Inside the U.S. Tax Court

IN FOCUS

Inside the U.S. Tax Court

An Interview with the Honorable Judge Juan F. Vasquez, CPA, U.S. Tax Court

By Donald E. Tidrick

Juan F. Vasquez earned his accounting degree from the University of Texas at Austin in 1972 and joined the audit staff of Lybrand, Ross Bros. & Montgomery (later Coopers & Lybrand, now PricewaterhouseCoopers) in Los Angeles. Judge Vasquez is a licensed CPA in Texas. He earned his JD from the University of Houston Law Center and his LLM in Taxation from New York University’s School of Law. He worked four years for the IRS Office of Chief Counsel in Houston before spending 13 years in private practice representing clients before the IRS and the U.S. Tax Court. Judge Vasquez was appointed to the U.S. Tax Court by President Clinton in 1995, and confirmed by the Senate. His initial term expires in 2010. (See the Exhibit for a complete list of current U.S. Tax Court judges.)

Beyond his noteworthy careers in accounting and law, Judge Vasquez has an inspirational personal story. Born in San Antonio, Texas, he was the youngest of four children and, after he lost his mother to tuberculosis at an early age, his grandparents, who had 14 children of their own and who were migrant farm workers in Texas and New Mexico, raised him. As a result, he spent the summers of his youth picking cotton and, upon entering high school, worked after school delivering telegrams for the Western Union Telegraph Company on his bicycle. Judge Vasquez notes with pride that he commissioned a painting by Jesse Trevino, a famous Hispanic artist, who attended the same high school in San Antonio. The painting depicts migrant cotton pickers, specifically Judge Vasquez at about 10 years old with his maternal grandfather, Jesus Flores. That painting has hung in the Smithsonian Institute in Washington, D.C., has been reproduced in a number of textbooks and newspaper articles, and is part of an art show titled “Chicano Visions,” which is touring the country.

About the Tax Court

The CPA Journal: Would you give a thumbnail sketch of the origins of the U.S. Tax Court and its role in the United States’ tax and judicial systems?
Juan F. Vasquez: The Board of Tax Appeals was established in 1924 by Congress to provide a forum in which taxpayers could litigate their cases at minimum expense and inconvenience and without having to pay the disputed taxes in advance. Prior to that, a taxpayer who disputed a deficiency in income, estate, or gift tax was required to first pay the tax, file a claim for refund with the IRS, and then, if the refund was refused, sue the IRS in a U.S. District Court or the former U.S. Court of Claims. In 1942, the board was renamed the Tax Court of the United States. The court began as part of the executive branch. In 1969, the name was changed to the United States Tax Court, and at that time, it was designated an Article I court of record under the U.S. Constitution.

Most federal tax litigation involving income, estate, and gift taxes in this country comes before the U.S. Tax Court. The residual federal tax litigation goes to the local U.S. District Courts and to the U.S. Court of Federal Claims in Washington, D.C. Originally, our jurisdiction was restricted to income, estate, and gift taxes, but Congress has continued to expand our jurisdiction. For instance, in 1996, Congress gave us jurisdiction to hear interest abatement cases; in 1997, worker classification cases; and in 1998, the review of lien and levy cases.

The Tax Court is a court of national jurisdiction and conducts trials in over 70 cities throughout the United States. We do not visit every state, but taxpayers in every state have reasonable access to the court. Each of the judges may request assignments to a particular session, but those assignments are generally determined by the Chief Judge on the basis of seniority and the previous judge to have been assigned a regular session in that particular city. In mandating that the court ride circuit throughout the United States, Congress ensured that the Tax Court would be accessible locally, while the court would have one centralized home in Washington, D.C. As a result, Congress’ twin objectives of local taxpayer access and the maintenance of a uniform system of tax precedents are effectively being achieved.

CPAJ: How many judges and law clerks comprise the court, and what are their backgrounds?
Vasquez: At full complement, the Court is composed of 19 judges, each of whom has been appointed by the President with the advice and consent of the Senate. As of this writing, there is one vacancy on the court. The specified term is 15 years, but judges are typically reappointed.

In addition, there are seven other judges who are recalled as a “senior” judge, meaning that they have completed their 15-year term or have reached age 70 and have been recalled for active service by the Chief Judge. These senior judges receive assignments of cases by the Chief Judge. The court also has nine “special” trial judges, who are appointed by the Chief Judge. They primarily hear small cases, designated “S” cases, and other cases assigned to them by the Chief Judge.
Generally, each of the presidentially appointed judges has two law clerks and each of the senior judges and special trial judges has one law clerk. As one might expect, getting a position as a law clerk is very competitive. Clerks come from excellent backgrounds; all have a juris doctorate and often they have a master’s degree in tax law.

CPAJ: How are cases assigned to individual judges? Do judges have specialized expertise in tax law that factors into such assignments?
Vasquez: Cases are not assigned based on a particular specialization or experience in federal tax law. Cases are heard during the three regular terms of the year: the Winter term (January–March), the Spring term (April–June), and the Fall term (September–December); no regular calendars are scheduled during July and August, although special sessions may be set by individual judges. All regular calendars are assigned by the Chief Judge. Each regular calendar is set about five months before the scheduled trial date and is set for either one or two weeks. Typically, in a large city, more than 100 cases may be scheduled for a two-week session, but by the time the session begins, many of the cases have been settled. The cases remaining to be heard may require the full two weeks of available trial time. The calendar can include all types of tax cases: foreign tax issues, pension cases, estate and gift taxes, income tax issues, accounting issues, collection cases, employment tax cases, interest abatement cases, section 6015 cases, and more. To borrow a phrase from Forrest Gump, each of these calendars is “like a box of chocolates”—you never know what you’re going to get. In addition to the regular sessions, each judge handles special sessions that involve the trial of a single case that can take anywhere from one week to two months or more for trial. The Court’s special trial judges handle the sessions involving S cases, although some S cases may appear on regular sessions.

CPAJ: In general, how does someone get selected to serve as a judge on the Tax Court?
Vasquez: The Tax Court has no input in this process. The nomination of judges is a presidential decision. After nomination, nominees are given a hearing before the Senate Finance Committee, and the full Senate votes on whether to confirm the nominee.

CPAJ: What led to your decision to practice law and to specialize in tax law?
Vasquez: My preparation for a career in tax started with a solid accounting education at the University of Texas at Austin, followed by an initial career opportunity with Lybrand, Ross Bros. & Montgomery in Los Angeles. Although I worked in the audit area for two years, the firm requested volunteers from the audit section to help prepare tax returns during the filing season. This led to my interest in becoming a tax lawyer. My first year of law school was at SUNY at Buffalo. I then transferred to the University of Houston Law Center, where I received my juris doctorate, and my professor there encouraged me to pursue my LLM in Taxation degree at New York University’s School of Law. After that, I spent four years with the IRS Office of Chief Counsel trying tax cases for the IRS, primarily in Houston and San Antonio. Then, I spent another 13 years in private practice.

I have always maintained my CPA license. I also had a great deal of involvement with the ABA’s Tax Section and its committees on employment taxes, civil and criminal penalties, and court procedure and administrative practice. Over the years, I developed a lot of relationships with outstanding professionals. Having the support during the nomination process of people who were frequently my adversaries in trying tax cases is particularly pleasing because it meant to me that they respected my professionalism. That support is doubly important, because there is an extensive background investigation of any nomination to the Tax Court. That investigation included interviews of people against whom I had litigated cases, for the purpose of assessing my temperament for judicial appointment.

Making Decisions

CPAJ: When a taxpayer disputes an IRS notice of deficiency, are there any strategic differences in choosing among the U.S. Tax Court, the local U.S. District Court, or the U.S. Court of Federal Claims in Washington, D.C.?
Vasquez: There are essentially three options when a taxpayer has received a notice of deficiency involving federal income, gift, or estate taxes: The taxpayer can pay the disputed tax deficiency and then file a claim for a refund with the IRS if the tax is disputed. If that claim is rejected, the taxpayer can file a suit with the local U.S. District Court to seek a refund. Alternatively, the refund suit may be filed in the U.S. Court of Federal Claims in Washington, D.C. Generally, if the taxpayer wishes to litigate the issue prior to actually making payment, the dispute must be filed in the Tax Court. If a taxpayer wishes to have a jury trial, then the only option would be to file in the U.S. District Court. In the Tax Court, a case is tried before an individual judge, who determines the outcome.

CPAJ: Why are some opinions designated as memorandum opinions, while others are designated as division opinions?
Vasquez: Each Tax Court judge who presides over a particular case is responsible for writing the report in that case. During the process of preparing my findings of fact and opinion, my law clerks and I review the pleadings, the stipulation of facts, the trial’s transcripts, the exhibits, the briefs, my trial notes, and we confer about my impressions of the case. The resulting “reports” are really proposed opinions under the Internal Revenue Code, which are then sent to the Chief Judge. The Chief Judge then determines whether the opinion should be issued as a “memorandum opinion,” or as a “Tax Court opinion” [also known as a “division opinion”], or whether the opinion should be first reviewed by the entire Tax Court, which we call “court conference.” The number of docketed cases in the Tax Court varies greatly from year to year. For the most recent fiscal year, which ended September 30, 2003, there were approximately 20,000 cases. How many opinions we issue is dependent on the number of petitions filed and trials held in any given year.

Memorandum opinions are not officially published by the Tax Court, but they are distributed by various commercial tax services as the opinions are released on a daily basis. The memorandum opinions tend to be very factual by nature and deal with legal issues that have been previously decided by the court. Division opinions tend to involve novel issues that contribute to the development of tax law in a particular area and, therefore, establish precedent. Opinions that reverse a previous Tax Court opinion or invalidate an IRS regulation generally necessitate court conference review, but that discretion lies with the Chief Judge. Division opinions are published by the U.S. Government Printing Office and constitute binding precedents on the Tax Court.

In 1998, Congress increased the deficiency amount in S cases from $10,000 to $50,000 per year. S cases are heard under streamlined and somewhat informal procedural rules. Decisions in such small cases are called “summary opinions” and they cannot be appealed. By statute, such decisions cannot be cited as precedent.

Each day before opinions are served on the parties, copies of the proposed opinions are circulated to all the judges’ chambers so that the opinions can be reviewed by the judges. At 3:00 p.m., the opinions are served on the parties and released to the public, and subsequently, those opinions can be accessed over the Internet—for example, on the Tax Court’s website at www.ustaxcourt.gov.

CPAJ: Of the cases litigated before the Tax Court, what proportion are won by the taxpayer?
Vasquez: The Tax Court does not tabulate and report who wins or loses the cases that are tried. Cases typically involve multiple issues that are not all resolved in one party’s favor. Additionally, in many cases, issues are conceded by one or both parties. Most cases are settled without going to trial, which is probably comparable to other types of cases and to other courts.

CPAJ: Would you comment on how Tax Court decisions can be appealed, and do you have any feel for the proportion of these cases that are appealed, either by the taxpayer or the government?
Vasquez: There are a total of 12 circuits to which Tax Court opinions can be appealed, consisting of the 11 U.S. Courts of Appeal around the country, and the U.S. Court of Appeals for the District of Columbia. An individual taxpayer’s place of residence at the time the petition is filed [or, if a corporation, where its principal place of business is located] determines which circuit the case can be appealed to. Ultimately, rulings by the U.S. Court of Appeals can be appealed to the U.S. Supreme Court. The Supreme Court typically takes no more than two tax cases each year.

Very few Tax Court decisions are appealed. Most of the appeals are filed by the taxpayers rather than the IRS. Appeals by the IRS tend to be based primarily on underlying legal issues, whereas taxpayers may be more inclined to appeal underlying facts, as well as legal issues. S cases cannot be appealed.

CPAJ: To what extent is the Tax Court obligated to follow precedents of the U.S. Court of Appeals and the U.S. District Courts when a tax case is heard in a particular geographical jurisdiction?
Vasquez: We are not bound by opinions of the U.S. District Courts. However, we will nonetheless read and consider the decisions of the U.S. District Courts if they are on point.

As a court of national jurisdiction, the Tax Court does not have to adhere to decisions of a particular court of appeals. In the past, the Tax Court may not have followed certain decisions of a given circuit, even when that circuit court had previously reversed decisions of the Tax Court. For reasons of judicial efficiency, the Tax Court decided to follow the law of a particular circuit if the circuit court had already ruled on the issue at hand. This judicial policy is referred to as the “Golsen Rule,” derived out of a 1970 case, Golsen v. Commissioner. The parties to a tax dispute sometimes argue over the applicability of the Golsen Rule, so that becomes another factual issue for the court’s determination.

CPAJ: How does a tax professional become qualified to practice before the U.S. Tax Court?
Vasquez: IRC section 7452 states: “No 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.” Any attorney who is a member of the highest court in his or her state can become a member of the Tax Court by filing an application and obtaining two sponsors who are already members of the court. Non-attorneys [such as CPAs, enrolled IRS agents, actuaries, or others] can obtain membership by passing an examination and also filing the application, which requires two sponsors. The half-day examination is given at the Tax Court in Washington, D.C., every two years, in November. There are four parts to the examination, dealing with Tax Court Rules of Practice and Procedure; Substantive Tax Law; Federal Rules of Evidence; and Professional Responsibility, including the ABA Model Rules of Professional Conduct. Several hundred candidates normally sit for the exam.

An Important Taxpayer Resource

CPAJ: What is the role of the Chief Judge in expressing the Tax Court’s decisions, and how is the Chief Judge selected?
Vasquez: Under the Internal Revenue Code, the Chief Judge must be elected at least every two years by the presidentially appointed Tax Court judges. The term generally starts in June. The Chief Judge decides whether an opinion should be issued as a “memorandum opinion” or a “division opinion,” as well as whether an opinion should be reviewed by the entire court. The Chief Judge is also a liaison for the court and interacts with Congress and the public. The Chief Judge attends numerous circuit courts of appeals’ judicial conferences or sometimes selects another judge of the Tax Court to attend.

The Chief Judge also handles a variety of administrative matters, including how many trial sessions should be scheduled in a particular city and which judges are assigned to those sessions. The Chief Judge may also choose to hear cases (usually infrequently, in view of so many other court-related responsibilities).

CPAJ: To what extent do the individual judges collaborate in expressing decisions on behalf of the court?
Vasquez: Judges collaborate in formal court conferences, which typically involve two or three cases. Also, as a collegial court, our judges frequently discuss particular issues that arise in various cases before the court.

CPAJ: Can you share any recollections of some of your most memorable cases, including the smallest and largest cases?
Vasquez: The smallest case I remember presiding over involved a $900 tax deficiency over the deductibility of mileage driven from an employer’s yard to remote work sites to drill oil and gas wells. On the other end of the spectrum, I recall presiding over a case involving a deficiency in excess of $300 million for one taxpayer. The variance in the size of tax cases can be huge. For example, the “jumbo-dollar cases” might be only a small percentage of the cases in the Court’s inventory of docketed cases, yet account for a large percentage of the alleged tax deficiencies in issue in those cases.

The cases tend to be very interesting across the board because they involve an enormous range of issues. For example, whether a cash basis taxpayer may be required to maintain inventories, thus requiring the taxpayer to change to the accrual basis of accounting for tax purposes. Some issues are rather emotional to taxpayers, such as whether certain payments are deductible as alimony. Cases alleging civil fraud or whether an activity is for profit can be especially interesting, because the taxpayer’s intent can be central to the case.

In most cases over which I have presided that have gone to trial, the parties have been represented by counsel. However, I also find pro se cases interesting because it gives me the opportunity to preside over cases where taxpayers represent themselves. Pro se cases are frequently settled and typically involve smaller dollar amounts.

CPAJ: Tax simplification continues to be debated and the AICPA has recently announced its support of two bills, H.R. 22 and H.R. 285, that would simplify sections of the Internal Revenue Code. Do you have any reaction to this recurring debate?
Vasquez: I cannot comment on legislation pending before Congress, which is responsible for enacting the laws, because I may be called upon to interpret those laws when there is a dispute before me involving those laws.

CPAJ: In closing, is there anything that you would like to say to readers of The CPA Journal?
Vasquez: The U.S. Tax Court has an important role in our judicial system, and attorneys, CPAs, and individual taxpayers should learn more about the Court. The Tax Court is an important resource to taxpayers to resolve tax disputes without having to first pay the proposed deficiency. I invite interested readers to visit www.ustaxcourt.gov for additional information about the U.S. Tax Court.

Donald E. Tidrick, PhD, CMA, CIA, CPA, is an associate professor of accountancy at Northern Illinois University, DeKalb, Ill.