in cases in which the

hearing took place before a judge of the court.

The commissioner procedure was used sparingly in its infancy.

In fact,

the first designation of a commissioner occurred in 1948.

In the resulting

See Memorandum from T.W.S. to Mr. Logan Morris, Member, Board of Tax

Appeals, Apr. 5, 1937, filed at the U.S. Tax Court in “Decisions: Memoranda &

Correspondence.”

See Joint Committee Report, supra note 4, at 28.

Revenue Act of 1943, ch. 63, § 503(b), 58 Stat. 72, amending Int. Rev. Code of

1939, ch. 5, § 1114, 53 Stat. 160. Legislative history of the provision is found in

H.R. R

EP. No. 78-871, at 71 (1943), and S. REP. No. 78-627, at 94 (1943). The

reports indicate that commissioners were to be attorneys from the legal staff of the

court, designated to act in particular cases, by written order of the presiding judge.

The Tax Court was given the power to promulgate rules for the use of

commissioners.

TAX CT. R. 48 (July 1, 1944 ed.). A commissioner, in cases under the 1944

Tax Court Rule 48 and present Rule 182, has no power to enter decision in a case.

Germain v. Commissioner, 11 T.C.M. (CCH) 226 (1952).

TAX CT. R. 48(c) (July 1, 1944 ed.).

Compare TAX CT. R. 48(c) (July 1, 1944 ed.) with Int. Rev. Code of 1939, ch. 5,

§§ 1117(a)(b), 53 Stat. 162 (now codified at I.R.C. § 7459). Eight years later, the

Tax Court amended Rule 48, in an effort to streamline the exception procedure.

Whereas earlier the parties had to file exceptions to the commissioner’s proposed

findings of fact within 20 days of service, the court merged the filing of exceptions

into the requirement of filing briefs. T

AX CT. R. 48(d) (Sept. 5, 1952 ed.). The time

for filing initial briefs, including exceptions to the proposed findings of fact, was

later extended to 60 days. T

AX CT. R. 182(a) (Jan. 1, 1974 ed.).

See Memorandum from Chief Judge Murdock to Judges of the Tax Court,

Nov. 15, 1956, filed at the U.S. Tax Court in “Decisions: Memoranda &

Correspondence” [hereinafter cited as Murdock, 1956]; see also Edward N. Polisher,

Tax Court Commissioners, 28 T

AXES 413 (1950).

Special Trial Judges 825

opinion, the court emphasized that only the findings of fact were the

commissioner’s,

and that the commissioner did not decide any of the legal

issues involved.

The infrequent use of the commissioner procedure and the clear

demarcation of the commissioner’s role were indicative of broader

questions that faced the court: Would the use of commissioners be

beneficial to the status of the court in the long run, and would it be

effective in reducing the amount of time spent by a judge in a particular

case? Diverging views with respect to these questions existed on the court.

Most judges apparently opposed any substantial use of commissioners, and

in practice, their view prevailed.

However, others believed that the

commissioner system should be expanded. In their view, the opponents of

the commissioner procedure had improperly placed too much emphasis on

the quantitative results of each commissioner. Rather, the important

consideration was how much additional work a judge would be able to

produce, freed from the burden of those cases assigned to commissioners

for hearing and preparation of findings of fact.

Those opposed to the commissioner procedure argued that extensive

use of the commissioners would not result in any substantial savings of time

because the judges were still required to study the record to reach a decision

and prepare an opinion.

In this regard, critics also contended that a

commissioner would not be able to convey accurately the “sense” of the

witnesses to the judge charged with the writing of the opinion.

Additionally, the use of commissioners was viewed as not befitting a judicial

tribunal, although this viewpoint ignored the fact that the court was not

technically a full judicial body at the time and that the Court of Claims used

commissioners extensively during this period.

The opponents suggested

that such a process might create an unfavorable public impression since

those hearing the case would not be judges and might thereby prejudice the

court’s efforts to be accepted as a judicial tribunal in fact if not in form.

Finally, they noted that the actual case production by the commissioners

over a seven-year period from 1948 to 1955 had been slow, and that

The first case in which the court used a commissioner was decided in 1948.

See Bibb Mfg. Co. v. Commissioner, 12 T.C. 665 (1949).

Id. at 672.

Id.

Tax Court Conference Minutes, Apr. 24, 1959.

Id. (remarks of Judge Fisher).

See Murdock, 1956, supra note 12, at 5.

Id.

Id. at 4–5.

Id. at 5.

826 The United States Tax Court – An Historical Analysis

reassignment of certain cases from the commissioners to the judges

probably was necessary to dispose of them.

Contrary to the prevalent view on the court opposing extensive use of

commissioners, the American Bar Association, in its 1957 proposal to

remove the Tax Court from the executive to the judicial branch of

Government, recommended a broad expansion in both the use and powers

of the commissioners.

Under the proposal, the Tax Court would be

authorized to appoint not more than ten commissioners, who would be

paid at the same rate as commissioners of the Court of Claims.

addition to reporting findings of fact, the commissioners also would make

recommendations for conclusions of law and decisions. The parties would

have an opportunity to file exceptions to the findings and

recommendations, and hearings would be provided by the court within a

reasonable time. If no exceptions were filed, the findings of fact and the

conclusions of law and decisions would become the decisions of the court.

Finally, the court would not be permitted to consider issues not raised by

exception to the commissioners’ reports.

These recommendations were

incorporated unchanged as part of the proposed legislation, submitted to

Congress in 1958 and 1959, to give the court article III status.

Although the court welcomed the move toward judicial status, it

opposed the proposed statutory provisions concerning the procedures to be

employed in proceedings before a commissioner.

The court indicated that

the proposed procedures, if employed, would result in both a fundamental

alteration of the court’s nature and a disruption of its operations.

For

example, the requirement of a hearing provided “by the court,” if

interpreted to mean review by the full court, would result in greater delays

in rendering decision in a case.

Moreover, the court would not be

permitted to consider any issue of fact not raised by exception to the

Id. at 5–6.

See Tax Court Act, Feb. 1957, filed at the U.S. Tax Court in “Decisions:

Memoranda & Correspondence” [hereinafter cited as Tax Court Act]. For a

discussion of the American Bar Association proposals in respect of article III status

for the court, see Part IV.B.2.

Tax Court Act, supra note 23, at 9.

Id. at 14.

Compare Tax Court Act, supra note 23, §§ 913, 2651 with S. 3796, 85th Cong.,

2d Sess. §§ 913, 2651 (1958) and S. 1274, 86th Cong., 1st Sess. §§ 913, 2651 (1959).

E.g., Letter from Chief Judge Murdock to Senator Eastland, July 17, 1959,

filed at the U.S. Tax Court in “Decisions: Memoranda & Correspondence;” Letter

from Judge Murdock to H. Kilpatrick, Jan. 22, 1957, filed at the U.S. Tax Court in

“Decisions: Memoranda & Correspondence.”

Memorandum from Judge Train to Chief Judge Murdock, July 17, 1959, filed

at the U.S. Tax Court in “Decisions: Memoranda & Correspondence” [hereinafter

cited as Train].

Id. at 1.

Special Trial Judges 827

commissioner’s report. Such a format, the court concluded, would change

the Tax Court from a trial court to a court of review.

Rather, the court

concluded, if it was considered necessary to include a provision with respect

to proceedings before commissioners, the language of the then-present law

should be retained.

The ABA proposal for new court status and a change

in the commissioner procedure was not enacted, and the procedures

employed in proceedings before commissioners remained subject to court

determination.

Although the commissioner system was proposed originally as a means

of handling lengthy evidentiary cases, it emerged as an important aspect of

Tax Court procedure in connection with small tax cases.

The small tax

case procedure was the result of congressional concern over the failure to

provide a readily available means of impartial review of modest deficiency

disputes.

In response to this concern, the court, in 1968, adopted a

procedure for small tax cases that provided for a simplified petition, early

assignment to trial calendar, informal trial procedures and waiver of briefs.

However, Congress believed that the then-existing statutory provisions,

with their requirement of technical rules of evidence, precluded such a

procedure from achieving its greatest potential.

Accordingly, the 1969

Id. Note that this argument later would be advanced (unsuccessfully) by the

taxpayers in Freytag v. Commissioner, 904 F.2d 1011 (5th Cir. 1990), as a basis for

challenging the propriety of the assignment of their case to the special trial judge.

See text accompanying infra notes 121–124.

Letter from Chief Judge Murdock to Senator Eastland, July 17, 1959, filed at

the U.S. Tax Court in “Decisions: Memoranda & Correspondence;” Train, supra

note 28.

Compare TAX CT. R. 48 (Sept. 1, 1965 ed.) with TAX CT. R. 48 (Nov. 15, 1952

ed.).

I.R.C. § 7463.

S. REP. No. 91-552, at 302 (1969).

During the fall of 1968, the Tax Court “in recognition of the apparent

demand for a procedure for handling small tax claims simply and expeditiously”

drafted a separate set of rules to accomplish these objectives. These new

procedures became effective Jan. 1, 1969. Memorandum from Chief Judge

Drennen to Tax Court Judges, Nov. 26, 1968, filed at the U.S. Tax Court in

“Decisions: Memoranda & Correspondence;” see also Tax Court Conference

Minutes, Nov. 1, 15, 29, 1968.

At this time the Internal Revenue Code required that all proceedings begun in

the Tax Court, irrespective of dollar amount, be conducted with equal formality.

Laurence Goldfein and Michael I. Saltzman, The New Tax Court Small Claims

Division: How It Will Operate, 34 J. T

AX’N 2 (1971). Section 7453 provides that every

hearing must be conducted in accordance with the rules of evidence applicable to

trials without a jury in the District Court for the District of Columbia. Section 7458

requires every proceeding to be stenographically transcribed. At the conclusion of

828 The United States Tax Court – An Historical Analysis

Tax Reform Act authorized a simplified and relatively informal procedure

for deficiency disputes involving not more than $1,000.

This amount has

been periodically raised over time to $1,500, $5,000, $10,000, and, most

recently, to $50,000.

Legislative history indicates that Congress intended the Tax Court to

make extensive use of commissioners in small tax cases,

and certain

statutory modifications with respect to commissioners were designed to

facilitate this objective. Of importance in this regard was authorization for

the court to appoint full-time commissioners who would be compensated at

the same rate as commissioners of the Court of Claims.

Prior to this

statutory revision, the court had been authorized only to appoint an

attorney from the legal staff of the court to act as a commissioner on a

case-specific basis.

Pursuant to the 1969 amendment, the court established a small tax case

division under the supervision of a judge of the court.

The majority of the

each of these proceedings the court is compelled to report all of its findings of fact,

opinions and memorandum opinions. I.R.C. § 7459(b).

Tax Reform Act of 1969, Pub. L. No. 91-172, § 957(a), 83 Stat. 733 (enacting

I.R.C. § 7463). If neither the amount of the deficiency placed in dispute, nor the

amount of any claimed overpayment exceeded $1,000 for any taxable year in the

case of income and gift tax or $1,000 for estate tax, the taxpayer was given the

option to request that the proceeding be conducted under a small case procedure.

In addition, the Act provided that notwithstanding statutory limitations which

require certain formal rules of evidence, publication, hearings, etc., the small case

procedure would be conducted in accordance with such rules of evidence, practice

and procedure as the Tax Court might prescribe.

The State and Local Fiscal Assistance Act of 1972 increased the limit to

$1,500. Pub. L. No. 92-512, § 203(b)(2), 86 Stat. 919, 945 (1972). The Revenue Act

of 1978 increased the jurisdictional amount to $5,000. Pub. L. No. 95-600,

§ 502(a)(1), 92 Stat. 2763, 2879 (1978). The Tax Reform Act of 1984 increased the

jurisdictional amount to $10,000. Pub. L. No. 98-369, § 461 (a), 98 Stat. 494, 823.

Lastly, Congress increased the ceiling amount on small tax cases to $50,000 as part

of the Internal Revenue Service Restructuring and Reform Act of 1998. Pub. L.

No. 105-206, § 3103, 112 Stat. 685, 731 (1998).

S. REP. No. 91-552, at 304 (1969).

Tax Reform Act of 1969, Pub. L. No. 91-172, § 958, 83 Stat. 734. In 1986,

Congress set the compensation of special trial judges to equal 90 percent of the

salary paid to a presidentially appointed judge of the court. Tax Reform Act of

1986, Pub. L. No. 99-514. § 1556(a), 100 Stat. 2754 (adding I.R.C. § 7443A(d)(1)).

See Memorandum from the Ad Hoc Committee on Small Tax Cases to the

Chief Judge, Apr. 2, 1970, at 2, filed at the U.S. Tax Court in “Decisions:

Memoranda & Correspondence,” wherein it was recommended that the Chief

Judge assign one of the judges of the court as the judge in charge of such division.

Judge Howard A. Dawson, Jr. was designated as the first judge in charge of the

Small Tax Case Division. See Tax Court Conference Minutes, Apr. 17, 1970;

General Order No. 2, U.S. Tax Court, Sept. 1, 1970.

Special Trial Judges 829

small tax case sessions are assigned to special trial judges (the official

designation since 1984

) for hearing and the preparation of summary

findings of fact and opinion.

The report of the special trial judge is then

submitted to the chief judge, or if the chief judge so directs, to a judge or

division of the court for review.

This review is conducted by the judge

heading the small tax case division. To expedite the resolution of small tax

cases, which generally involve well-settled legal questions, such opinions

generally are not subsequently reviewed by the chief judge if authored by a

special trial judge.

Although the Tax Reform Act of 1969 authorized commissioners and

later special trial judges to issue summary opinions in small tax cases, the

commissioner/special trial judge lacked authority to enter the decision in

such cases.

Congress corrected this shortcoming in 1980, granting special

trial judges the authority to make the decision of the court in small tax

cases.

The small tax case procedure has proved to be remarkably popular with

taxpayers who invoke the Tax Court’s jurisdiction, the majority of whom

chose to prosecute their cases on a self-represented basis. Given the large

number of small tax cases filed in the Tax Court, the small tax case

procedure is detailed in Part XIII in connection with a discussion of the

Tax Court’s institutional support for self-represented litigants.

In 1975, the court issued a General Order which provided that a

“commissioner” should be referred to as a “special trial judge” except when in

conflict with statute. General Order No. 4, 65 T.C. IV (1975). The Tax Reform

Act of 1984 changed the statutory designation of a “commissioner” to “special trial

judge.” Pub. L. No. 98-369, § 464, 98 Stat. 494, 824–25.

In more recent years, as the number of special trial judges has declined and

the number of cases being tried under the small tax case procedures has increased

(due in large part to the increase in the limitation on the amount in controversy),

judges of the court have presided over a substantial share of small tax cases.

The Tax Court Rules of Practice and Procedure provide that a special trial

judge presiding over trial of a small tax case shall “prepare a summary of the facts

and reasons for the proposed disposition of the case” as soon as practicable after

trial. T

AX CT. R. 182(a) (July 6, 2012 ed.). The summary opinion is to be submitted

to the chief judge, or if the chief judge so directs, to a judge or division of the

court. Id.

Tax Court Conference Minutes, Apr. 17, 1970.

See Memorandum from the Ad Hoc Committee on Small Tax Cases to the

Chief Judge, Apr. 2, 1970, at 3 n.6, filed at the U.S. Tax Court in “Decisions:

Memoranda & Correspondence;” Tax Court Conference Minutes, Apr. 17, 1970.

The language of § 7463, as then in effect, permitted a brief summary of reasons to

satisfy the requirements of a decision as defined in § 7459(b). However, Congress

made no change to § 7459(a), which required that such a decision be made by a

judge.

Pub. L. No. 96-222, § 105(a)(1)(B), 94 Stat. 194, 218 (1980).

830 The United States Tax Court – An Historical Analysis

B. Early Expansion in Use of Special Trial Judges

Rules promulgated by the Tax Court following the 1969 Act generally

retained the pre-existing limitations on the authority of special trial judges.

Thus, except in small tax cases, special trial judges were authorized only to

prepare findings of fact and were not authorized to prepare an opinion in

the case.

Reports containing the special trial judge’s findings of fact were

submitted for review to the chief judge or a judge designated by the chief

judge. The report of a special trial judge thus differed significantly from a

judge’s report, which usually contains both findings of fact and opinion.

Prior to the 1974 revision of the Tax Court Rule of Practice and

Procedure, special trial judge reports were served on the parties.

After

service of the reports, the parties had a limited time in which to file

exceptions to the proposed findings of fact, in advance of the issuance of

an opinion.

Upon receiving any exceptions filed by the parties, the judge

was authorized to direct the parties to file additional briefs or order that an

oral argument be held so as to better enable the judge to determine whether

the special trial judge’s report should be adopted, rejected, or modified.

The Tax Court’s Rules of Practice and Procedure were revised in 1974

to expand the special trial judges’ function to include preparation of

proposed opinions.

However, the procedures for filing exceptions to the

reports of special trial judges

were elaborate and could unnecessarily

consume judicial resources. Accordingly, in 1976, the Tax Court further

expanded the use of special trial judges.

From the inception of the small

tax case procedure, special trial judges had been authorized to prepare a

preliminary findings of fact and opinion in a report submitted for review

directly to the judge in charge of the small tax case division.

As a result,

the managerial capabilities of special trial judges in small tax cases were not

hampered by the procedures for parties filing exceptions to their reports

which applied in other cases. Recognizing that the procedures for objecting

to the special trial judge reports could adversely affect the efficient

disposition of regular cases involving small amounts of tax, the court

authorized the submission of cases involving deficiencies of $2,500 or less

to special trial judges; the reports prepared in these cases were submitted

TAX CT. R. 48 (Jan. 25, 1971 ed.).

See TAX CT. R. 48 (Sept. 1, 1965 ed.).

Id.

Id..

See Former TAX CT. R. 182(b), 60 T.C. 1149 (1973).

See Former TAX CT. R. 182(c), 60 T.C. 1149 (1973).

General Order No. 5, 67 T.C. XXI (1976).

See Part XIII.A., text accompanying notes 8–14.

Special Trial Judges 831

directly to the chief judge, or to a judge designated by him.

By providing

for submission of special trial judge reports in such cases directly to the

chief judge or a judge designated by him, the court eliminated the

unnecessary restraints on judicial time and attention that could arise if one

or both parties objected to the report of a special trial judge in a case

involving a small amount of tax. Moreover, by eliminating the time

consuming procedures in cases not exceeding the $2,500 limitation, the

authority of special trial judges was made consistent in cases involving small

amounts of tax, regardless of whether the case was conducted under the

small tax case procedure. In cases involving amounts exceeding the $2,500

limitation, however, the procedures for service on the parties and for filing

party exceptions continued to apply.

The 1976 changes in the Tax Court’s use of special trial judges served as

the foundation for current § 7443A(b)(3), which permits the chief judge to

assign to a special trial judge any case in which the deficiency placed in

dispute does not exceed $50,000. Accordingly, all cases concerning a

statutorily determined small amount of tax—regardless of whether the

taxpayer elects the small tax case procedures of § 7463—may be heard by a

special trial judge. In cases in which the taxpayer does not proceed under

§ 7463, the special trial judge submits the report in the case to the chief

judge (as opposed to the head of the small tax case division) for review.

C. Authority to Make Decisions in Certain Cases

In the Miscellaneous Revenue Act of 1982,

Congress provided that

special trial judges could make the decision of the court in any declaratory

judgment case,

small tax case, or any other case in which the amount in

dispute did not exceed the jurisdictional limit applicable to small tax cases.

The Tax Court rules make it clear that a special trial judge may make the

decision in the case even if it does not go to trial.

Moreover, as a result of

the 1982 legislation, special trial judges have the authority to render “bench

decisions” in those cases, other than declaratory judgment proceedings, in

which they have decision-making authority and in which the facts and law

General Order No. 5, 67 T.C. XXII (1976). It is not clear why the court

chose the $2,500 amount.

TAX CT. R. 182(b) (July 6, 2012 ed.).

Pub. L. No. 97-362, § l06(c)(1), 96 Stat. 1726, 1730 (adding I.R.C. § 7456(d)

(1982) (codified as amended at I.R.C. § 7443A(c)).

In the Revenue Act of 1978, Congress provided that, subject to the discretion

of the Tax Court, special trial judges could make the decisions of the court in

declaratory judgment proceedings. Pub. L. No. 95-600, § 336(b)(1), 92 Stat. 2763,

2841–42 (1978); former Tax Ct. R. 218, 68 T.C. 1051 (1977).

See Rules Comm. Note, TAX CT. R. 182, 85 T.C. 1138 (1985).

832 The United States Tax Court – An Historical Analysis

are clear.

The difference between authority to make a “decision” and the

authority to make a “report” is significant, because the decision authority

more directly involves the application of judicial power.

In the Tax Reform Act of 1984,

Congress clarified that the authority of

special trial judges to preside over a case extends to any proceeding to

which they are assigned by the chief judge. However, except to the extent

specifically authorized by statute, special trial judges were not authorized by

Congress to make a decision of the court. Hence, in those cases in which

the special trial judge could not enter the decision, the special trial judge was

required to submit a report containing findings of fact and opinion to the

chief judge, who would then assign the case to a division of the court for

disposition.

As part of the Tax Reform Act of 1986, Congress moved the

jurisdictional limits of special trial judges from § 7456(d) to its current

location in § 7743A(b).

At that time, the chief judge of the court was

permitted to assign to a special trial judge any declaratory judgment

proceeding, any proceeding governed by the small tax case procedures of

§ 7463, any proceeding in which the amount in dispute did not exceed the

jurisdictional limits of the small tax proceedings, and “any other proceeding

which the chief judge may designate.”

When the catch-all category was

added in as part of the Tax Reform Act of 1984,

Congress also enacted

the predecessor of §7443A(c), authorizing the special trial judge to enter

decision in any case assigned to him other than cases assigned under the

catch-all category. For those cases, a decision on behalf of the court had to

See TAX CT. R. 152, 79 T.C. 1147–48 (1982); TAX CT. R. 182(a)–(b), 81 T.C.

1068 (1983), 82 T.C. 1073 (1984), 85 T.C. 1138 (1985); Tax Ct. R. 182(b), (c) (July

6, 2012 ed.); see also Part XI.D., addressing the Tax Court’s authority to issue bench

decisions.

See I.R.C. § 7459.

Pub. L. No. 98-369, § 463(a), 98 Stat. 494, 824 (1984) (amending I.R.C.

§ 7456(d)(1982) (codified as amended at I.R.C. § 7443A(b)(4) (Supp. IV 1986))).

TAX CT. R. 183(b), 81 T.C. 1068 (1983). The division to which the case was

assigned could modify or reject the report. T

AX CT. R. 183(c), 81 T.C. at 1068.

However, at the time, service of the special trial judge’s report was not required to

be made on the parties, and the parties did not have a right to further brief the case.

AX CT. R. 183(a), (c), 81 T.C. at 1068. The division could, in addition to directing

the filing of additional briefs, receive further evidence, direct oral argument, or

recommit the report to the special trial judge with instructions. T

AX CT. R. 183(c),

81 T.C. at 1068. The provisions for reviewing reports of special trial judges have

since been significantly modified. The development of the Tax Court’s procedures

for reviewing reports of special trial judges is discussed below in Section D of this

Part.

Pub. L. No. 99-514, § 1556(a), 100 Stat. 2754 (1986).

I.R.C. § 7443A(b)(1)–(4) (as enacted in 1986).

Pub. L. No. 98-369, §§ 463(a), 464(b), 98 Stat. 494, 824.

Special Trial Judges 833

be entered by a presidentially appointed judge of the court.

Whether the text of the § 7443A(b)(4) catch-all category meant what it

actually said—that is, that the chief judge of the Tax Court could assign any

proceeding to special trial judge for hearing and preparation of a

preliminary report, provided the decision in the case is entered by a

presidentially appointed Tax Court judge—was challenged by the taxpayers

in First Western Securities Inc. v. Commissioner.

This case emanated the same

straddle investment strategy that served as the subject of the Freytag

litigation previously analyzed in Part V. Stressing the complexity of the

underlying case at hand, the taxpayers in First Western contended §

7443A(b)(4) did not permit the assignment of a case involving complex

financial transactions with deficiencies measured in the billions at stake to a

special trial judge. Conceding that the text of § 7443A(b)(4), interpreted

literally, did not impose any limitations on the cases that could be assigned

to a special trial judge pursuant to that provision, the taxpayers claimed that

§ 7443A(b)(4), interpreted in context, was limited to the sort of cases

enumerated in the preceding provisions of § 7443A(b)(1)-(3) of the statute

(which generally concerned cases involving declaratory judgments or

relatively minor deficiencies).

The taxpayers relied principally on the

Supreme Court’s then recent decision in Gomez v. United States

to support

their narrow interpretation of the statute. The Court in Gomez addressed

the scope of a provision in the Federal Magistrates Act permitting

magistrates to be assigned “such additional duties as are not inconsistent

with the Constitution and laws of the United States,”

a provision that

preceded a list of specific delegable duties. Specifically, the Court examined

whether the general grant of authority permitted a magistrate to conduct

juror voir dire in a criminal case. The Supreme Court found the general

grant of authority insufficient for this purpose. Instead, the Court

explained that the specific list of delegable duties “outline[d] the attributes

of the office,” and that additional duties encompassed by a general grant of

94 T.C. 549 (1990).

During the relevant period, § 7443A(b) provided as follows:

(b) Proceedings which may be assigned to special trial judges.—The chief

judge may assign—

(1) any declaratory judgment proceeding,

(2) any proceeding under section 7463,

(3) any proceeding where neither the amount of the deficiency placed in

dispute . . . nor the amount of any claimed overpayment exceeds $10,000,

and

(4) any other proceeding which the chief judge may designate,

to be heard by the special trial Judge of the court.

490 U.S. 858 (1989).

28 U.S.C. § 636(b)(3).

834 The United States Tax Court – An Historical Analysis

authority “reasonably should bear some relation to the specified duties.”

Given the Court’s contextual interpretation of the Magistrate’s Act in

Gomez, the taxpayers’ statutory argument in First Western was not as specious

as it appeared at first glance.

The Tax Court in First Western rejected the taxpayers’ interpretation of

§ 7443A(b)(4) as not only inconsistent with the literal text of the provision

but also with congressional intent. The court grounded its explanation in

the broader legislative change concerning the authority of special trial

judges in the Tax Reform Act of 1984. The legislative history

accompanying the statutory change described the genesis for the

amendment and its effect as follows:

Reasons for Change

The committee wishes to clarify that additional proceedings may

be assigned to [Special Trial Judges] so long as a Tax Court judge

must enter the decision.

Explanation of Provision

A technical change is made to allow the Chief Judge of the Tax

Court to assign any proceeding to a special trial judge for hearing and

to write proposed opinions, subject to the review and final decision

by a Tax Court judge, regardless of the amount in issue. However,

special trial judges will not be authorized to enter decisions in the

latter category of cases.

Accordingly, in contrast to the statute at issue in Gomez, the Tax Court

recognized that Congress did not intend § 7443A(b)(4) to provide an

overarching general grant of authority that rounded out the specific

delegations of authority under § 7443A(b)(1)-(3). Instead, Congress

intended § 7443A(b)(4) to supply an independent source of authority

concerning cases that could be assigned to special trial judges subject to a

separate procedural regime—namely, the requirement that the decision in

the assigned case be entered by a presidentially appointed judge of the

court. Accordingly, no context was to be gleaned by reference to

§ 7443A(b)(1)–(3), leaving assignment of the case permissible pursuant to

Gomez, 490 U.S. at 864.

H.R. REP. NO. 98-432, at 1568 (1984) (quoted in First Western, 94 T.C. at

555). The legislation therefore amended § 7443A(c), precluding the special trial

judges from entering a decision in cases assigned to them pursuant to

§ 7443A(b)(4).

Special Trial Judges 835

the terms of § 7443A(b)(4).

The Tax Court’s rejection of the taxpayer’s

narrow interpretation of § 7443A(b)(4) was repeated in similar terms by the

Second Circuit Court of Appeals in the case,

as well as by the Supreme

Court in resolving the related case of Freytag v. Commissioner.

The range of cases that may be assigned by the chief judge to a special

trial judge for hearing and decision has expanded over the years, beyond the

expansion in the scope of cases that may be tried by a special trial judge

under the small tax case procedures of § 7463. In 1998, Congress

authorized special trial judges to hear and issue a decision in any review of a

collection due process determination pursuant to § 6330(d).

Most

recently, in 2006, Congress authorized special trial judges to hear and decide

an appeal of an adverse whistleblower award determination pursuant to

§ 7326(b)(4).

Following these expansions of the authority, the catch-all

category of cases over which a special trial judge may preside but not make

the decision of the court has been redesignated as § 7443A(b)(7).

D. Review of Special Trial Judge Reports

Prior to 1983, Tax Court Rule 182 provided the procedural guidelines

governing the Tax Court’s review of reports submitted by special trial

judges.

The prior post-trial procedure for cases tried before a special trial

judge (then referred to as a commissioner), housed in Tax Court Rule 182,

provided for a copy of the commissioner’s report, containing proposed

findings of fact and opinion, to be served the parties.

The procedures

See First Western, 94 T.C. at 555–56. As later explained by the Second Circuit

Court of Appeals, the taxpayers in First Western attempted to use the legislative

history accompanying § 7443A(b)(4) to their advantage, noting that Congress

characterized the addition of the provision as a “technical change.” The argument

was that a mere technical change would not have permitted a special trial judge to

hear any type of case the chief judge of the court determined to assign, with the

discretion of the chief judge serving as the sole limitation. See Samuels, Kramer &

Co. v. Commissioner, 930 F.2d 975, 982 (2d Cir. 1991). The Supreme Court in

Freytag ultimately dispensed with this argument on its terms, noting that Congress

regarded the amendment as technical only because it confirmed the Tax Court’s

longstanding use of commissioners as evidentiary referees. See Freytag v.

Commissioner, 501 U.S. 868, 875 (1991).

See Samuels, Kramer & Co. v. Commissioner, 930 F.2d 975, 979–82 (2d Cir.

1991).

501 U.S. 868, 873–77 (1991).

Internal Revenue Restructuring and Reform Act of 1998, Pub. L. No. 105-

206, § 3401(c)(1), 112 Stat. 731, 749 (adding current I.R.C. § 7443A(b)(4)).

Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, § 406(a)(2),

120 Stat. 2959 (adding current I.R.C. § 7443(b)(6)).

TAX CT. R. 182, 60 T.C. 1149 (1973).

TAX CT. R. 182(b), 60 T.C. 1149 (1973).

836 The United States Tax Court – An Historical Analysis

afforded the parties an opportunity to file exceptions to the commissioner’s

report, and the reviewing judge could schedule oral argument on those

exceptions in the judge’s discretion. The reviewing judge thereafter

possessed a number of options concerning action on the commissioner’s

report. The judge could (a) adopt the report in full, (b) modify the report

or reject the report in whole or in part, (c) receive additional evidence from

the parties, or (d) recommit the report to the commissioner with

instructions.

The procedures required the reviewing judge to afford a

degree of deference to the commissioner’s factual findings, as reflected in

the closing sentence in Rule 182:

Due regard shall be given to the circumstance that the

commissioner had the opportunity to evaluate the credibility of

witnesses; and the findings of fact recommended by the

commissioner shall be presumed to be correct.

The explanatory note to Rule 182 provided that the rule was intended to

align the Tax Court’s procedures in this setting with those of the Court of

Claims, and the note specifically referenced Court of Claims Rule 147(b)

(which served as a practical verbatim template for Rule 182) with respect to

the “special weight” to be accorded the findings of the commissioner who

heard the case.

The degree of deference with which the Tax Court judge responsible for

entering the decision in the case was to review the findings of the

commissioner under Rule 182(d) proved to be a central issue in Rosenbaum v.

Commissioner.

There, the reviewing judge noted that he had given “due

regard” to the circumstance that the special trial judge had the opportunity

to see and evaluation the credibility of the witnesses. Nevertheless, the

judge reversed certain findings of the special trial judge, explaining that the

presumption of correctness “does not impair nor dilute our duty of bearing

the ultimate responsibility for determining matters before us.”

On appeal, the D.C. Circuit Court of Appeals in Stone v. Commissioner

reversed and remanded the case based on the level of deference the

reviewing Tax Court judge accorded the findings of the hearing officer.

Describing the level of deference employed by the reviewing Tax Court

judge as “somewhere between de novo review and a mild presumption in

favor of correctness,” the court explained that Rule 182(d) required a

TAX CT. R. 182(d), 60 T.C. 1150 (1973).

Id.

Rules Comm. Note, TAX CT. R. 182(d), 60 T.C. 1150 (1973).

T.C. Memo. 1983-113, 45 T.C.M. (CCH) 825.

Id. at 827.

865 F.2d 342 (D.C. Cir. 1989).

Special Trial Judges 837

“relatively high level of deference” embodied in clearly erroneous review.

The D.C. Circuit based its decision on Rule 182(d)’s emulation of Court

of Claims Rule 147(b). At the time of Rule 182’s adoption, the Court of

Claims reviewed the credibility determinations of its hearing officers under

a clearly erroneous standard.

While the court explained that the Tax

Court was free to establish a different set of rules to govern the relation

between it and its special trial judges, the court determined that the Tax

Court, in adopting Rule 182(d), had chosen language with a well-established

meaning that it could not later disavow.

The Tax Court significantly modified the post-trial procedures

governing cases referred to special trial judges for trial but not for final

decision in 1983. The amended procedures, moved to Tax Court Rule

183,

no longer required a copy of the special trial judge’s report to be

Id. at 344.

Id. at 345 (citing Elmers v. United States, 172 Ct. Cl. 226 (1965)).

Id. at 347. The D.C. Circuit concluded its analysis with the following:

If a simple preponderance of the evidence—half plus a little bit—suffices to

overturn the factual findings of a Special Trial Judge, then it is difficult to

see what value or force attaches to the presumptive correctness of that

judge’s factual determinations, much less the “due regard” owed “to the

circumstance that the [Special Trial Judge] had the opportunity to evaluate

the credibility of the witnesses.”

Id.

81 T.C. 1069 (1983). Rule 183, as amended in 1983, is reproduced below:

Rule 183. Cases Involving More

Than $5,000

Except in cases subject to the provisions of Ru1e 182 or as otherwise

provided, the following procedure shall be observed in cases tried before a

Special Trial Judge:

(a) Trial and Briefs: A Special Trial Judge shall conduct the trial of any

such case assigned to him for such purpose. After such trial, the parties

shall submit their briefs in accordance with the provisions of Rule 151.

Unless otherwise directed, no further briefs shall be filed.

(b) Special Trial Judge’s Report: After all the briefs have been filed by

all the parties or the time for doing so has expired, the Special Trial Judge

shall submit his report, including his findings of fact and opinion, to the

Chief Judge, and the Chief Judge will assign the case to a Division of the

Court.

may adopt the Special Trial Judge’s report or may modify it or may reject it

in whole or in part, or may direct the filing of additional briefs or may

receive further evidence or may direct oral argument, or may recommit the

report with instructions. Due regard shall be given to the circumstance that

the Special Trial Judge had the opportunity to evaluate the credibility of the

witnesses, and the findings of fact recommended by the Special Trial Judge

shall be presumed to be correct.

838 The United States Tax Court – An Historical Analysis

served on the parties. Additionally, the amended procedures eliminated the

round of briefing following submission of the special trial judge’s report

that permitted the parties to record their objections thereto. Instead, Rule

183(b) simply required the special trial judge to submit a report containing

the judge’s proposed findings of fact and opinion to the chief judge of the

Tax Court, who would in turn assign the case to a judge of the court for

disposition. However, the options available to the reviewing judge under

the streamlined procedures remained largely the same. The reviewing judge

could adopt the report, reject or modify the report in whole or in part,

direct the filing of additional briefs, receive additional evidence, schedule

oral argument, or recommit the report to the special trial judge with

instructions. Importantly, the reviewing Tax Court judge remained

obligated under Rule 183(c) to afford “due regard” to the circumstance that

the special trial judge had the opportunity to evaluate the credibility of the

witnesses, and the factual findings of the special trial judge continued to

enjoy a presumption of correctness.

The explanatory note that accompanied the Tax Court’s changes to

these procedures did not provide a rationale for the court’s movement to

the streamlined approach. Years later, in its briefing before the Supreme

Court in Ballard v. Commissioner,

the Commissioner suggested that the Tax

Court eliminated the disclosure of the special trial judge’s report and the

round of briefing that followed out of a desire to expedite the resolution of

cases. The Commissioner cited statements made by Chief Judge

Tannenwald in 1983 warning of an increased number of tax shelter and tax

protestor cases attributable to newly enacted provisions of the Code,

prediction that later was borne out in the Tax Court’s docket.

Additionally, the modification of the Tax Court’s rules in this context were

consistent with modifications the court made in 1976 to its procedures

governing cases that fell outside of the small tax case category but involved

deficiencies less than $2,500. The court eliminated the requirement that the

parties receive the special trial judge’s report with an opportunity to object

in this setting, explaining that the change was made “to dispose of pending

cases more promptly and efficiently.”

544 U.S. 40 (2005). The Ballard litigation is analyzed below in Section E of

this Part.

Brief for Respondent at 35, Ballard v. Commissioner, 544 U.S. 40 (2005)

(citing Treasury, Postal Service, and General Government Appropriations for Fiscal Year

1984: Hearings Before the Subcomm. of the House Comm. on Appropriations, 99th Cong.,

1st Sess. pt. 4, at 8 (1983)).

Id. (citing Treasury, Postal Service, and General Government Appropriations for Fiscal

Year 1987: Hearings Before the Subcomm. of the House Comm. on Appropriations, 99th

Cong., 2d Sess. Pt. 4, at 355, 380 (1986)).

Tax Ct. General Order No. 5, at 1 (Oct. 1, 1976) (cited in Brief for

Respondent, Ballard v. Commissioner, 544 U.S. 40 (2005), at 36). For a discussion

Special Trial Judges 839

The Tax Court’s burgeoning docket during the late 1970’s and early

1980’s suggests that similar considerations of expediency motivated the

court to adopt the streamlined Rule 183 procedures in 1983. The court’s

docket increased from approximately 12,000 pending cases in fiscal year

1970, to 35,000 in 1980, and to more than 58,000 in 1983. Approximately

34,000 new cases were filed in fiscal year 1983 alone. Making matters more

pressing, the court was forced to cancel all trial calendars in the spring of

1982 due to appropriations issues. The court therefore was faced with an

increasing backlog of cases. Many of the cases filed during this period

involved complex tax shelters that had been assigned to special trial judges

and were subject to the former Rule 182 adoption procedures. In response

to the influx of cases, the chief judge significantly increased the number of

special trial judges, from 7 to 17. The decision to no longer serve the

special trial judge’s report on the parties and to eliminate the extra round of

briefing on such report reflected in Rule 183 is best understood as an

additional measure taken by the court to promote the expeditious

disposition of the cases before it.

The Tax Court’s practice of reviewing the reports of special trial judges

came under examination in the cases of Freytag v. Commissioner

and Ballard

v. Commissioner,

both of which are discussed extensively below.

The

Supreme Court in Ballard concluded that the Tax Court had adopted a

practice of “quasi-collaborative” judicial deliberation between the special

trial judge and the reviewing Tax Court judge under Rule 183, one through

which the Tax Court treated the initial report submitted by the special trial

judge as an “in-house draft to be worked over collaboratively by the regular

judge and the special trial judge.”

The Supreme Court in Ballard

determined this “novel” and “anomalous” practice to represent an

unreasonable interpretation of Rule 183.

100

The Supreme Court determined

that the rule instead required the initial (but later withdrawn) report

submitted by the special trial judge to the chief judge to be included in the

of the expansion in the authority of special trial judges occasioned by the 1976

alteration of the Tax Court’s procedures, see text accompanying supra notes 54–56.

In a speech before the American Bar Association Section of Taxation Court

Procedure Committee following the issuance of the Supreme Court’s decision in

Ballard v. Commissioner (discussed below in Section E), Chief Judge Gerber of the

Tax Court described the motivation for the rule change in these terms, describing

the Tax Court’s desire to avoid the previously cumbersome Rule 182 procedures in

the face of a burgeoning caseload. See Chief Judge Joel Gerber, Speech to ABA

Tax Section Court Procedure Committee, at 1–2 (Sept. 16, 2005).

501 U.S. 868 (1991).

544 U.S. 40 (2005).

See Section E of this Part.

Id. at 57.

100

Id. at 57, 59–62.

840 The United States Tax Court – An Historical Analysis

appellate record.

101

In response to the Supreme Court’s decision in Ballard, the Tax Court

amended Rules 182 and 183 in 2005.

102

The 2005 amendments reinstated

the procedure of serving the parties with the report of the special trial judge

pursuant to Rule 183(b), and the parties once again were provided the

opportunity to submit written objections to the findings and conclusions

contained in the special trial judge’s report pursuant to Rule 183(c).

However, the stated level of deference to the special trial judge’s findings

remained unchanged. Newly designated Rule 183(d) continues to provide

that “due regard” is to be given to the circumstance that the special trial

judge had the opportunity to evaluate the credibility of the witnesses, and

that the special trial judge’s findings of fact are to be presumed correct.

103

Additionally, the 2005 revision of the Tax Court rules also added a

paragraph to Rule 182 which addresses cases in which the special trial judge

is statutorily authorized to make the decision of the court. Pursuant to Rule

182(e), if the chief judge decides to assign any such case (other than a small

tax case) to a presidentially appointed judge of the court to prepare the

opinion and make the decision, the court would follow the procedures set

forth in Rule 183.

104

Hence, the proposed findings of fact and opinion

prepared by the special trial judge in such instances would be filed as the

recommended findings of fact and conclusions of law of the special trial

judge as contemplated by Rule 183(b).

105

The 2005 modifications of Tax

Court Rules 182 and 183 were intended to align the Tax Court’s practice in

this area with the procedures employed by Federal district courts to review

the findings and recommendations of a Magistrate Judge.

106

E. Examining the Tax Court’s Procedures for Reviewing Special Trial

Judge Reports: The Saga of Ballard v. Commissioner

The Tax Court’s procedures for reviewing reports submitted by special

trial judges in cases requiring final decision to be entered by a presidentially

appointed judge of the Tax Court have been the subject of considerable

controversy. The controversy emanated from the Tax Court’s 1983

decision to modify its procedural rules to no longer provide litigants with a

copy of the special trial judge’s report as it was assigned to the reviewing

101

Id. at 52.

102

See Rules Comm. Note, TAX CT. R. 183, 125 T.C. 343–47 (2005).

103

Newly designated Rule 183(d) added one element not included in its pre-

1983 predecessor: the requirement that the reviewing judge’s action on the special

trial judge’s report be separately noted by appropriate order or in the judge’s report.

104

TAX CT. R. 182(e), 125 T.C. 342 (2005).

105

Id.

106

Rules Comm. Note, TAX CT. R. 183, 125 T.C. 345–46 (2005).

Special Trial Judges 841

Tax Court judge.

107

Despite the absence of the special trial judge’s report in

the case record, the modified procedures continued to obligate the

reviewing judge to afford deference to the factual determinations made by

the special trial judge in the undisclosed report. The manner in which the

Tax Court reviewed special trial judge reports under this framework

culminated in the Supreme Court decision in Ballard v. Commissioner.

108

The Ballard litigation concerned the Commissioner’s assertion of income

tax deficiencies and a civil tax fraud penalty against two real estate

executives and a prominent tax attorney. The case centered on allegations

that these three individuals participated in a kickback scheme that generated

income the parties failed to report. Several years after a lengthy trial, the

Tax Court issued an opinion that adopted the opinion of the special trial

judge who had presided over trial of the case. The adopted opinion

represented a considerable victory for the Commissioner, as it upheld the

Commissioner’s deficiency determinations and sustained the imposition of

the civil fraud penalty. However, counsel for one of the taxpayers had

reason to believe that the special trial judge had, at some prior stage, drafted

an opinion in favor of the taxpayers—not only on the issue of civil tax

fraud, but on the majority of the underlying deficiency determinations as

well. The taxpayers in the case therefore sought disclosure of what they

referred to as the special trial judge’s original report. The Tax Court

declined, stating that the taxpayers had been provided the special trial

judge’s only report in the case—the one that was adopted by the reviewing

judge. Orders issued by the Tax Court in response to the taxpayers’

motions appeared to acknowledge the existence of prior drafts of the

special trial judge’s report, but the court refused to disclose any such draft

on grounds that disclosure would represent an intrusion into its internal

deliberative process. The dispute between the taxpayers and the Tax Court

therefore appeared to turn on a definitional matter—that is, what document

constituted the report of the special trial judge.

All three taxpayers in the Ballard litigation appealed the decision against

them to the Court of Appeals for the circuit in which they resided. In

addition to contesting the decision on the merits, the taxpayers sought an

order compelling the Tax Court to release the purported original report of

the special trial judge. After the Circuit Courts of Appeals declined to do

so, two of the taxpayers petitioned the Supreme Court for a writ of

certiorari on the disclosure issue alone. Specifically, the taxpayers

contended that the alleged practice of the reviewing Tax Court judge

working with the special trial judge to modify the special trial judge’s initial

107

The Tax Court’s Rules of Practice and Procedure governing review of a

report submitted by a special trial judge, including the 1983 revisions to such rules,

are discussed above in Section D of this Part.

108

544 U.S. 40 (2005).

842 The United States Tax Court – An Historical Analysis

report in the case—to yield a final report that the reviewing Tax Court

judge then would adopt in full—violated the taxpayers’ due process rights

as well as the statute governing appellate review of Tax Court decisions.

Notwithstanding the universal rejection of these claims at the Circuit

Court level, the Supreme Court granted the taxpayers’ certiorari petition. In

its opinion in Ballard, the Supreme Court examined the assumed but

unconfirmed practice of Tax Court judges working with special trial judges

on the content of the final report to be issued by the special trial judge.

The Court held that the Tax Court could not exclude from the record on

appeal the special trial judge’s report as it was first conveyed to the chief

judge of the court for assignment. While the result of the case may have

been predicted given the circumstances leading up to the grant of certiorari,

the rationale for the Court’s decision was somewhat surprising. The Court

did not rule in favor of the taxpayers on the constitutional or statutory

grounds raised by the parties in their certiorari petitions; rather, the Court

determined that the Tax Court failed to follow its published procedures

governing the case.

Following the Supreme Court’s decision in Ballard, the Tax Court

released the original report issued by the special trial judge, a report that the

special trial judge had withdrawn prior to any official action being taken

upon it by the reviewing Tax Court judge. As previously claimed by the

taxpayers, this report had determined that the taxpayers were not liable for

the majority of the asserted income tax deficiencies, much less the civil

fraud penalty. The release of this report ultimately led to decisions in favor

of the taxpayers on the merits.

The Ballard litigation represents one of the more challenging chapters in

the Tax Court’s history. In addition to the Supreme Court’s determination

that the Tax Court had failed to adhere to its procedural rules governing the

case, fallout from the release of the special trial judge’s original but later

withdrawn report in the case led some to question the Tax Court’s integrity.

Even though the Tax Court has since amended the procedural rule that

spawned the Ballard litigation,

109

the story of the Ballard litigation warrants

expanded discussion given the effect of the case on public perception of the

court.

110

In doing so, this Section endeavors to convey the story from a

chronologically accurate standpoint, recounting factual aspects of the

proceedings as they became publicly available.

109

See text accompanying supra notes 102–106.

110

The proceedings in the Ballard litigation and the conduct of the Tax Court

therein received extensive coverage in tax-related periodicals. Coverage of the Tax

Court’s procedures in the case even spilled into the popular press. See, e.g., Louise

Story, A Glimpse Inside U.S. Tax Court and How It Made a Decision, N.Y.

TIMES, July

23, 2005, at C4; Maurice Possley, Tax Court Case Stirs Multiple Questions: Request for

Judge’s Trial Findings Rebuffed, C

HI. TRIB., July 10, 2005, at C1.

Special Trial Judges 843

In many respects, the central dispute in the Ballard litigation was

foreshadowed in the Supreme Court case of Freytag v. Commissioner.

111

Although Freytag is most noted for its determination that the appointment

of special trial judges does not contravene the Appointments Clause of the

Constitution,

112

the taxpayer’s statutory argument in Freytag turned on the

extent of the Tax Court’s review of the special trial judge’s report. The

Supreme Court managed to sidestep the procedural issues in Freytag, but the

case highlighted shortcomings in the Tax Court’s procedures in this

setting—shortcomings the Tax Court failed to address at the time. The

often overlooked procedural aspect of Freytag provides a critical backdrop

to the Ballard litigation.

1. Analysis of Rule 183 Procedures in Freytag v. Commissioner

The Tax Court’s modified procedures under Rule 183 for reviewing the

reports of special trial judges first were examined in litigation that

culminated in the Supreme Court’s decision in Freytag v. Commissioner.

113

Because the particulars of the Tax Court’s review of the special trial judge’s

report proved central to this aspect of the case, they are recounted below.

a. Developments at the Tax Court

The Freytag litigation concerned ten test cases relating to a tax shelter

based on straddle derivative transactions that were consolidated for

discovery, briefing, trial, and decision. Trial of the cases began before Judge

Richard C. Wilbur in November of 1984, but the trial was periodically

postponed on account of Judge Wilbur’s illness. In November of 1985,

Chief Judge Samuel Sterrett of the Tax Court assigned Special Trial Judge

Carlton D. Powell to preside over the trial as an evidentiary referee. The

proceedings were videotaped for the benefit of Judge Wilbur, permitting

him to observe the proceedings from his home. At this point in the case,

Judge Wilbur anticipated that he would prepare his factual findings and

opinion in the case when he recovered. However, Judge Wilbur’s

continued illness eventually forced him to retire from his full-time position

as judge in April of 1986, whereupon he assumed senior status. In July of

1986, Chief Judge Sterrett notified the parties that he intended to assign the

case to Special Trial Judge Powell pursuant to what was then § 7443A(b)(4)

for the preparation of findings of fact and opinion,

114

unless the parties

111

501 U.S. 868 (1991).

112

This aspect of the Freytag case is addressed in Part V.

113

501 U.S. 868 (1991).

114

At that time, § 7443A(b)(4) permitted the Chief Judge of the Tax Court to

assign “any other proceeding which the chief judge may designate” to a special trial

judge, in addition to the types of cases enumerated in prior portions of § 7443A(b).

844 The United States Tax Court – An Historical Analysis

objected. All but one of the taxpayers (whose case was severed) consented

to the assignment, on the condition that either Judge Wilbur or Chief Judge

Sterrett bear responsibility for entering the decision in the case.

115

Trial of the consolidated cases before the Tax Court in Freytag was fairly

complex. The trial consumed 14 weeks of evidence, 9,000 pages of

transcripts, and over 3,000 exhibits.

116

Special Trial Judge Powell, who

already had presided over nine weeks of the trial in his capacity as

evidentiary referee before being formally assigned the case, prepared a

report sustaining the Commissioner’s position on all fronts, including the

imposition of a negligence penalty.

117

On October 21, 1987, Chief Judge

Sterrett issued an order assigning the case to himself for disposition. On

the same day, Chief Judge Sterrett adopted the report of Special Trial Judge

Powell in full.

b. Appeal to the Fifth Circuit

On appeal of their case to the Fifth Circuit Court of Appeals, the

taxpayers challenged the Tax Court’s compliance with the relevant statutory

procedure. Specifically, the taxpayers contended that Chief Judge Sterrett’s

wholesale adoption of Special Trial Judge Powell’s report on the same day

that Chief Judge Sterrett assigned the case to himself effectively permitted

Special Trial Judge Powell to enter the final decision in the case—contrary

to the limitation posed by § 7443A(c).

118

The Fifth Circuit treated the

taxpayer’s contention as a challenge to the subject matter jurisdiction of the

Tax Court, and therefore determined the issue appropriate to hear for the

first time on appeal.

The Fifth Circuit accepted the taxpayers’ contention that Special Trial

Judge Powell submitted his report in the case on the date Chief Judge

Sterrett assigned the case to himself, even though the precise date of such

submission was not reflected in the record. However, the court curtly

rejected the taxpayers’ challenge on the merits: “Our analysis begins and

ends with the simple fact that the opinion in this case was issued by the Tax

Court in the name of the chief judge.”

119

The court found no evidence that

Chief Judge Sterrett failed in his obligation to maintain full responsibility

However, pursuant to § 7443A(c), the special trial judge lacked authority to enter

the final decision in a § 7443A(b)(4) case. Hence, the special trial judge’s report

had to be submitted to a regular judge of the Tax Court for proposed adoption.

115

See Freytag v. Commissioner, 904 F.2d 1011, 1014 (5th Cir. 1990); Brief for

Petitioner, Freytag v. Commissioner, 501 U.S. 868 (1991), at 8.

116

Freytag v. Commissioner, 501 U.S. 868, 871 n.1 (1991) (citing statements of

taxpayers’ counsel at oral argument).

117

See id. at 887–89.

118

See Freytag, 904 F.2d at 1015.

119

Id.

Special Trial Judges 845

for the decision in the case,

120

and the court was not willing to infer

impropriety based on the (presumed) short time span between the filing of

the special trial judge’s report and the issuance of the Tax Court opinion

adopting it.

In addition to stressing the alleged brief amount of time Chief Judge

Sterrett devoted to reviewing the report of Special Trial Judge Powell prior

to adopting it, the taxpayers argued that the Tax Court’s procedures as

written could not be reconciled with § 7443A(c). Rule 183(c) obligated the

reviewing Tax Court judge to regard the factual findings of the special trial

judge as presumptively correct. With respect to the level of deference that

presumption entailed, the District of Columbia Circuit Court of Appeals in

Stone v. Commissioner

121

had interpreted the rule as permitting the reviewing

Tax Court judge to overturn the factual findings of the special trial judge

only if they proved “clearly erroneous.”

122

The taxpayers in Freytag

characterized the Tax Court procedures contained in Rule 183(c), as

interpreted in Stone, as establishing a regime of appellate-like review by the

Tax Court judge. The taxpayers then contended that effective appellate

review of special trial judge reports by the Tax Court violated the statutory

directive under § 7443A(c) that a regular Tax Court judge bear primary

responsibility for the entry of the decision in the case.

123

The Fifth Circuit flatly rejected the taxpayers’ structural argument under

Rule 183(c) as well. The court noted that the Tax Court judge to whom a

§ 7443A(b)(4) case was assigned possessed “full responsibility” for the

decision in the case, rejecting the assertion that the Tax Court judge

conducted his review of the special trial judge’s report from an appellate

posture. The Fifth Circuit justified its position in part by pointing to the

changes to the Tax Court’s procedures as reflected in Rule 183. The

elimination of the parties’ entitlement to a copy of the special trial judge’s

report as it was conveyed to the reviewing Tax Court judge along with the

ability of the parties to file exceptions to such report undermined any

characterization of the reviewing Tax Court judge operating in an appellate

capacity in this context.

124

120

See id. (“We will assume that the judge [acted] in good faith. The record

before us is devoid of any evidence that even remotely suggests otherwise.”).

121

865 F.2d 342 (D.C. Cir. 1989).

122

Id. at 345–47.

123

Brief for Petitioners at 22–23, Freytag v. Commissioner, 501 U.S. 868

(1991).

124

Freytag v. Commissioner, 904 F.2d 1011, 1015 n.8 (5th Cir. 1990).

846 The United States Tax Court – An Historical Analysis

c. The Supreme Court’s Resolution

The taxpayers in Freytag pressed their objection to the application of the

Tax Court’s procedures in the case before the Supreme Court following the

grant of their certiorari petition. The taxpayers contended that “[t]he

special trial judge’s filing of his report and its verbatim adoption by Chief

Judge Sterrett appear from the record to have been virtually

simultaneous.”

125

The taxpayers buttressed their interpretation of the

record with the Fifth Circuit’s observation that Special Trial Judge Powell

filed his report on the same day as its adoption,

126

an observation the Fifth

Circuit had dismissed as irrelevant.

127

Claiming that “[n]o presumption of

administrative regularity [could] convert this into meaningful review,” the

taxpayers characterized the Tax Court’s application of § 7443A(b)(4) in the

case as effectively permitting the special trial judge to enter the final

decision in the case.

128

The taxpayers in Freytag understandably were pleased to cite the Fifth

Circuit’s finding that Special Trial Judge Powell had issued his report in the

case on the same day it was adopted by Chief Judge Sterrett. Yet that

characterization overstated the case. As noted by the Commissioner, the

record on this issue consisted of two documents: an order by Chief Judge

Sterrett formally reassigning the case to himself for disposition and the

entry by Judge Sterrett of his decision adopting the report of Special Trial

Judge Powell on the same day. Neither of these address the date on which

Special Trial Judge Powell first submitted his report to the Chief Judge for

assignment.

129

Indeed, at oral argument, counsel for the taxpayers

acknowledged that Special Trial Judge Powell “sometime in the preceding 4

months had filed a report with the Chief Judge of the tax court.”

130

This

concession, coupled with the complexity of the case, suggested that Chief

Judge Sterrett received Special Trial Judge Powell’s report a considerable

period prior to the day he adopted it as his own.

The taxpayers’ challenge to the application of § 7443A(b)(4) consumed a

considerable portion of the parties’ oral argument before the Court, a

125

Brief for Petitioners at 8, Freytag v. Commissioner, 501 U.S. 868 (1991).

126

Id. at 23–24.

127

See Freytag, 904 F.2d at 1015.

128

Brief for Petitioners at 24, Freytag v. Commissioner, 501 U.S. 868 (1991).

129

See Brief for Respondent at 18 n.9, Freytag v. Commissioner, 501 U.S. 868

(1991). The Commissioner noted that it was the apparent practice of the Tax

Court to formally reassign the case to a regular Tax Court judge only when the

reviewing judge was prepared to enter decision in the case. See id. (citing various

decisions adopting reports of special trial judges and the attendant orders assigning

cases to Tax Court judges).

130

Transcript of Oral Argument at 11, Freytag v. Commissioner, 501 U.S. 868

(1991).

Special Trial Judges 847

surprising fact given that the Tax Court’s application of § 7443A(b)(4) was

of dubious relevance to the questions presented in the taxpayers’ petition

for certiorari. At argument, counsel for the taxpayers did not mince words

concerning the alleged failure of Chief Judge Sterrett to adequately review

the report of the special trial judge: “[T]here is no basis to suppose there

was meaningful review or therefore meaningful supervision that would

enable us to accept this as the decision of the Tax Court rather than that of

the special trial judge himself.”

131

Moments later, counsel for taxpayers

reiterated the point in even stronger terms: “We do think that there is

nothing—absolutely nothing in this record to suggest that the regular tax

court judge actually reviewed the case.”

132

When pressed about the number

of days that would have been sufficient for review of the special trial judge’s

report, counsel for taxpayers returned to the lack of transparency in the

proceedings by noting the Tax Court’s failure to serve the parties with the

special trial judge’s report:

The Government simply tries to suggest that perhaps it was 5 days or

2 days or 14 days – who knows? The parties can’t know, because

they have no opportunity to see the special trial judge’s report or

know when it is filed or object to it, unlike the procedure in the

Magistrate’s court.

133

As these excerpts indicate, the conduct of the Tax Court and,

specifically, Chief Judge Sterrett, was being called into question. Making

matters interesting, Chief Judge Sterrett was present in the courtroom as a

spectator. The colloquy below provides some indication of the

awkwardness of the situation. Additionally, the exchange reflects both the

taxpayers’ frustration at not being provided with the special trial judge’s

report as it was submitted to the chief judge for assignment and the Court’s

reluctance to assume that Chief Judge Sterrett lacked familiarity with the

case until he formally assigned it to himself:

QUESTION: The first -- Judge Sterrett was chief judge.

MS. SULLIVAN: That’s right.

QUESTION: He knew what was going on.

MS. SULLIVAN: Well --

131

Transcript of Oral Argument at 11, Freytag v. Commissioner, 501 U.S. 868

(1991).

132

Id. at 12–13.

133

Id. at 12.

848 The United States Tax Court – An Historical Analysis

QUESTION: He must have known what was going on.

MS. SULLIVAN: Actually, Your Honor --

QUESTION: I’d like to ask him. He’s present in the courtroom --

(Laughter.)

MS. SULLIVAN: Like the line in Annie Hall where Woody Allen

says, I just happen to have Marshall McLuhan right here.

(Laughter.)

MS. SULLIVAN: I won’t ask him, Your Honor. What I would like

to point out not that -- we cast no aspersion on Chief Judge Sterrett

personally in the least. What we are doing here in the absence of any

evidence that there was meaningful review is arguing about what we

should presume from the regular procedures of the tax court that

Chief Judge Sterrett can be expected faithfully to adhere to. And the

published rules of the tax court say you reassign the special trial

judge’s case to a judge of the tax court and then that judge reviews it.

QUESTION: Ms. Sullivan.

MS. SULLIVAN: Yes, Justice?

QUESTION: Would you be satisfied with the usual expression that I

think you and I have seen of an appellate court judge who says, I

have reviewed all of the objections of appellate [sic] and find no

merit in any of them? Is that what you want?

MS. SULLIVAN: I believe we might accept that, Justice Marshall.

But the fact is under the tax court’s rules, the chief judge of the tax

court could not review all of the objections of the parties to the

special trial judge's findings because they never got to see them.

Up until 1984, the tax court had provided by its rules for

exceptions by the parties to the special trial judge’s report and an

opportunity to try to get the tax court judge to reject some of those

findings. That opportunity was eliminated in 1984.

134

Transcript of Oral Argument at 13-15, Freytag v. Commissioner, 501 U.S.

868 (1991).

Special Trial Judges 849

Following the lengthy discussion of the Tax Court’s procedures in the case,

the Court questioned whether these matters were properly subsumed in the

questions presented in the taxpayers’ certiorari petition. Only then did

counsel conclude her argument of the case on statutory grounds, spending

the few remaining minutes of oral argument addressing the Appointments

Clause issue.

Notwithstanding the Court’s apparent uneasiness concerning the

relevance of the Tax Court’s application of § 7443A(b)(4) to the appeal

before it, the Court pressed the Commissioner’s counsel at oral argument

concerning the presumption of correctness afforded to the special trial

judge’s findings of fact under Tax Court Rule 183(c). After noting that the

taxpayers failed to raise the issue before the Tax Court—the body best

equipped to resolve issues concerning the application of its procedural

rules—counsel for the Commissioner contended that Rule 183(c) did not

contravene the statutory requirement that a regular Tax Court judge enter

decision in § 7443A(b)(4) cases. Conceding on brief that the presumption

of correctness contained in Rule 183(c) was “not ideal,”

135

counsel

contended that the presumption merely provided a starting point for the

consideration of the case by the regular Tax Court judge. Accordingly, the

benefit of the presumption of correctness was confined to its resulting

inertia. In the Commissioner’s view, this process fell far short of an

effective abdication of the Tax Court judge’s responsibility to enter the

decision in the case.

136

Later in the argument, counsel for the Commissioner addressed the

relevance of the Tax Court’s failure to serve the parties with the special trial

judge’s report. In short, the Commissioner found no fault with the

procedure, given that the special trial judge possessed no statutory authority

with respect to cases assigned under § 7443A(b)(4):

And again to get back to the relationship between the regular tax

court judge and the special trial judge, it is internal. Petitioners

object, we never had a chance to review the report. We never had a

chance to object to it. And they say that's very different than the

procedure that applies with respect to magistrates. That’s our point

exactly. A magistrate decides a matter that he is -- he is hearing -- a

civil trial. And therefore, the parties need to be able to review that

decision to determine if they want to object and seek further review.

135

Brief for Respondent at 19, Freytag v. Commissioner, 501 U.S. 868 (1991).

Counsel for the Commissioner at oral argument conceded that if the presumption

of correctness necessitated the application of a “clearly erroneous” standard of

review, then the Tax Court rule “might well” violate the statute. Transcript of Oral

Argument at 40, Freytag v. Commissioner, 501 U.S. 868 (1991).

136

Id. at 34–35.

850 The United States Tax Court – An Historical Analysis

Special trial judge under subsection (b)(4) decides nothing, and

therefore, it’s perfectly appropriate that there is no opportunity for

review and objection, just as there is not an opportunity for a party

to review and object to a law clerk’s draft that is -- that is submitted

to a judge. A law clerk acts as an aide and assistant to the judge, just

as a special trial judge does to a regular judge under this provision.

137

Despite the portion of the parties’ briefs and oral arguments devoted to

the issue of whether the Tax Court procedures effectively enabled the

special trial judge to enter the Tax Court’s decision in contravention of the

statutory structure set out in § 7443A(b)(4) and (c), the Supreme Court

barely touched on these issues when it issued its decision in the Freytag case.

The Court did not address at all the compatibility of the presumption of

correctness to be afforded to the special trial judge’s findings of fact under

Rule 183(c) with the statutory scheme. Concerning the taxpayers’

contentions regarding the alleged failure of Chief Judge Sterrett to

meaningfully review Special Trial Judge Powell’s report, the Court

dispensed with the matter by footnote. In doing so, the Court followed the

Fifth Circuit’s lead in refusing to infer impropriety on the basis of a thin

record alone:

In any event, this chronology does not appear to us to be at all

significant. The Chief Judge had the duty to review the work of the

Special Trial Judge, and there is nothing in the record disclosing how

much time he devoted to the task. As Chief Judge, he was aware of

the presence of the several cases in the court and the magnitude of

the litigation. The burden of proof as to any negative inference to be

drawn from the time facts rests on petitioners. We are not inclined

to assume “rubber stamp” activity on the part of the Chief Judge.

138

Even though the Supreme Court in Freytag rejected the taxpayers’

argument that the Rule 183 procedures could not be reconciled with

§ 7443A(c), the case served to highlight shortcomings in the streamlined

procedures. The points raised concerning the length of Chief Judge

Sterrett’s review of Special Trial Judge Powell’s report suggested the need to

clarify the reviewing Tax Court judge’s right to access to the workings of

the special trial judge prior to the submission of the special trial judge’s

formal report. The procedures could have been modified further to

acknowledge expressly the reviewing Tax Court judge’s ability to consult

with the special trial judge in the preparation of the special trial judge’s

report. Additionally, the Freytag litigation highlighted the potential

137

Id. at 36–37.

138

Freytag v. Commissioner, 501 U.S. 868, 872 n.2 (1991).

Special Trial Judges 851

problems stemming from the presumption of correctness afforded to the

factual findings of the special trial judge. To reinforce the reviewing judge’s

responsibility for the case, Rule 183(c) could have been revised to eliminate

this presumption in favor of de novo review,

139

while maintaining the

requirement that “due regard” be provided to the presiding judge’s ability to

evaluate the credibility of the witnesses’ testimony. However, Rule 183(c)

was not revised in the aftermath of Freytag, leaving many of these issues to

be raised once again in the course of the litigation in Ballard.

2. The Initial Tax Court Opinion in Ballard

The litigation that culminated in the Supreme Court’s decision in Ballard

v. Commissioner had its origins in an alleged kickback scheme involving three

individuals: Claude M. Ballard, Robert W. Lisle, and Burton W. Kanter.

Ballard and Lisle served as senior real estate executives with Prudential Life

Insurance Company of America (Prudential), which during the relevant

time period held one of the largest commercial real estate portfolios in the

country. Their senior status within the company enabled Ballard and Lisle

to exert considerable influence over Prudential real estate transactions and

lending operations. Kanter was a prominent Chicago tax attorney who

counseled a number of high-profile clients, including the Pritzker family,

owners of the Hyatt Corporation. In addition to his legal practice, Kanter

taught at his alma mater, the University of Chicago Law School, and he

originated the renowned “Shop Talk” column in the Journal of Taxation.

Kanter was known for his aggressive tax planning techniques, including

those he employed to help finance the production of movies during the

1960’s and 1970’s, including “One Flew Over the Cuckoo’s Nest.”

Kanter’s aggressive tax planning apparently carried over to his personal

finances, leading the Seventh Circuit Court of Appeals to note that “from

1979 to 1989 Kanter, who hobnobbed with Pritzkers and Hollywood

producers and who participated in countless extremely large and lucrative

business ventures, reported a negative adjusted gross income each year on

his federal tax return and paid no federal income taxes.”

140

Kanter’s

activities drew the attention of the IRS, to put it mildly. He and various of

139

De novo review of a hearing officer’s findings in the civil context does not

implicate due process concerns. As explained by Judge Cudahy in his separate

opinion in the Seventh Circuit’s initial consideration of the Estate of Kanter case,

“the Fifth Amendment does not require that the Tax Court review STJ findings

using any particular degree of deference. . . . [T]here is no constitutional

requirement that the Tax Court use an appellate-style review of its STJ reports.”

Estate of Kanter v. Commissioner, 337 F.3d 833, 882 (7th Cir. 2003) (Cudahy, J.,

concurring in part and dissenting in part).

140

Id. at 838.

852 The United States Tax Court – An Historical Analysis

his closely held entities were audited by the Service “virtually, if not literally,

every year since Richard Nixon was President.”

141

In the early 1970’s, Kanter met Lisle and Ballard at the grand opening of

the Hyatt Regency Hotel in Houston, Texas. The three became friends,

and, according to the IRS, their friendship led to an arrangement whereby

Kanter assisted Ballard and Lisle in collecting fees in exchange for

exercising their influence over Prudential’s real estate investment decisions.

These fees were paid into an entity controlled by Kanter, Investment

Research Associates, Ltd., or one of its subsidiaries. The fee income,

totaling approximately $5 million by the end of 1983, later was distributed

in a 45-45-10 ratio to corporations controlled by Ballard, Lisle, and Kanter,

respectively.

After discovering and investigating this arrangement, the Service issued

deficiencies notices to Ballard, Lisle, and Kanter, for 1975 through 1982,

1984, and 1987 through 1989 alleging that the three individuals received

millions of dollars of income from the arrangement that they failed to

report. The individuals and their related entities petitioned the Tax Court

for review. On January 7, 1994, Chief Judge Lapsley W. Hamblen assigned

the consolidated cases to Special Trial Judge D. Irwin Couvillion for trial

pursuant to § 7443A(b)(4).

142

The notices of deficiency issued by the Commissioner in the case failed

to assert the civil fraud penalty. The Commissioner thereafter sought to

amend its answers in the cases to raise the fraud penalty, and the parties and

the Court agreed that the amended answers would not be filed until the trial

commenced in June 1994.

143

Hence, the case did not raise the prospect of

fraud when it was assigned to Special Trial Judge Couvillion for trial.

The trial took place largely over the summer of 1994, consuming five

weeks of actual trial time. Over 50 witnesses testified at the trial, and the

resulting transcript of the proceeding spanned approximately 6,000 pages.

In addition, the parties introduced thousands of exhibits into evidence, and

these exhibits consumed hundreds of thousands of pages.

The parties concluded their post-trial briefing in the case in March 1996.

The next communication from the Tax Court came on December 15, 1999,

the day on which Chief Judge Mary Ann Cohen issued an order by which

141

Id.

142

At the time, § 7443A(b)(4) permitted a special trial judge to hear any

assigned case. However, the special trial judge could not enter the decision in a

case assigned under this provision; rather, the decision had to be entered by a

presidentially appointed judge of the court. See IRC § 7443A(c). Given the

expansion of the types of cases a special trial judge may hear, former § 7443A(b)(4)

now is contained in § 7443A(b)(7).

143

See Investment Research Assocs., Ltd. v. Commissioner, T.C. Memo. 1999-

407, 78 T.C.M. (CCH) 951, 1076.

Special Trial Judges 853

she “reassigned” the case to Judge Howard A. Dawson, Jr.

144

for

disposition. The order provided that Judge Dawson had been assigned the

case on September 2, 1998, suggesting that Special Trial Judge Couvillion

had submitted his report to Chief Judge Cohen on or before that date. On

the same day the order reassigning the case to Judge Dawson was entered,

Judge Dawson issued a memorandum opinion that “agree[d] with and

adopt[ed] the opinion of the Special Trial Judge.”

145

The decision then

reproduced the opinion of Special Trial Judge Couvillion in full.

The incorporated opinion, over 600 pages in length, represented a

considerable victory for the Service. The opinion upheld substantially all of

the Commissioner’s deficiency determinations. Most notably, the opinion

sustained the Commissioner’s imposition of the penalty for civil tax fraud.

3. Post-Trial Developments

Counsel for the taxpayers in Investment Research Associates came away from

the case anticipating a decision in their favor based on comments made by

Judge Couvillion at trial.

146

According to one of Kanter’s attorneys, Randall

G. Dick, he had occasion to speak with one or more judges of the Tax

Court about the case. These judges reportedly informed him that Special

Trial Judge Couvillion had initially submitted a report holding in favor of

the taxpayers. Pursuant to these conversations, Dick became convinced

that Judge Couvillion’s findings had been reversed in a manner not reflected

in the record.

147

Thereafter, in April 2000, the taxpayers filed a motion with the Tax

Court seeking access to “all reports, draft opinions, or similar documents

prepared and delivered to the Court pursuant to Rule 183(b).”

148

Judge

Dawson denied the motion by order dated April 26, 2000, explaining as

follows:

144

At the time, Judge Dawson had assumed senior status, having served two

full terms as a Tax Court judge from 1962 to 1985.

145

Investment Research Assocs., Ltd. v. Commissioner, T.C. Memo. 1999-407,

78 T.C.M. 951, 963.

146

See Brief for Petitioner at 5–6, Ballard v. Commissioner, 544 U.S. 40 (2005).

According to counsel for Kanter, Special Trial Judge Couvillion stated “I’m waiting

to hear the fraud case,” when the Government rested at trial. Sam Young, Kanter

Plaintiffs Call for Investigation of Tax Court Judges, 126 T

AX NOTES 1181, 1182 (Mar. 8,

2010).

147

These conversations were later recounted by Dick in an affidavit filed in

August 2000. The details of the affidavit are discussed in text accompanying infra

notes 152–154.

148

See Tax Court Order dated August 30, 2000 (describing the contents of the

taxpayers’ initial request).

854 The United States Tax Court – An Historical Analysis

[P]etitioners’ motion requesting access to any internal Court

documents, including any preliminary drafts of reports or opinions,

documents, memorandums or notes by judges, special trial judges or

employees of the Court, will be denied. In any event such materials

are confidential and not subject to production because they relate to

the internal deliberative processes of the Court.

149

As part of the order, Judge Dawson stated that he gave due regard to the

fact that Special Trial Judge Couvillion evaluated the credibility of the

witnesses, and that he regarded the findings of fact recommended by the

Judge Couvillion to be presumptively correct.

150

A month later, the taxpayers moved to place Special Trial Judge

Couvillion’s initial post-trial report under seal and to include it in the

record, thereby making it available for appellate review. The Tax Court

denied this order as well.

151

Having been twice rebuffed in their efforts to gain access to what they

believed to be Special Trial Judge Couvillion’s original report in the case or,

at a minimum, cause such report to be included in the record under seal,

Mr. Dick swore out an affidavit detailing the particulars of his informal

communications with judges of the Tax Court concerning the case. Mr.

Dick declared that he had been informed by two judges of the court that

Special Trial Judge Couvillion, in his original report that he submitted to the

Chief Judge, had concluded that the taxpayers did not realize unreported

income from the transactions at issue and that the civil fraud penalty was

not applicable.

152

According to the affidavit, these judges told Mr. Dick

that “substantial sections of the opinion were not written by Judge

Couvillion,” and that the portions of the opinion relating to the finding of

fraud “were wholly contrary to the findings made by Judge Couvillion in his

report.”

153

Mr. Dick testified that he had confirmed these events with a

third judge of the Tax Court.

154

Armed with Mr. Dick’s declaration, the taxpayers on August 22, 2000,

filed a motion seeking reconsideration of the court’s previous denial of the

149

Tax Court Order dated April 26, 2000.

150

Id.

151

Tax Court Order dated May 30, 2000.

152

Affidavit of Randall G. Dick, Aug. 21, 2000, at ¶ 4.

153

Id. ¶ 5. The amicus brief filed by the Estate of Burton Kanter—represented

in part by Randall Dick—in support of the certiorari petition filed by Ballard

explains that Mr. Dick believed that his legal obligations to his client required

testifying to the statements made to him by unnamed judges of the court. Brief of

Joshua S. Kanter, as Executor of the Estate of Burton W. Kanter, as Amicus Curiae

in Support of Petitioners, Ballard v. Commissioner, Docket No. 03-184, at 7 n.2 (Oct.

6, 2003).

154

Id. ¶ 7.

Special Trial Judges 855

taxpayers’ motion for access to what they believed to be Special Trial Judge

Couvillion’s initial report in the case. In the alternative, this last motion

requested a new trial—before someone other than Judge Dawson. On

August 30, 2000, the Tax Court denied the taxpayers’ motion once again.

However, at this point, the court provided a more thorough explanation of

its position:

In the present motion . . . Randall G. Dick, . . . for the first time

in the motion and in his declaration attached thereto, has made

general assertions, without specificity, that two or three judges of the

Court informed him that an original report of Special Trial Judge

Couvillion “concluded that payments made [by those seeking

Prudential’s business] were not taxable to the individual Petitioners

and that the fraud penalty was not applicable.” Although Mr. Dick

states in his declaration that some judges commented about the

procedures involved in handling these cases, whatever may have

been said to Mr. Dick is irrelevant and immaterial.

The only official Memorandum Findings of Fact and Opinion by

the Court in these cases is T.C. Memo. 1999-407, filed on December

15, 1999, by Special Trial Judge Couvillion, reviewed and adopted by

Judge Dawson, and reviewed and approved by former Chief Judge

Cohen.

Judge Dawson states and Special Trial Judge Couvillion agrees,

that, after a meticulous and time-consuming review of the complex

record in these cases, Judge Dawson adopted the findings of fact and

opinion of Special Trial Judge Couvillion, that Judge Dawson

presumed the findings of fact recommended by Special Trial Judge

Couvillion were correct, and that Judge Dawson gave due regard to

the circumstance that Special Trial Judge Couvillion evaluated the

credibility of the witnesses.

The order was signed by Chief Judge Thomas B. Wells, Judge Dawson, and

Special Trial Judge Couvillion.

After this final rejection by the Tax Court, the taxpayers petitioned the

appropriate Circuit Courts of Appeals seeking for a writ of mandamus

ordering the Tax Court to release the initial post-trial report issued by

Special Trial Judge Couvillion in the case. All such petitions were denied.

155

The taxpayers thereafter appealed the decision against them on the merits.

155

See In re Estate of Lisle, No. 00-60637 (5th Cir. Sept. 18, 2000); In re

Ballard, No. 00-14762-H (11th Cir. Oct. 23, 2000); In re Investment Research

Assocs., No. 00-3369 (7th Cir. Dec. 15, 2000).

856 The United States Tax Court – An Historical Analysis

However, as part of the taxpayers’ appeal on the merits, each taxpayer

continued to seek access to the special trial judge’s initial post-trial report in

the case. Lisle’s appeal was prosecuted by his estate, which was subject to

administration in Texas. Kanter died during the period of appeal of his

decision, and his estate was subject to administration in Illinois. Ballard had

since moved to Florida. Accordingly, appeals from the case rested in three

different Circuit Courts of Appeals: the Fifth Circuit, the Seventh Circuit,

and the Eleventh Circuit, respectively.

4. Treatment at the Circuit Courts of Appeals

a. The Eleventh Circuit in Ballard

The Eleventh Circuit Court of Appeals issued the first appellate decision

in the litigation, resolving the appeal prosecuted by Ballard.

156

In addition

to contesting the sufficiency of the evidence supporting the Tax Court’s

findings, Ballard argued that the Tax Court’s procedures denying access to

the initial post-trial report issued by the special trial judge in the case

violated his due process rights. Ballard’s due process argument proceeded

from a number of angles. First, he analogized the use of special trial judges

by the Tax Court to the use of magistrate judges and special masters by a

Federal district court, noting that the Tax Court provided the lone example

of a federal court that required the official presiding over trial to submit a

report of proposed findings of fact and opinion to the court for adoption,

modification, or rejection before making the report available to the parties.

In Ballard’s view, the Tax Court’s departure from this universally accepted

practice through Rule 183 led to a presumptive denial of due process.

Apart from this broader objection, Ballard contended that the Tax Court’s

failure to include the initial report of Special Trial Judge Couvillion in the

record made it impossible to determine if Judge Dawson afforded his

factual findings the requisite presumption of correctness. Lastly, Ballard

contended that the absence of the initial report precluded meaningful

appellate review of the Tax Court’s actions.

157

The Eleventh Circuit noted that Ballard’s arguments all were premised

on the assertion that “the underlying report adopted by the Tax Court [was]

not, in fact, Special Trial Judge Couvillion’s report.”

158

In the court’s view,

Ballard’s assertion was belied by the record before it, which “clearly

reveal[ed]” that the report adopted by Judge Dawson was that of Special

Trial Judge Couvillion.

159

The Eleventh Circuit relied heavily on the August

156

See Ballard v. Commissioner, 321 F.3d 1037 (11th Cir. 2003).

157

See id. at 1042 (summarizing Ballard’s due process arguments).

158

Id.

159

Id.

Special Trial Judges 857

30, 2000 order signed by Special Trial Judge Couvillion along with Chief

Judge Wells and Judge Dawson.

160

However, the Eleventh Circuit did not rest its rejection of Ballard’s due

process contentions on the record alone. After assuming the truth of the

allegations contained in Mr. Dick’s affidavit, the court nonetheless found

Ballard’s due process claim wanting:

While the procedures used in the Tax Court may be unique to that

court, there is nothing unusual about judges conferring with one

another about cases assigned to them. These conferences are an

essential part of the judicial process when, by statute, more than one

judge is charged with the responsibility of deciding the case. And, as

a result of such conferences, judges sometimes change their original

position or thoughts. Whether Special Trial Judge Couvillion

prepared drafts of his report or subsequently changed his opinion

entirely is without import insofar as our analysis of the alleged due

process violation pertaining to the application of Rule 183 is

concerned.

161

After disposing with Ballard’s due process claim, the Eleventh Circuit

proceeded to affirm the Tax Court decision on the merits.

b. The Seventh Circuit Majority in Estate of Kanter

The Seventh Circuit Court of Appeals was next to weigh in, hearing the

appeal prosecuted by Kanter’s estate.

162

During argument before the

Seventh Circuit, the taxpayers’ counsel was pointedly asked which Tax

Court judges had spoken informally with Mr. Dick.

163

Counsel identified

those judges as Judge Julian I. Jacobs, and Chief Special Trial Judge Peter J.

Panuthos.

164

The Seventh Circuit, in a divided opinion, followed the lead of the

Eleventh Circuit in rejecting the taxpayers’ due process claims. As an initial

matter, the court determined that all of the taxpayers’ claims were rendered

160

Perhaps obviously, the Eleventh Circuit was most persuaded by the

participation of Special Trial Judge Couvillion in the order: “[W]e . . . save for

another day the more troubling question of what would have occurred had Special

Trial Judge Couvillion not indicated that the report adopted by the Tax Court

accurately reflected his findings and opinion.” Id. at 1043.

161

Id.

162

See Estate of Kanter, 337 F.3d 833 (7th Cir. 2003).

163

See id. at 875–76 n.1 (Cudahy, J., concurring in part and dissenting in part).

164

Id. at 875. Counsel was not asked for the name of the third Tax Court

judge alleged to have confirmed the contents of Mr. Dick’s conversations with the

two named individuals.

858 The United States Tax Court – An Historical Analysis

moot because the underlying report adopted by the Tax Court was, in fact,

the report authored by Special Trial Judge Couvillion, as recited in the

opinion itself.

165

The court observed that any preliminary

recommendations of Special Trial Judge Couvillion—“if they ever

existed”—would lack relevance as having been abandoned.

166

The court was not troubled by the allegation that the facially

straightforward statement by Judge Dawson in the opinion—that he agreed

with and adopted the report of the special trial judge—may have masked a

“quasi-collaborative judicial deliberation” between the two. Even if this

process rendered the factual determinations of the special trial judge

“malleable,”

167

the court determined that such a practice would not offend

its notions of fundamental fairness, much less rise to the level of a due

process violation. The Seventh Circuit grounded its rejection of the

taxpayers’ due process claims in the statutory regime governing the

assignment of cases to special trial judges under § 7443A(b)(4). Because the

Tax Court maintains sole authority to enter the decisions in these cases, the

reviewing Tax Court judge serves as the original finder of fact. As such, the

deference the Tax Court judge had to afford the preliminary factual findings

of the special trial judge was necessarily limited. While the Tax Court

procedures obligated the reviewing judge to afford due regard to the special

trial judge’s ability to evaluate the credibility of the witnesses while

presuming the preliminary factual findings to be correct, the Seventh Circuit

explained that the presumption operated as a mere starting point. The Tax

Court could overcome the presumption by finding evidence that suggested

the preliminary findings were incorrect. The Seventh Circuit flatly rejected

the taxpayers’ contention that the factual findings of the special trial judge

could be overturned only if clearly erroneous, finding that such an approach

would “all but abdicate the Tax Court’s original decisionmaking

authority.”

168

From this perspective, the special trial judge’s report lacked

little if any independent significance. The Seventh Circuit therefore

regarded suppression of the report pursuant to Tax Court procedures to be

inconsequential.

169

The taxpayers in Estate of Kanter contended that inclusion of the special

trial judge’s initial report in the case was necessary to facilitate effective

appellate review by an article III court. Not only did the Seventh Circuit

reject this argument, it turned the argument on its head. Citing its

jurisdiction to review “decisions” of the Tax Court pursuant to § 7482(a)(1)

165

Id. at 840–41.

166

Id. at 844.

167

Id. at 841.

168

Id. at 841. In this regard, the Seventh Circuit’s opinion in Estate of Kanter

mirrors the position taken by the Commissioner at oral argument in the Freytag

case. See Section E.1.c. of this Part.

169

Id. at 841–42.

Special Trial Judges 859

as opposed to “reports,” the court concluded that the special trial judge’s

report was not reviewable on appeal. The Seventh Circuit observed that the

scope of its appellate jurisdiction lent credence to the Commissioner’s view

that the reports of special trial judges were properly regarded as preliminary

factual findings that arise in the course of the Tax Court’s internal

deliberative process.

170

Indeed, the court analogized the review of a special

trial judge’s report by a Tax Court judge to the occasional review of the

report of a Tax Court judge by the full Tax Court. Citing § 7460(b), the

Seventh Circuit observed that portions of the report issued by the Tax

Court judge presiding over the case that were not adopted in the final

opinion emanating from court conference were not preserved in the record

for later review. Accordingly, not all “reports” of the Tax Court

necessitated publication or even inclusion in the record.

c. The Estate of Kanter Dissent

As mentioned above, the Seventh Circuit in Estate of Kanter did not issue

a unanimous decision. Through a separate 24-page opinion in the case,

Judge Cudahy explained his belief that the Tax Court’s failure to include the

initial post-trial report issued by the special trial judge in the record on

appeal constituted a violation of the taxpayers’ Fifth Amendment due

process rights. Given the considerable influence of Judge Cudahy’s dissent

in the Supreme Court’s later resolution of the case, Judge Cudahy’s

rationale is discussed at length below.

Judge Cudahy devoted considerable attention to the Tax Court’s

practice of reviewing the reports of special trial judges before turning to his

legal analysis. While Judge Cudahy did not necessarily accept Kanter’s

alleged version of events as fact, he agreed with the taxpayers that the Tax

Court’s routine declaration in this setting that it “agrees with and adopts the

opinion of the Special Trial Judge” did not mean that the Tax Court’s

opinion represented a verbatim adoption of the special trial judge’s original

report in the case.

171

Rather, Judge Cudahy found that the record

supported the view that the Tax Court engaged in a “quasi-collaborative

process of review” of the special trial judge’s initial report from which a

new and frequently revised report emerged to be adopted in full by the Tax

Court judge.

172

Judge Cudahy based this determination primarily on the

extraordinary consistency with which Tax Court judges adopted the reports

of special trial judges without objection or modification. Having reviewed

880 decisions involving a special trial judge report since the then-current

Rule 183 procedures had been adopted, Judge Cudahy observed that the

170

Id. at 842.

171

Id. at 875 (Cudahy, J., concurring in part and dissenting in part).

172

Id. at 876.

860 The United States Tax Court – An Historical Analysis

Tax Court never once failed to adopt the proposed opinion of the special

trial judge. He regarded this degree of unanimity “impossible” among all of

the judicial officers of the Tax Court.

173

Judge Cudahy’s legal analysis

therefore presumed some degree of a collaborative process between a

special trial judge and the reviewing Tax Court judge from the time the

special trial judge issued his initial post-trial report in the case to the time

the Tax Court issued the ultimate opinion in the case.

Judge Cudahy did not regard the alleged collaborative process between

the special trial judge and the reviewing Tax Court judge as per se

objectionable; rather, he recognized that the opportunity of the special trial

judge to receive additional input into the decision making process may

enhance the quality of the final product.

174

From this standpoint, Judge

Cudahy proceeded to note the various grounds on which he agreed with the

majority opinion, albeit reluctantly at times. First, he agreed that Rule

183(c) did not require the report of the special trial judge to be reviewed

under a clearly erroneous standard, rejecting the taxpayers’ invocation of

the D.C. Circuit’s holding in Stone v. Commissioner.

175

Second, even though

he acknowledged that the Tax Court’s application of Rule 183 necessitated

the existence of two reports (that is, the initial report conveyed to the chief

judge and the final opinion reviewed and adopted by the Tax Court), Judge

Cudahy did not find that the Tax Court had violated its procedure under

Rule 183.

176

He noted that the Tax Court enjoys a considerable level of

deference in interpreting its procedural rules;

177

hence, he accepted the Tax

Court’s position that Rule 183 no longer required the production of special

trial judge reports even while lamenting the movement away from

transparency reflected in the amended procedure. Last, Judge Cudahy

acknowledged that although the statutory regime governing the publication

of Tax Court reports created a strong presumption in favor of public

dissemination of Tax Court documents, nothing in those statutes

specifically required the Tax Court to make the initial report of the special

trial judge public.

178

Turning to the taxpayers’ due process claims, Judge Cudahy again found

a number of points of agreement with the majority opinion. Reviewing

173

Id.

174

Id. at 883, 887.

175

See id. at 887–88. Judge Cudahy found the holding of the D.C. Circuit in

Stone v. Commissioner, 865 F.2d 342 (D.C. Cir. 1989) (that the presumption of

correctness provided under former Rule 182 necessitated a clearly erroneous level

of deference to the special trial judge’s findings), to have been superseded by the

Tax Court’s adoption of new procedures that eliminated production of the special

trial judge’s report. See id. at 878.

176

Id. at 878.

177

Id.

178

See id. at 881.

Special Trial Judges 861

relevant Supreme Court precedent, Judge Cudahy concluded that, outside

of the criminal setting, due process does not require the ultimate finder of

fact to be constrained by a formal degree of deference to the hearing

officer. As appellate-style review of special trial reports was not

constitutionally required, the Tax Court’s presumed quasi-collaborative

model in this setting was not constitutionally precluded.

179

Consistent with

this approach, Judge Cudahy concluded that any reversal of the special trial

judge’s initial factual findings by the Tax Court judge as a result of the

collaborative process did not offend a taxpayer’s due process rights—even

if the reviewing Tax Court judge did not first rehear the testimony of the

relevant witness.

180

This discussion led to the one due process point on which Judge

Cudahy differed from the majority: the taxpayer’s due process right to

appellate review of the Tax Court’s decision. Judge Cudahy viewed the

appellate court’s access to the initial findings of the special trial judge as

indispensable to its task of evaluating the findings in the final Tax Court

opinion under the requisite clearly erroneous standard of § 7482(a). In

explaining his conclusion, Judge Cudahy parsed the operation of clear-error

review. Specifically, he explained that clear error standard of review did not

yield a uniform level of deference to be afforded to all factual findings.

Rather, the greater a factual finding turned on the ability of the hearing

officer to evaluate the credibility of the witness, the greater a degree of

deference was owed.

181

From this standpoint, an appellate court would not

be able to know the degree of deference to be afforded to the findings of

fact in the Tax Court’s opinion unless it were aware of the extent to which

those findings differed from those of the special trial judge.

182

Judge

Cudahy found the need for the special trial judge’s initial findings

particularly pressing in the “quasi-criminal” context of civil tax fraud: “I

can think of no single item of more significance in evaluating a Tax Court’s

decision on fraud than the unfiltered findings of the STJ who stood watch

over the trial.”

183

179

See id. at 882.

180

Id. at 883–84.

181

See id. at 884 (citing Anderson v. City of Bessemer City, N.C., 470 U.S. 564

(1985)).

182

See id. at 885 (“If we are to give ‘even greater deference’ to the findings of a

judge who has heard the witness whose credibility is at stake, we must inevitably

give less deference to the judge who subsequently reverses those findings.”).

183

Id. at 886. The dissent ultimately reached the conclusion that the failure of

the Tax Court to include the initial report of the special trial judge in the record on

appeal constituted a due process violation based on a three-part balancing test

suggested by Supreme Court precedent. Judge Cudahy found that the quasi-

criminal nature of a civil fraud determination gave rise to a more significant private

interest on the part of the taxpayer than a simple civil determination. The risk of

862 The United States Tax Court – An Historical Analysis

To his credit, Judge Cudahy addressed the most glaring and difficult

retort to his position: The special trial judge signs the final report that is

adopted by the Tax Court, thereby certifying the correctness of any factual

findings that may have been modified in the process of the collaborative

review. Judge Cudahy observed that the alleged quasi-collaborative process

could yield such a result, whereby the “original impressions of the STJ are

tempered through the collaborative process with the Tax Court, and . . . the

Tax Court’s opinions would be molded and informed by the first-hand

impressions of the STJ.”

184

However, Judge Cudahy was not willing to

accept this “utopian” characterization of the Tax Court’s procedures.

Citing the subordinate status of special trial judges and the resulting absence

of judicial independence,

185

Judge Cudahy refused to ascribe binding effect

to the special trial judge’s subsequent assent to the findings contained in the

final Tax Court opinion.

d. The Fifth Circuit in Estate of Lisle

Appeal of the Tax Court’s decision in Investment Research Associates on

behalf of Lisle was prosecuted by his estate before the Fifth Circuit.

186

The

court disposed of the taxpayers’ due process challenge to the Tax Court’s

application of its Rule 183 procedures in short order. Finding the prior

analysis of the issue by the Eleventh Circuit in Ballard and by the Seventh

Circuit in Estate of Kanter as “direct and persuasive,” the Fifth Circuit in

Estate of Lisle adopted it as its own.

187

The Fifth Circuit devoted the bulk of

its opinion to addressing the merits of the Tax Court’s determination,

which yielded a considerable victory for the taxpayers. While it upheld the

Tax Court’s determination that the Commissioner had established Lisle’s

income tax deficiencies by a preponderance of the evidence, the Fifth

Circuit determined that the evidentiary record failed to support a finding

that Lisle had engaged in tax fraud by clear and convincing evidence.

188

Hence, the Fifth Circuit overturned the imposition of the civil fraud penalty

against Lisle, and this determination also affected the tax years that

error in the setting was heightened as well. Without the special trial judge’s report,

the appellate court would be reviewing, on the basis of a cold record, the Tax Court

judge’s determination of fraud, which also was made on the basis of a cold record.

Finally, Judge Cudahy viewed the additional cost and administrative burden of

avoiding the risk of error—that is, publication of the special trial judge’s initial

report—as de minimis. See id. at 887.

184

Id. at 887.

185

Id.

186

See Estate of Lisle v. Commissioner, 341 F.3d 364 (5th Cir. 2003).

187

Id. at 384.

188

Id. at 382–83.

Special Trial Judges 863

remained open to the Commissioner under the statute of limitations on

assessment.

5. Supreme Court Review

Following their defeats at the Circuit Court level, Ballard and the Estate

of Kanter petitioned the Supreme Court for certiorari.

189

Ballard’s petition

presented the following questions for review: (1) whether the alleged off-

the-record collaborative process between Special Trial Judge Couvillion and

Tax Court Judge Dawson was consistent with the due process clause or the

right to effective article III review; and (2) whether § 7482(a), which

requires Tax Court decisions to be reviewed in the same manner as

decisions of a U.S. District Court, is consistent with the alleged secretive

collaboration between the special trial judge and the reviewing Tax Court

judge in this setting. The petition filed on behalf of Kanter’s estate raised

two questions for review: (1) whether the due process clause or governing

federal statutes require the court of appeals to review the decision of the

Tax Court on the basis of a complete record that included the special trial

judge’s findings of fact, and (2) whether Rule 183 required the Tax Court to

uphold factual findings of special trial judges unless clearly erroneous. The

Supreme Court granted the parties certiorari petitions on April 26, 2004.

Although the parties did not raise the Tax Court’s compliance with the

Rule 183 procedures (apart from the appropriate degree of deference to be

afforded to the special trial judge’s factual findings) as part of their certiorari

petitions or in their briefs, Justices Ginsburg and Souter injected this as a

possible issue in the taxpayers’ favor early in the taxpayers’ argument of the

case:

JUSTICE GINSBURG: Mr. Shapiro, why don’t you simply read the

text of 183(b) --

MR. SHAPIRO: Yes.

JUSTIFICE GINSBURG: . . . It says, special trial judge’s report. It

is the only report to which the Tax Court rules refer.

MR. SHAPIRO: That’s correct, Your Honor. And it’s --

JUSTICE SOUTER: And -- and if in fact --

189

The Estate of Lisle likely declined to continue its appeal to the Supreme

Court because the Fifth Circuit’s reversal of the civil fraud determination

eliminated a large portion of the estate’s liability.

864 The United States Tax Court – An Historical Analysis

MR. SHAPIRO: -- it is presumed correct.

JUSTICE SOUTER: -- you rely on the rule, do we even have to

resolve the issue on the meaning of report in the statute? Can’t we

simply, from your position, rely on the rule and say you’ve got to

follow your own rules?

MR. SHAPIRO: Absolutely. This is a report that must be

submitted. It is presumed correct under this rule. It’s an

independent evaluation of credibility from the only judge who heard

the witnesses, and of course, it’s part of the record. And it doesn’t --

JUSTICE SOUTER: So you’ve really got three arguments. You’ve

got the rule. You’ve got the statute, and you have due process.

MR. SHAPIRO: And it doesn’t make the slightest difference that

the superior judge caused the subordinate judge to say, I have

changed my mind at a later stage in the proceeding, because it is the

original report that is presumed correct under the rules.

190

An exchange between the Court and counsel for the Commissioner on the

same topic highlighted the critical procedural question in the case: Does a

post-trial report submitted by a special trial judge in a § 7443A(b)(4)

proceeding but later withdrawn by the authoring judge in favor of a

substitute report continue to have significance under the Tax Court’s

procedures, or is the withdrawn report treated as a nullity?

JUSTICE SOUTER: . . . The rule presumes that some original

document, which you are treating as provisional, enjoys a

presumption of correctness, and I don’t see the consistency between

provisionality and deliberate character on the one hand and

presumption on the other.

MR. HUNGAR: If I may, Your Honor, the rule does not state that

the, quote, original report shall receive a presumption of correctness.

It doesn’t even say that -- that any report shall receive a presumption

of correctness. It says the findings of fact recommended by the

special trial judge.

190

Transcript of Oral Argument at 7–9, Ballard v. Commissioner, 544 U.S. 40

(2005).

Special Trial Judges 865

JUSTICE SOUTER: And aren’t those findings of fact the findings

of fact that are delivered to the chief judge in the report that is made

to the chief judge before it is even assigned to a Tax Court judge?

MR. HUNGAR: Not if -- not if the tax -- if the special trial judge

has abandoned those recommendations, withdrawn those

recommendations, and replaced them.

JUSTICE SOUTER: But he hasn’t abandoned them at the point he

delivers them to the chief judge, and if that’s what this is referring to,

then the presumption of the -- of -- of correctness necessarily has to

apply to whatever the document is that’s delivered to the chief judge.

MR. HUNGAR: Well, it applies to the report, but I submit that if

the special trial judge withdraws in order to correct an error in the

report, what he submits as the corrected report is then the, quote,

report.

191

After members of the Court continued to press counsel for the

Commissioner on the application of Rule 183 in the case, counsel

appropriately noted that the ability of the special trial to change his initial

report under Rule 183 was not among the questions presented in the

case.

192

Rather, Rule 183 had been raised by Kanter’s estate only in

connection with the level of deference owed to the factual findings of the

special trial judge as a result of the rule’s treatment of such findings as

presumptively correct.

Although predicting the result and rationale of a Supreme Court

decision based on the content of oral argument is an approach fraught with

191

Id. at 38–39. Earlier in the argument, counsel for the Commissioner and

Justice Souter engaged in a similar exchange:

MR. HUNGAR: . . . the important thing to understand, Your Honor, is

that nothing in the rule precludes, during the course of the deliberative

process that then follows, the special trial judge from concluding that he has

made a mistake, that he no longer agrees with the -- the stated findings of

fact in that -- in that original report, from withdrawing and submitting a

corrected report.

JUSTICE SOUTER: But that is not the way the rule reads. The rule reads,

as I understand it, under (c) that the court itself may accept, reject, or

modify. It doesn’t say anything about the special trial judge reconsidering

and rewriting his report.

Id. at 29–30.

192

Id. at 46.

866 The United States Tax Court – An Historical Analysis

peril, the tenor and content of the oral argument in Ballard strongly

resonated in the Court’s resolution of the case.

193

Justice Ginsburg, writing

for a seven-justice majority, reversed the decisions of the Eleventh Circuit

and Seventh Circuit. The grounds for reversal did not rest in the due

process clause or any statute governing the appeal of Tax Court decisions

or the publication of Tax Court documents. Rather, the Supreme Court

grounded its decision in the Tax Court’s failure to follow its published

procedure governing the proceeding under Rule 183.

194

The Supreme Court began its analysis of the case by tracing the

development of the Tax Court’s procedures for reviewing the reports of

special trial judges is cases assigned to them for trial pursuant to

§ 7443A(b)(4). In the course of this discussion, the Court accepted the

taxpayers’ premise that, following the 1983 amendments to Rule 183, the

Tax Court adopted the following novel practice regarding the post-trial

report issued by the special trial judge to the chief judge:

No longer does the Tax Court judge assigned the case alone review

the report and issue a decision adopting it, modifying it, or rejecting

it in whole or in part. Instead, the Tax Court judge treats the special

trial judge’s report essentially as an in-house draft to be worked over

collaboratively by the regular judge and the special trial judge.

195

In reaching this understanding, the Court cited the declaration by Mr. Dick

concerning his informal conversations with members of the Tax Court,

quoting from his affidavit. Additionally, the Court observed the remarkable

degree of unanimity between special trial judges and their reviewing Tax

Court judge peers noted by Judge Cudahy in his dissent to the Seventh

Circuit’s decision in Estate of Kanter.

Unlike the appellate courts below, the Supreme Court was not

indifferent to the presumed collaborative process between the special trial

judge and the reviewing Tax Court. Rather, in the Court’s view, the

anomalous practice represented an “unreasonable”

and “arbitrary”

interpretation of Rule 183.

196

The Court thereafter explained its

interpretation of the procedural rule: Rule 183(b) referred to the report

initially communicated by the presiding special trial judge to the chief judge

of the Tax Court—not some later report representing the collaborative

work of the special trial judge and the reviewing Tax Court judge.

Furthermore, this initial report (which the Court referred to as the “Rule

183(b) report” for clarity) served as the subject of Rule 183(c), a provision

193

See Ballard v. Commissioner, 544 U.S. 40 (2005).

194

Id. at 58–59.

195

Id. at 57.

196

Id. at 59, 61.

Special Trial Judges 867

the Court observed was captioned “Action on the Report.” Noting that

Rule 183(c) required the Tax Court to accord the factual findings of the

presiding special trial judge deference when conducting the review process,

the Court highlighted the anomaly that would result if Rule 183(c) were

interpreted as referring to a subsequent report submitted by the special trial

judge with the aid of the reviewing judge:

One would be hard put to explain . . . how a final decisionmaker,

here the Tax Court judge, would give “due regard” to, and

“presum[e] to be correct,” an opinion the judge himself collaborated

in producing.

197

Unmoved by any purported efficiencies generated by the Tax Court’s

assumed practice, the Court found that the practice was not warranted by

the Tax Court’s published procedures. The Court’s rationale can therefore

be summed up through the following blunt observation: “The Tax Court,

like all other decisionmaking tribunals, is obligated to follow its own

Rules.”

198

The Court’s disposition of the case in Ballard undoubtedly was colored

by its displeasure with the lack of transparency in the Tax Court’s alleged

practice of reviewing special trial judge reports. The Court noted the

routine practice in federal judicial and administrative decision making

tribunals to disclose the initial report of the hearing officer to the parties

and to include the hearing officer’s report in the appellate record.

199

The

Court viewed the assumed “concealment” of the special trial judge’s initial

report by the Tax Court as representing a “departure of . . . bold character”

from the prevailing norm.

200

Given this perspective, the Court was not

inclined to afford the Tax Court considerable leniency in the interpretation

and application of its procedural rules.

The Court in Ballard noted that the Tax Court’s assumed practice of

failing to disclose the original report issued by the special trial judge and of

“obscuring” the procedure by which the Tax Court judge reviewed such

report impeded “fully informed” appellate review.”

201

While this point

appeared to channel the rationale of Judge Cudahy in his dissent in the

Seventh Circuit’s decision in Estate of Kanter, the Supreme Court was not

similarly willing to resolve the case on constitutional grounds. Indeed, the

Court likely was reluctant to invoke notions of due process to achieve the

197

Id. at 59.

198

Id.

199

See id. at 46.

200

Id.; see also id. at 61 (“We are all the more resistant to the Tax Court’s

concealment of the only special trial judge report its Rules authorize given the

generally prevailing practice regarding a tribunal’s use of hearing officers.”).

201

Id. at 59–60.

868 The United States Tax Court – An Historical Analysis

result it desired in the case, concerned over the ramifications of a decision

on those grounds. Justice Breyer remarked at oral argument as follows: “If

we have to go to the Constitution, I don’t see exactly the implications. So

I’m nervous.”

202

Accordingly, the Court did not resolve the case on the

basis of due process violations alleged by the taxpayers or, for that matter,

the myriad claimed statutory violations. Instead, the Court merely warned

that if the Tax Court were to modify its procedural rules to expressly

condone its assumed practice in this context, any such change would be

subject to review on constitutional and statutory grounds at that time.

The result of the Supreme Court’s decision in Ballard may not have been

surprising, given the lack of transparency embodied in the Tax Court’s

assumed practice of reviewing special trial judge reports. Yet the Court’s

rationale proved exceedingly weak. As the body that promulgated the

procedural rule the Court thrust to the forefront of the resolution of the

case, one would expect the Tax Court to be afforded wide deference in

determining the proper application of the Rule.

203

In that regard, reconciling the assumed practice of the Tax Court with

the terms of Rule 183 did not present an overwhelming task. Rule 183(b)

referred to the report submitted by the special trial judge to the chief judge

for assignment, and Rule 183(c) was captioned “Action on the Report.” As

the majority explained, these two provisions presumably referred to the

same document. However, if the special trial judge were to withdraw that

report and substitute an amended report in its place,

204

the withdrawn

report would be rendered a nullity. Only one report would remain—the

later submitted substitute—to be governed by the Rule 183 procedures.

Chief Justice Rehnquist, writing in dissent, explained this interpretation of

Rule 183 more succinctly:

Paragraph (c)’s use of the possessive “Special Trial Judge’s report” is

most naturally read to refer to the report authored and ascribed to by

the special trial judge. If the special trial judge changes his report,

202

Transcript of Oral Argument at 60, Ballard v. Commissioner, 544 U.S. 40

(2005).

203

This point essentially summarizes the dissent authored by Chief Justice

Rehnquist in the case, which was joined by Justice Thomas: “The Tax Court’s

compliance with its own Rules is a matter on which we should defer to the

interpretation of that court.” Ballard v. Commissioner, 544 U.S. 40, 68 (2005)

(Rehnquist, C.J., dissenting).

204

How the special trial judge would arrive at the decision to withdraw the

report initially submitted to the chief judge in this manner—whether through

further independent research or contemplation, or through input received from the

reviewing judge—would be irrelevant, as no prohibition existed on collaboration

between the special trial judge and the reviewing Tax Court judge (or, for that

matter, any other judge of the Tax Court).

Special Trial Judges 869

then the new version becomes “the Special Trial Judge’s report.” It

is the special trial judge’s signature that makes the report attributable

to him.

205

Under this approach, the withdrawn and superseded initial report of the

special trial judge would have no lasting significance. Rather, it would

amount to a prior draft of the final report submitted in the name of the

special trial judge. And no party claimed entitlement to discovery of prior

drafts of Tax Court opinions or reports as such. Hence, the reasonableness

of the Tax Court’s interpretation of Rule 183 turned on the reasonableness

of treating a report, initially submitted by the special trial judge but later

withdrawn by the same judge, as an internal draft.

206

Views on this question

may differ, but treating the withdrawn report as a nullity certainly is not

unreasonable or arbitrary as characterized by the Supreme Court majority in

Ballard.

207

The Supreme Court’s invocation of Rule 183 as the basis for its decision

in favor of the taxpayers in Ballard represented something of a path of least

resistance for the Court to achieve its desired result. The Court clearly was

not enamored with the assumed practice of the Tax Court, as evidenced by

its repeated characterization of the Tax Court’s “concealment” of the

special trial judge’s initial report. By basing its decision on the Tax Court’s

205

Id. at 71.

206

Another way of framing the same issue is whether, after having submitted

the initial draft of his post-trial report to the chief judge, the presiding special trial

judge had any standing to participate in the case going forward.

207

See id. (“At the very least, it is not unreasonable or arbitrary for the Tax

Court to construe the Rule as not requiring the disclosure of preliminary drafts or

reports.”). Regarding the Court’s rhetorical question concerning how a reviewing

Tax Court judge could afford deference to factual findings that judge helped

prepare, see id. at 59, the question does not highlight a logical obstacle. In fact, the

answer is simple: the reviewing judge would be affording deference to the

substituted factual findings of the special trial judge with which the reviewing judge

likely agrees. The rhetorical question becomes problematic only if the substituted

findings of fact do not actually represent those of the special trial judge, but instead

only those of the reviewing Tax Court judge, notwithstanding the special trial

judge’s issuance of the substituted report. This approach assumes the existence of

reviewing Tax Court judges who routinely impose their views on consistently

compliant special trial judges. It ignores the prospect of (a) a reviewing Tax Court

judge who does not desire to participate in the “quasi-collaborative” deliberative

process in the first place, (b) a special trial judge who resists suggestions of the

reviewing Tax Court judge that contravene his own, and (c) a special trial judge

who simply wishes to be rid of the case after submitting his post-trial report to the

Chief Judge. Hence, the Tax Court’s interpretation of Rule 183(c) did not

necessarily produce illogical results as the majority suggested.

870 The United States Tax Court – An Historical Analysis

“arbitrary construction” of Rule 183,

208

at the Tax Court’s expense, the

Supreme Court was able to avoid broaching the Fifth Amendment’s due

process protections—a critical but evolving constitutional doctrine—to

dispose of the case before it.

209

However, it is worth noting that the dissent

authored by Judge Cudahy in Estate of Kanter, which appeared to influence

the majority’s decision in Ballard, determined that the Tax Court’s assumed

practice of quasi-collaborative decision making was not precluded by Rule

183. Rather, Judge Cudahy’s point of contention rested in the Tax Court’s

refusal to include the initial findings of the special trial judge in the appellate

record—an issue that has nothing to do with Rule 183.

210

Judge Cudahy

viewed the initial report as indispensable to meaningful review of the Tax

Court’s ultimate factual findings, and he was willing to invoke the litigants’

constitutional rights to due process of law as a means of assuring its

inclusion. The Supreme Court in Ballard, however, did not see the need to

follow Judge Cudahy down this sobering legal path to achieve essentially

the same result.

Typically, the Supreme Court’s resolution of the case triggers a

denouement of sorts in the legal proceedings. Not in this instance. Rather,

the decision in Ballard pointed to a crescendo: production of the elusive

initial report of Special Trial Judge Couvillion in Investment Research Associates,

if indeed the claimed prior report even existed. However, obtaining access

to this report involved additional procedural maneuvering, as the Supreme

Court in Ballard did not order its production. The Court reversed the

judgments of the Eleventh Circuit in Ballard and the Seventh Circuit in

Estate of Kanter to the extent those judgments upheld the Tax Court’s

exclusion of the special trial judge’s initial post-trial report from the record

on appeal, and remanded the cases for “further proceedings consistent with

this opinion.”

211

208

Id. at 61.

209

Basing its decision on the variety of narrow statutory grounds raised by the

parties and their amici would have similarly permitted the Court to limit

ramifications of its holding. Presumably, either the Court found the statutory

avenues for ruling in the taxpayers’ favor less meritorious than the Rule 183

rationale, or the Court determined the Rule 183 approach to present the preferred

narrow basis for its decision.

210

See Estate of Kanter v. Commissioner, 337 F.3d 833, 878 (7th Cir. 2003)

(Cudahy, J., concurring in part and dissenting in part) (“[T]he Tax Court’s

interpretation of its own rules of procedure receives a great deal of deference.

Therefore, the 1983 amendment to the Tax Court rules had the effect of no longer

requiring that the parties (or the general public or a reviewing court, for that

matter) have access to the STJ’s report.”).

211

Ballard, 544 U.S. at 65.

Special Trial Judges 871

6. Release of the Initial Report of the Special Trial Judge

The Seventh Circuit was the first court to grabble with the Court’s

decision in Ballard on remand.

212

In a per curiam opinion issued on May 9,

2005, the majority in Estate of Kanter II declined the estate’s request for the

initial report of Special Trial Judge Couvillion to be produced on the parties

and included in the record on appeal.

213

Instead, the Seventh Circuit

remanded the case to the Tax Court for further proceedings consistent with

the Supreme Court’s decision. Judge Cudahy, however, expressed his

displeasure at protracting the proceedings in this manner: “This report

must be included in the record, and I see no reason why it cannot be

produced without further delay. It was improperly withheld, and its

nondisclosure ought to cease—now.”

214

The next court to act on the Supreme Court’s decision in Ballard was the

Eleventh Circuit. On May 17, 2005, it granted Ballard’s motion to include

the initial report submitted by Special Trial Judge Couvillion in the appellate

record, directing the Tax Court to transmit the appellate record as

supplemented within 14 days.

215

The Tax Court complied, producing the

report for the first time on May 26, 2005.

The release of Special Trial Judge Couvillion’s initial post-trial report in

Investment Research Associates confirmed the suspicions of the taxpayers’

attorneys. In the initial report, spanning some 300 pages, Special Trial

Judge Couvillion unqualifiedly rejected the Commissioner’s central theory

of the case:

Respondent has not demonstrated that there was an underpayment

tax by any of the petitioners arising out of what respondent derisively

described throughout the trial as “kickback schemes” wherein

moneys were exacted as a condition for doing business, and that

such moneys constituted income that was nor [sic] reported by

petitioners.

. . .

[T]here were no “kickback schemes”, and none of the alleged

“kickback schemes” payments by “the Five” represented unreported

212

See Estate of Kanter v. Commissioner, 406 F.3d 933 (7th Cir. 2005).

213

See id. at 934.

214

Id. (Cudahy, J., dissenting).

215

See Order of Eleventh Circuit Court of Appeals in Ballard v. Commissioner,

Docket 01-17249-GG (May 17, 2005), reprinted in Crystal Tandon, Eleventh Circuit in

Ballard Orders Special Trial Judge Report Included in Record, T

AX NOTES TODAY, May 24,

2005, available at 2005 TNT 99-2.

872 The United States Tax Court – An Historical Analysis

taxable income of Kanter, Ballard, and Lisle. There was, therefore,

no underpayment of tax.

216

Having rejected the Commissioner’s deficiency determinations, the

Commissioner’s assertion of a civil fraud penalty quickly fell by the wayside:

[I]n the Court’s view, certain transactions that respondent cited . . . in

asserting petitioners are liable for these additions to tax for fraud, at

best, amount to only respondent’s suspicions of fraud. The Court,

however, does not consider these transactions as even rising to the

level of suspicion of fraud. Consequently, the Court holds that

petitioners are not liable for additions to tax for fraud under section

6653(b).

217

The initial report submitted by Special Judge Couvillion in Investment

Research Associates is difficult to reconcile with his subsequent report, to put

it mildly. The incompatibility of the two is even more striking when one

considers that a penalty for civil tax fraud—the imposition of which the

subsequent report of Special Trial Judge Couvillion affirmed—requires the

Government to establish fraudulent conduct by clear and convincing

evidence.

218

The disclosure of Judge Couvillion’s initial report in the case

therefore left the Tax Court to face considerable challenges on the public

relations front.

Through a July 19, 2005 order issued in the Estate of Lisle proceeding

that remained before the Tax Court, Chief Judge Gerber referred to the

observation by Justice Kennedy in his concurring opinion in Ballard that

“we do not know what happened in the Tax Court, a point that is

important to underscore here.”

219

Chief Judge Gerber therefore sought to

clarify the record in the case by serving the parties with separate statements

216

Initial Report of Special Trial Judge Couvillion, Investment Research

Assocs., Ltd. v. Commissioner, at 84–85. This report is reproduced as an

attachment to a June 16, 2005 order issued by Chief Judge Gerber ordering the

service of the report on the parties and its inclusion in the record. The order, with

attachments, is accessible on the Tax Court’s website at:

https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=419

7532.

217

Id. at 85–86.

218

The change in the two reports is stark. Whereas the initial report found that

the events in question did not give rise to a suspicion of fraud, the subsequent

report declared that “what we have here, purely and simply, is a concerted effort by

an experienced tax lawyer and two corporate executives to defeat and evade the

payment of taxes and to cover up their illegal acts.” Investment Research Assocs.,

Ltd. v. Commissioner, T.C. Memo. 1999-407, 78 T.C.M. (CCH) 951, 1083.

219

Ballard v. Commissioner, 544 U.S. 40, 67 (2005) (Kennedy, J., concurring).

Special Trial Judges 873

provided by former Chief Judge Mary Ann Cohen, Judge Dawson, and

Special Trial Judge Couvillion, each describing the procedures that were

followed in the proceedings that culminated in the Tax Court’s

memorandum decision in Investment Research Associates. Together, the three

statements largely confirmed the “quasi-collaborative” judicial deliberation

process assumed by the Seventh Circuit in Estate of Kanter and by the

Supreme Court in Ballard. A summary follows.

On June 23, 1998, Special Trial Judge Couvillion transmitted his

recommended findings and opinion in the case to Chief Judge Cohen. On

July 14, 1998, Chief Judge Cohen referred the document to Judge Dawson,

for review and possible adoption.

On August 20, 1998, Judge Dawson telephoned Chief Judge Cohen to

inform her that he disagreed with Judge Couvillion’s report and could not

adopt it. Chief Judge Cohen next contacted Judge Julian I. Jacobs to

determine if he could review the report for potential adoption. Judge

Jacobs declined, however, citing his personal friendship with Randall Dick,

counsel for Kanter. Chief Judge Cohen thereafter reviewed Judge

Couvillion’s report to determine if perhaps she could adopt it. Viewing the

facts as not supporting the opinion, she concluded that she could not.

Chief Judge Cohen thereafter scheduled a meeting with Judge Couvillion

and Judge Dawson to discuss how to best proceed with the case. On

September 1, 1998, the day prior to their scheduled meeting, Judge

Couvillion informed Chief Judge Cohen that he was withdrawing his report.

In Judge Couvillion’s words, “I requested that the report I submitted be

withdrawn for further consideration.” The withdrawn report was returned

to Judge Couvillion on that date and regarded by those involved as nullity.

The judges thereafter agreed that Judge Couvillion and Judge Dawson

would collaborate on the preparation of a revised report to be submitted by

Judge Couvillion for adoption. Judge Dawson’s statement indicates that

this arrangement was requested by Special Trial Judge Couvillion, and that

Judge Dawson agreed with the arrangement following the approval of Chief

Judge Cohen. This process yielded a revised report submitted by Judge

Couvillion to Chief Judge Cohen on September 2, 1999. Judge Dawson

described the arrangement leading to the revised report as “a collaborative

judicial deliberation” of the sort indicated by the Supreme Court and the

Courts of Appeals. For his part, Judge Couvillion described that he and

Judge Dawson worked together on each of the many issues raised in the

case, and that findings and conclusions on each were “based on the

concurrence of the two of us.” Chief Judge Cohen described the

arrangement between Judge Couvillion and Judge Dawson as consistent

with the collegial process that pervaded the Tax Court, citing the customary

practice of proposed opinions being reviewed by the Chief Judge and all

judicial officers of the court prior to their release.

874 The United States Tax Court – An Historical Analysis

Chief Judge Cohen referred Special Trial Judge Couvillion’s substituted

report to Judge Dawson on September 2, 1999, for his final review. On

October 25, 1999, Judge Dawson adopted the revised report and submitted

it to Chief Judge Cohen. On November 4, 1999, Chief Judge Cohen

approved the report with some modifications and directed that it be filed as

a Memorandum Opinion. On December 15, 1999, Chief Judge Cohen

issued an order reassigning the cases to Judge Dawson for decision, and the

opinion was filed as T.C. Memo. 1999-407 on that date.

In her statement, Chief Judge Cohen specifically addressed the allegation

that Special Trial Judge Couvillion had been “reversed” by Judge Dawson

or, for that matter, anyone else. She viewed this as a mischaracterization of

events, explaining that “Judge Couvillion reconsidered the cases and

reversed himself.”

In an appearance before the Court Procedure Committee of the

America Bar Association Section of Taxation meeting in September of

2005, then Chief Judge Gerber sought to clarify the Tax Court’s procedures

with respect to the review of special trial judge reports prior to the issuance

of the Supreme Court’s decision in Ballard. In particular, Chief Judge

Gerber placed the review of special trial judge reports in the larger context

of the Tax Court’s traditional practices:

Judges prepare proposed opinions and submit them to the Chief

Judge for review. The Chief Judge, with the assistance of legal staff,

reviews the opinions and notes changes in the text and margins. On

occasion, a proposed opinion may disagree with a prior opinion or

several judges may have the same legal issue and the Chief Judge may

arrange an informal discussion among the Judges to try to resolve

any disagreements. If a matter is sufficiently important, the Chief

Judge may refer it to the Court Conference for consideration and

review by all 19 presidentially appointed Judges. A majority of the

Court Conference may reach a result different from that proposed by

the initial authoring judge, who may also have been the trial Judge.

In that event, the opinion issued by the Court would differ from the

report initially offered by the trial Judge. That collegial process has

served to provide a generally uniform body of law and precedent.

Special Trial Judges’ proposed opinions under Rule 183 were

reviewed and treated in the same manner as opinions of regular

judges. The Special Trial Judges’ proposed opinions were first sent

to the Office of the Chief Judge where [they were] reviewed for

quality and uniformity with prior precedent. At this juncture, the

Chief Judge did not decide how the opinion was to be published or

whether it required full court review. The Chief Judge’s staff made

suggestions, both in the text and in the margins. After that review,

the proposed opinion was sent to a presidentially appointed judge for

Special Trial Judges 875

review and adoption. The adopting judge would also perform a

review for quality and uniformity with prior precedent, likewise

placing suggestions in the text and margins. Finally, the opinion with

editorial markings was returned to the Special Trial Judge, who

decided whether or not to change the original proposed opinion. If

there was disagreement, there could be deliberations between the

adopting judge and Special Trial Judge. Ultimately, the Special Trial

Judge would craft and forward an opinion which was adopted by a

regular judge and, in turn, forwarded for the Chief Judge’s

consideration and issuance.

Judges and Special Trial Judges considered the draft of their

opinion that was submitted to the Chief Judge to be part of the

deliberative process. Accordingly, each Judge or Special Trial Judge

was permitted to set [his] own retention policy with respect to [his]

own deliberative materials. It is important to recognize that the

Judges and Special Trial Judges understood that deliberative

materials, which include draft opinions, are not made part of the

public record. As far as I am aware, that is the practice of all federal

courts with respect to draft opinions.

220

7. Corrective Action

On the heels of releasing Special Trial Judge Couvillion’s initial report,

the Tax Court on July 7, 2005, proposed amendments to its Rules of

Practice and Procedure governing cases assigned to a Special Trial Judge for

hearing but not decision.

221

As explained above,

222

the amendments largely

returned to the transparent review process embodied in former Rule 182

prior to its amendment in 1983. The proposed modifications were

intended to align the Tax Court’s practice in this area with the procedures

employed by Federal district courts to review the findings and

recommendations of a Magistrate Judge.

223

The amendments to Rule 183

proposed an effective date of September 20, 2005, and amendments later

220

Chief Judge Joel Gerber, Speech to ABA Tax Section Court Procedure

Committee, at 3–4 (Sept. 16, 2005); see also Sheryl Stratton, In Ballard’s Wake, Tax

Court Releases Initial Reports, 108 T

AX NOTES 1230, 1230–31 (Sept. 12, 2005)

(reporting similar description provided by Chief Judge Gerber through interview).

221

See Press Release, United States Tax Court, July 7, 2005.

222

For an analysis of the 2005 amendments to Tax Court Rules 182 and 183,

see text accompanying supra notes 102–106.

223

Rules Comm. Note, TAX CT. R. 183, 125 T.C. 342, 345–46 (2005). In

addition to the amendments to Rule 183, the Tax Court revised its procedures

under Rule 182 to incorporate the Rule 183 procedures when reviewing reports of

special trial judges in cases concerning small amounts of tax that were not subject

to the special small tax case procedures. T

AX CT. R. 182(e), 125 T.C. 342 (2005).

876 The United States Tax Court – An Historical Analysis

were adopted as of that date.

224

Accordingly, the procedural environment

that created the prospect of the Ballard litigation has been rectified.

225

In addition to rectifying its procedures going forward in the manner

suggested by the Supreme Court, the Tax Court conducted a search for

retained copies of initial opinions submitted by special trial judges to the

chief judge pursuant to Rule 183(b). The search involved reviewing over

900 cases in which a report of a special trial judge had been adopted under

the post-1983 streamlined procedures of Rule 183. Of these cases, the

court was able to identify 117 initial reports that had been preserved by the

Court.

226

“For purposes of transparency and in the spirit of the Supreme

Court’s opinion,”

227

Chief Judge Gerber ordered these initial reports to be

served on the parties on August 19, 2005. However, each order reminded

the parties that the decisions in the cases were final under § 7481 and would

not be re-opened.

Responding to a request of a reporter from the Chicago Tribune, the Tax

Court matched the 117 identified reports to the final opinions for review at

the court. This review identified four other cases in which the outcome of

the final opinion differed from that of the initial report of the special trial

judge; three were changed in favor of the taxpayer, one in favor of the

Government.

228

In this manner, the Tax Court attempted to eliminate any

remaining shroud of secrecy surrounding its prior practices for reviewing

the reports of special trial judges, to the extent possible.

8. Remand of the Proceedings to the Tax Court

Returning to the proceedings in the litigation, the Eleventh Circuit

Court of Appeals in Ballard, like the Seventh Circuit in Estate of Kanter,

vacated the Tax Court’s decision in Investment Research Associates and

224

See Press Release, United States Tax Court, Sept. 21, 2005. The

amendments as adopted are reported in 125 T.C. 342–43 (2005).

225

However, the potential incompatibility of the presumption of correctness

afforded to the findings of the special trial judge under Rule 183 with the

requirement that the decision in the case be entered by a regular Tax Court judge

pursuant to § 7443A(c)—as raised in the Freytag litigation—remains.

226

Sheryl Stratton, In Ballard’s Wake, Tax Court Releases Initial Reports, 108 TAX

NOTES 1230, 1230–31 (Sept. 12, 2005). Chief Judge Gerber later explained that the

search included inquiries of retired judges and a search of the court’s computers for

electronic copies. Chief Judge Joel Gerber, Speech to ABA Tax Section Court

Procedure Committee, at 5 (Sept. 16, 2005).

227

Id.

228

See Maurice Possley, Tax Court Findings Secretly Changed in at Least 5 Cases,

Chi. Trib., Sept. 5, 2005, at C1; Sheryl Stratton, In Ballard’s Wake, Tax Court Releases

Initial Reports, 108 T

AX NOTES 1230, 1230–31 (Sept. 12, 2005); see also Chief Judge

Joel Gerber, Speech to ABA Tax Section Court Procedure Committee, at 5 (Sept.

16, 2005).

Special Trial Judges 877

remanded the case to the Tax Court.

229

Yet the Eleventh Circuit had the

benefit of the Special Trial Judge Couvillion’s initial report in the case and

the Tax Court’s clarifying statements at the time of its decision. The

Eleventh Circuit evidently was not mollified by the Tax Court’s explanation.

If anything, the court appeared perturbed. The court commented on the

recently-disclosed details of behind-the-scene events at the Tax Court as

follows:

Altering the original credibility determinations and findings of Judge

Couvillion without explanation was not only contrary to the

requirements of the law but also misleading. It is obvious now that

the withholding of Special Trial Judge Couvillion's original report

did, in fact, impede the process of appellate review.

230

The Eleventh Circuit therefore adorned its remand of the case with a

detailed set of instructions: (1) the “collaborative report” that served as the

basis for the Tax Court’s decision in the case was to be stricken from the

record; (2) the initial post-trial report submitted by Special Trial Judge

Couvillion was to be reinstated; (3) the reinstated report was to be referred

to a judge of the Tax Court who had no involvement in the preparation of

the collaborative report; (4) the reviewing Tax Court judge was to give “due

regard” to Special Trial Judge Couvillion’s credibility determinations, and

Special Trial Judge Couvillion’s findings were to be presumed correct unless

“manifestly unreasonable;” and (5) the Tax Court was to adhere strictly to

its recently amended Rule 183(b) procedures.

231

By footnote, the Eleventh

Circuit specifically instructed that former Chief Judge Cohen, Judge

Dawson, and Judge Couvillion were to have no involvement in the Tax

Court’s review of the reinstated report.

232

Reflecting its ongoing interest in

the resolution of the case, the panel retained jurisdiction of any subsequent

appeal of the Tax Court’s decision to be issued on remand.

233

The directive from the Eleventh Circuit left the unmistakable

impression that it expected the Tax Court to adopt the initial report of

Special Trial Judge Couvillion in full. Yet the Eleventh Circuit could not

order this result expressly, lest it usurp the role of the Tax Court as the

body responsible for entering the trial decision in the case.

A few weeks after the Eleventh Circuit remanded the Ballard case to the

Tax Court on a restricted basis, the Fifth Circuit followed suit in Estate of

Lisle.

234

Although Lisle’s estate had not appealed the Fifth Circuit’s decision

229

See Ballard v. Commissioner, 429 F.3d 1026 (11th Cir. 2005).

230

Id. at 1032.

231

Id.

232

Id. at 1032 n.7.

233

Id. at 1027.

234

See Estate of Lisle v. Commissioner, 431 F.3d 439 (5th Cir. 2005).

878 The United States Tax Court – An Historical Analysis

in the case, the court nonetheless recalled its earlier mandate to the Tax

Court to recalculate the remaining deficiency in the case “in the interest of

fairness” and to prevent “possible injustice.”

235

The Fifth Circuit subjected

its remand of the case to the same terms and conditions mandated by the

Eleventh Circuit.

9. The Tax Court’s Resolution of the Case on Remand

As directed by the Courts of Appeal, the initial post-trial report of

Special Trial Judge Couvillion was reinstated in the record and assigned to

Tax Court Judge Harry A. Haines for review. Judge Haines clearly satisfied

the requirement of having no involvement in the “collaborative report”

produced by Special Trial Judge Couvillion and Judge Dawson, as Judge

Haines was not a member of the Tax Court when those events transpired.

To accommodate the recently revised procedures under Rule 183, the

parties were afforded an opportunity to file written objections to Special

Trial Judge Couvillion’s reinstated report. The Commissioner and Kanter’s

estate availed themselves of this procedural opportunity; Ballard and Lisle’s

estate did not. All three taxpayers responded to the Commissioner’s

objections, and the Commissioner responded to the objections raised by

Kanter’s estate.

Judge Haines issued his decision in the case, captioned Estate of Kanter v.

Commissioner,

236

on February 1, 2007. At the outset of the opinion, Judge

Haines clarified that he would accept the factual findings of Special Trial

Judge Couvillion unless “manifestly unreasonable” as directed. Judge

Haines wrestled with the precise contours of this standard of review at the

outset of the opinion, concluding that the standard required Judge

Couvillion’s findings to be accepted unless the finding was (1) internally

inconsistent or so implausible that a reasonable fact finder would not

believe it, or (2) directly contradicted by documentary or objective

evidence.

237

Judge Haines interpreted the remand instructions from the

Courts of Appeals to have imposed this same level of deference to the

credibility determinations reached by Special Trial Judge Couvillion, rather

than directing those credibility determinations to have binding effect.

238

In his opinion, spanning over 400 pages and addressing 24 identified

issues, Judge Haines went to painstaking lengths to segregate the findings of

fact incorporated from Special Trial Judge Couvillion’s initial report from

those that reflected departures from the initial report. In the course of the

decision, Judge Haines determined that certain findings of fact warranted

235

Id. at 439.

236

T.C. Memo. 2007-21, 93 T.C.M. (CCH) 721.

237

Id. at 735.

238

Id.

Special Trial Judges 879

rejection even under the manifestly unreasonable standard, and he

supplemented other original findings that he viewed as incomplete. Most

notably, Judge Haines determined that the ultimate holding recommended

in Special Trial Judge Couvillion’s original report—that Kanter, Ballard, and

Lisle did not participate in the alleged kickback scheme—was “directly

contradicted by the overwhelming objective evidence” in the case.

239

Additionally, Judge Haines rejected a number of credibility determinations

reflected in the initial report under the manifestly unreasonable standard.

Ultimately, Judge Haines, like Judge Dawson before him, found that Ballard

and Kanter had engaged in civil tax fraud

240

and that all three taxpayers

were liable for income tax deficiencies on unreported income.

241

10. The Unwelcomed Return to the Courts of Appeals

In light of the second round of appellate review in the Ballard litigation,

Judge Haines’ thorough review of Special Trial Judge Couvillion’s initial

post-trial report in the case proved to be an exercise in futility. The

Eleventh Circuit determined that none of Special Trial Judge Couvillion’s

findings of fact were clearly erroneous;

242

rather, in the court’s view, the

record fully supported Judge Couvillion’s initial findings and conclusions.

243

The error rested with Judge Haines. According to the Eleventh Circuit, he

failed to accord the findings of fact and credibility determinations of Judge

Couvillion the appropriate level of deference,

244

conducting instead a

“nearly de novo review of the facts.”

245

Accordingly, the Eleventh Circuit

remanded the case to the Tax Court once again, this time with an even

more restrictive instruction: to vacate Judge Haines’ opinion and to enter

an order approving and adopting Judge Couvillion’s report as the opinion

of the Tax Court.

246

At this stage, it is worth recalling the taxpayer’s procedural argument in

Freytag: that the level of deference required to be accorded the findings of

the special trial judge under Rule 183(c) effectively permitted the special

trial judge to enter the decision in the case, contrary to the limitation

imposed § 7443A(c). Following the Eleventh Circuit’s second decision in

Ballard, the argument gained newfound persuasiveness.

The Fifth Circuit was the next circuit court to follow suit. After

conducting an independent review of the record, it agreed with the decision

239

Id. at 787.

240

Id. at 802.

241

Id. at 805.

242

Ballard v. Commissioner, 522 F.3d 1229, 1249 (11th Cir. 2008).

243

Id. at 1254.

244

Id. at 1249.

245

Id. at 1254.

246

Id. at 1255.

880 The United States Tax Court – An Historical Analysis

of the Eleventh Circuit as it applied to Lisle.

247

Specifically, the court

determined that the trial record adequately supported Judge Couvillion’s

initial determination that Lisle had no deficiency in tax.

248

The Seventh Circuit rounded out the trio, following the two circuit

courts before it in concluding that Judge Haines’ review of Judge

Couvillion’s report amounted to an inappropriate de novo evaluation of the

evidence.

249

The court acknowledged that the evidence in the case was not

one-sided: “This is not to say that there is not plenty of evidence in the

record that supports the Tax Court’s decision.”

250

Accordingly, either

interpretation of the facts likely would have survived clear error review.

However, because Special Trial Judge Couvillion was the initial trier of fact

whose findings were entitled to deferential review, they were to be upheld

unless clearly erroneous.

251

The Seventh Circuit was satisfied that Judge

Couvillion did not clearly err.

In the end, Judge Haines’ review of Judge Couvillion’s initial report in

Investment Research Associates did not suffer the potential inconsistent results

of being appealed to three different courts. All of them ordered the

decision to be vacated in its entirety.

252

In its place, the appellate courts

ordered the Tax Court to enter an order adopting Special Trial Judge

Couvillion’s initial report as the opinion of the Tax Court.

253

The last gasp in the Ballard litigation concerned the manner in which the

Tax Court complied with the directive to issue an order adopting the initial

report of Special Trial Judge Couvillion as its opinion in the case. On

October 15, 2010, the Tax Court in the Estate of Kanter case issued an order

247

Estate of Lisle v. Commissioner, 541 F.3d 595, 602 (5th Cir. 2008).

248

Id. at 597.

249

Estate of Kanter v. Commissioner, 590 F.3d 410, 420 (7th Cir. 2009).

250

Id.

251

See id. at 421(identifying Special Trial Judge Couvillion’s initial report as the

one entitled to deferential review).

252

An observation by Professor Carlton Smith appears particularly apt: “As I

read the appellate court judges, they are in effect saying that they will ignore the

Tax Court judge reviews of the special trial judge and substitute themselves as the

reviewers of the special trial judge opinions.” Sam Young, Kanter Plaintiffs Call for

Investigation of Tax Court Judges, 126 T

AX NOTES 181 (Mar. 8, 2010) (quoting

Professor Smith).

253

See Ballard v. Commissioner, 522 F.3d 1229, 1255 (11th Cir. 2008)

(instructing the Tax Court to “enter an order approving and adopting Judge

Couvillion’s original report as the opinion of the Tax Court”); Estate of Lisle v.

Commissioner, 541 F.3d 595, 605 (5th Cir. 2008) (instructing the Tax Court to

“enter an order adopting Judge Couvillion’s original report as the opinion of the

Tax Court and to enter judgment consistent with that report and this opinion”);

Estate of Kanter v. Commissioner, 590 F.3d 410, 427 (7th Cir. 2009) (instructing

the Tax Court to “enter an order adopting the special trial judge’s report as the

decision of the Tax Court”).

Special Trial Judges 881

providing that “the Special Trial Judge’s report, made part of the record in

this case on June 16, 2005, shall be treated as the Court’s opinion in the

case.”

254

The estate thereafter sought publication of the Special Trial

Judge’s report, as adopted by the Tax Court, as an independent opinion of

the court—one that would be indexed under the “Opinions” tab of the

court’s website. The court granted the motion to publish, but did so by

uploading the special trial judge’s report as an attachment to the June 16,

2005 order that was available under the “Docket Inquiry” tab of the court’s

website. This resolution led to yet another appeal to the Seventh Circuit by

the Estate of Kanter, in which the estate sought publication of the Special

Trial Judge’s initial report as a stand-alone opinion. Finding that the Tax

Court had fully complied with its directive to issue an order adopting

Special Trial Judge Couvillion’s initial report as its opinion in the case, the

Seventh Circuit dismissed the appeal for lack of a justiciable controversy.

255

11. Conclusion

By all accounts, the saga of Ballard, Kanter, and Lisle represented a

bruising affair for all involved—the parties and the Tax Court alike. In

published decisions, two separate judges of the Tax Court affirmed the

Commissioner’s allegations that the taxpayers had engaged in a kickback

scheme generating income that they fraudulently failed to report. To avoid

not only the serious financial consequences of this determination but also

the personal and professional reputational damage it carried, the taxpayers

(in certain cases represented by their estates) engaged in multiple rounds of

litigation that spanned well over a decade. The taxpayers ultimately proved

successful on the merits, and they received a healthy dose of vindication

along the way. However, it is doubtful that the taxpayers found the

resulting path equivalent to the elusive un-ringing of a bell.

From the Tax Court’s perspective, the institution by no means emerged

from the litigation unscathed. Several judges, among them titans of the

institution, saw their integrity publicly impugned with little if any ability to

254

See Estate of Kanter v. Commissioner, 432 Fed. Appx. 618 (7th Cir. 2011)

(recounting the procedural posture of this aspect of the litigation). The order

issued on June 16, 2005, which includes Special Trial Judge Couvillion’s initial

report as an attachment, is available on the Tax Court’s website at

https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=419

7532.

255

Estate of Kanter, 432 Fed. Appx. at 620 (“We cannot find a justiciable

controversy in the details of the Tax Court’s website design.”). Perhaps not

surprisingly, Judge Cudahy issued a separate opinion reluctantly concurring. See id.

at 620–21 (Cudahy, J., concurring in part) (“From all appearances, the Tax Court is

not a graceful loser and I can appreciate the dissatisfaction of the prevailing litigant

with the Tax Court’s response to correction.”).

882 The United States Tax Court – An Historical Analysis

defend themselves directly.

256

And for a brief period, the conduct of the

Tax Court in this and similar proceedings was the subject of Congressional

inquiry.

257

These were surely uncomfortable positions, ones with which the

court and its judges were not familiar.

The circumstances that gave rise to the Ballard litigation have been

eliminated through the Tax Court’s return to its prior transparent process

of reviewing the reports of special trial judges. Hence, the Ballard saga

should be of minimal practical relevance in the future. The lasting value of

the proceedings may rest in their lesson concerning the potential costs of

non-transparency in the adjudicative process.

256

See, e.g., Sheryl Stratton, Original Tax Court Report Found No Fraud Against

Kanter, Ballard, 107 T

AX NOTES 1216 (June 6, 2005); Sam Young, Kanter Plaintiffs

Call for Investigation of Tax Court Judges, 126 T

AX NOTES 181 (Mar. 8, 2010).

257

See Crystal Tandon & Karla L. Miller, Judge’s Statements on Kanter, Ballard

Provoke Dismay, 108 T

AX NOTES 394, 395 (July 25, 2005) (reporting on investigation

conducted by the House Ways and Means Oversight Subcommittee); Louise Story,

A Glimpse Inside U.S. Tax Court and How It Made a Decision, N.Y.

TIMES, July 23,

2005, at C4 (same).

Small Tax Cases and Self-Represented Litigants 883

ART XIII

THE SMALL TAX CASE PROCEDURE AND

SUPPORT FOR SELF-REPRESENTED LITIGANTS

As of 2012, 68 percent of cases filed in the Tax Court were prosecuted

by taxpayers without the benefit of representation.

While this percentage

varies, in modern times, the percentage of cases filed by taxpayers on a pro

se basis has consistently exceeded half of the Tax Court’s docket.

In light

of these figures, the court has undertaken a number of measures to render

the forum more accessible and its proceedings less intimidating to taxpayers

who navigate the process on their own, likely due to the inability to afford

representation. Before discussing the Tax Court’s institutional outreach on

this front, this chapter will begin by exploring the single most important

legislative development aimed at accommodating self-represented litigants

before the court—the small tax case procedure of § 7463.

A. Small Tax Cases

The small tax case procedure currently reflected in § 7463 arose out of

congressional concern over the failure to provide a readily available means

of impartial review of modest deficiency disputes.

In response to this

concern, the court, in 1968, adopted a procedure for small tax cases which

provided for a simplified petition, early assignment to trial calendar,

informal trial procedures and waiver of briefs.

However, Congress

believed that the then existing statutory provisions, with their requirement

of technical rules of evidence, precluded such a procedure from achieving

its greatest potential.

Accordingly, the 1969 Tax Reform Act authorized a

Statistics provided by the Clerk of Court, United States Tax Court.

Id.

S. REP. NO. 91-552, at 302 (1969).

During the fall of 1968, the Tax Court “in recognition of the apparent

demand for a procedure for handling small tax claims simply and expeditiously”

drafted a separate set of rules to accomplish these objectives. These new

procedures became effective Jan. 1, 1969. Memorandum from Chief Judge

Drennen to Tax Court Judges, Nov. 26, 1968, filed at the U.S. Tax Court in

“Decisions: Memoranda & Correspondence;” see also Tax Court Conference

Minutes, Nov. 1, 15, 29, 1968.

At this time the Internal Revenue Code required that all proceedings begun in

the Tax Court, irrespective of dollar amount, be conducted with equal formality.

Laurence Goldfein and Michael I. Saltzman, The New Tax Court Small Claims

Division: How It Will Operate, 34 J. T

AX’N 2 (1971). Section 7453 provides that every

hearing must be conducted in accordance with the rules of evidence applicable to

884 The United States Tax Court – An Historical Analysis

simplified and relatively informal procedure for deficiency disputes

involving not more than $1,000.

This amount has been periodically raised

over time to $1,500, $5,000, $10,000, and, most recently, to $50,000.

Legislative history indicates Congress intended that the Tax Court make

extensive use of commissioners in small tax cases,

and certain statutory

modifications with respect to commissioners were designed to facilitate this

objective. Of importance in this regard was authorization for the court to

appoint full-time commissioners who would be compensated at the same

rate as commissioners of the Court of Claims.

Prior to this statutory

revision, the court had been authorized only to appoint an attorney from

the legal staff of the court to act as a commissioner on a case-specific basis.

Pursuant to the 1969 amendment, the court established a small tax case

division under the supervision of a judge of the court.

The majority of

trials without a jury in the District Court for the District of Columbia. Section 7458

requires every proceeding to be stenographically transcribed. At the conclusion of

each of these proceedings the court is compelled to report all of its findings of fact,

opinions, and memorandum opinions. I.R.C. § 7459(b).

Tax Reform Act of 1969, Pub. L. No. 91-172, § 957(a), 83 Stat. 733 (enacting

I.R.C. § 7463). If neither the amount of the deficiency placed in dispute, nor the

amount of any claimed overpayment exceeded $1,000 for any taxable year in the

case of income and gift tax or $1,000 for estate tax, the taxpayer was given the

option to request that the proceeding be conducted under a small case procedure.

In addition, the Act provided that notwithstanding statutory limitations that require

certain formal rules of evidence, publication, hearings, etc., the small case

procedure would be conducted in accordance with such rules of evidence, practice

and procedure as the Tax Court might prescribe.

The State and Local Fiscal Assistance Act of 1972 increased the limit to

$1,500. Pub. L. No. 92-512, § 203(b)(2), 86 Stat. 919, 945 (1972). The Revenue Act

of 1978 increased the jurisdictional amount to $5,000. Pub. L. No. 95-600,

§ 502(a)(1), 92 Stat. 2763, 2879 (1978). The Tax Reform Act of 1984 increased the

jurisdictional amount to $10,000. Pub. L. No. 98-369, § 461 (a), 98 Stat. 494, 823.

Most recently, Congress increased the ceiling amount on small tax cases to $50,000

as part of the Internal Revenue Service Restructuring and Reform Act of 1998.

Pub. L. No. 105-206, § 3103, 112 Stat. 685, 731 (1998).

S. REP. NO. 91-552, at 304 (1969).