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August 1991

Consideration of the claims court as a civil tax litigation forum.

by Kafka, Gerald A.

    Abstract- The U.S. Claims Court is an attractive alternative for taxpayers planning civil tax litigation. Administrative changes in IRS practices now enable taxpayers to consider litigating a federal tax dispute at the U.S. Claims Court instead of the U.S. Tax Court. A CPA working with a taxpayer's litigation counsel can develop a strategy to take advantage of litigation alternatives now available as a result of procedural changes at the U.S. Claims Court regarding jurisdiction over certain civil tax cases.

The volume of civil tax litigation is likely to increase in the near future, as recent changes in IRS administrative practices and in certain procedural rules under the IRC begin to take effect. On the administrative front, the IRS has commenced a program of involving its attorneys in the audit process, with the intended purpose of assisting in the development of facts and the identification of potential litigation vehicles. Although this program initially is limited to large case taxpayers, it is likely that the IRS will extend this effort to smaller taxpayer audits if a close working relationship develops between its attorneys and its auditors.

In addition, the taxpayers' cost of non-compliance in the form of interest on tax underpayment increases in 1991. For corporate taxpayers, new Sec. 6621(c) imposes an additional 2% interest rate for underpayments in excess of $100,000 that remains unpaid during a protest by an Appeals Office or while a case is pending in the Tax Court. Similarly, the Sec. 163(h) limitation on the deductibility of personal interest, including interest on federal income tax payments, becomes fully effective in 1991 for taxpayers other than corporations. Both of these changes will likely prompt taxpayers to consider paying disputed taxes and then seeking recovery by way of a refund claim and, if necessary, a refund suit. The less attractive alternative is to proceed in the Tax Court, where prepayment of the disputed tax is not jurisdictionally required.


Taxpayers generally can select one of three forums for litigating a federal tax dispute: the U.S. Tax Court, the U.S. Claims Court, or the local U.S. District Court. The jurisdiction of each court is different, but there is significant overlap.

The Tax Court has jurisdiction to determine a deficiency of most federal taxes, including income, estate and gift taxes, certain excise taxes, and windfall profit taxes on domestic crude oil. The Tax Court also has limited jurisdiction in other areas, such as declaratory judgment actions with respect to certain exempt organization matters, improper disclosure actions, and various issues relating to deficiency redetermination matters pending before the court.

The District Court and the Claims Court have concurrent jurisdiction over all deficiency taxes and other matters over which the Tax Court has jurisdiction. In addition, these courts have jurisdiction over employment taxes, excise taxes, and assessable penalties, which cannot be considered by the Tax Court.

Prepayment of Tax as a

Jurisdictional Prerequisite

One significant factor that is responsible for the Tax Court hearing over 90% of all civil tax cases is the fact that a disputed tax need not be paid prior to commencing an action. Although a taxpayer is free to pay all or part of a proposed deficiency after receiving a statutory notice of a deficiency, there is no jurisdictional requirement that such payment be made. Indeed, absent a taxpayer's objective to reduce the accrual of interest on any tax deficiency that may be determined by the Tax Court, there is little incentive for a taxpayer to prepay a disputed tax in advance of a decision by the court.

In the Claims Court, by contrast, a civil tax action can only be brought as a refund suit, which must be preceded by full payment of the tax for the taxable period in question. This jurisdictional prerequisite, which is equally applicable to refund suits commenced in District Court, has been strictly construed by the Claims Court to require full payment of the contested tax and of any related interest and penalties.

This full payment rule does not apply, however, to so-called "divisible taxes" such as employment and excise taxes that are considered to be discrete tax liabilities arising from a series of separate, but related, transactions. Thus, in order to commence a refund suit for employment taxes, for example, a taxpayer need only pay the tax attributable to one employee for one taxable quarter. The government will counterclaim in the refund suit for the balance of the unpaid divisible taxes and, absent circumstances suggesting that the collection of such balance would be jeopardized by delay, the IRS will forego any administrative collection activity during the pendency of the refund suit.

Other Pre-Litigation Procedural


In addition to the jurisdictional requirement of prepayment of the disputed tax, Sec. 7422 requires that a taxpayer file a timely claim for refund prior to commencement of a tax refund suit. In brief, a claim for refund should be filed on the specified IRS form (usually an amended tax return), it must state the amount and type of tax in question as well as the taxable period for which refund is sought, and, perhaps most importantly, it must include a narrative statement of all relevant facts and legal grounds on which the claim is based.

Because the format of a claim for refund is prescribed by Treasury Regulations rather than by the IRC, the Supreme Court has determined that the IRS can waive compliance with the rule that the proper form be used, as long as all essential information is provided to the IRS in an informal written claim. In other words, while the statutory requirement that a claim be filed must be satisfied, the IRS can waive any defects in the format of the claim by timely considering its merits. The Claims Court has been much more liberal than the District Courts in its application of this informal claim rule, holding that letters and even a series of related documents can constitute a claim for refund.

The requirement of Reg. Sec. 301.6402-2(b)(1) that a refund claim "set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof" precludes a taxpayer from raising at trial any factual or legal grounds that are at variance with those stated in the refund claim. The variance defense that is provided to the government by this provision is based on the premise that the IRS must be given an opportunity to evaluate a claim administratively and thereby limit the scope of any ensuing refund litigation to those issues that the IRS has examined and is willing to defend. The variance defense is largely one of inadequate notice and prejudice to the government, but because it is jurisdictional in nature it results in the dismissal of the taxpayer's refund suit to the extent of the variance. The courts have generally dealth with the variance defense from a practical perspective, and, again, the Claims Court has generally applied this rule more liberally in favor of taxpayers than the District Courts.

The general rule under Sec. 6511 is that a refund claim must be filed within the later of three years after the filing date of the return to which the claim relates or two years after the date of payment of the tax for which refund is sought. For purposes of this latter rule, the claimed refund is not limited to the items for which the tax was paid, but, rather, by the amount of such taxes that were paid within the two- year period.

An Illustration

Consider the situation where the IRS audits an income tax return and determines a tax deficiency of $100,000 based on the disallowance of a reported bad debt loss. The taxpayer pays the amount of the assessed deficiency without contesting the matter in the Tax Court. After expiration of the three-year limitation from the filing date of the return, but within two years after payment was made, the taxpayer is entitled to file a claim for refund of the $100,000 for the taxable year in question based on any grounds, even though such grounds are totally unrelated to the basis for the assessed deficiency. These limitations for filing the refund claim are jurisdictional in nature and cannot be waived by the IRS.

Under Sec. 6532, the period of limitations for filing a refund suit precludes both premature and late filings. Suit cannot be commenced before the expiration of six months after a refund claim has been filed or more than two years after the date of any certified notice of disallowance of the claim. Because the execution of a written waiver of the notice of disallowance, Form 2297, starts the running of the two- year period of limitations, but does not remove the six-month restriction for filing suit, there is no incentive for the taxpayer to sign this waiver routinely proffered by the IRS. By contrast, there is a procedure under IRS N. Rel. IR-1600 for a taxpayer to request that the disallowance of a claim be accelerated. There also is authority for the taxpayer and the IRS to enter into a written agreement (Form 907) to extend the two-year period of limitations for bringing suit. Both of these administrative procedures are infrequently used and often require extended discussions with the IRS to implement.

Precedent and Judicial Expertise

An important consideration in the selection of a forum for litigating a civil tax case is the existence of a precedent decision of the trial court or the court to which any appeal would be taken. A decision of the U.S. Court of Appeals for the region within which a taxpayer resides or has its principal place of business is binding on both the District Court in which a refund suit can be filed and, under the Golsen rule, upon the Tax Court if a deficiency redetermination proceeding is filed. By contrast, the Claims Court is bound only by its own precedent and that of the U.S. Court of Appeals for the Federal Circuit, and, of course, by that of the Supreme Court. Thus, in those instances where a decision adverse to the taxpayer's position exists either in the Tax Court or in the taxpayer's regional Circuit Court of Appeals, the Claims Court provides a forum for a fresh look at an issue.

In the absence of controlling precedent, whether favorable or not, the experience of the Claims Court in handling civil tax cases also should be evaluated. It must be recognized that the Claims Court handles civil actions against the U.S. in several broad categories, including government contract matters, governmental takings of private property under the Fifth Amendment, and governmental compensation disputes. Nonetheless, the federal tax component of the Claims Court's docket is significant, comprising approximately 25% of its total caseload. Thus, while Claims Court judges do not have the tax expertise or the volume of civil tax litigation that the Tax Court judges have, the Claims Court is second only to the Tax Court in those categories.

Risk of Setoffs

The filing of a Tax Court deficiency proceeding stays the running of the period of limitations within which an assessment must be made. Accordingly, any new issues that are raised by the IRS after it sends the statutory notice of deficiency can be affirmatively recovered by the IRS if its position is upheld by that court. Although the IRS normally bears the burden of proof with respect to any such new issues, the risk of an increased tax liability arising from an undiscovered "skeleton in the taxpayer's closet" is a consequence that a taxpayer must carefully consider before commencement of a Tax Court proceeding.

By contrast, a taxpayer can delay the filing of a tax refund suit until after the expiration of the period of limitations for assessment and thereby preclude the IRS from any affirmative recovery for the taxable period in issue. The government can only raise as a counterclaim in a tax refund suit those amounts that have already been timely assessed or for which the period of limitations for assessment remains open. Where the period of limitations is closed and no assessment is outstanding, the government is limited to raising as a setoff any adjustment present in the tax return that the taxpayer has placed in issue before the court. It must be remembered, however, that the government's ability to raise a setoff is not restricted to the issues raised in the taxpayer's refund claim or to the amount of the claim--it can raise any issue relevant to the tax return before the court.

A setoff can only reduce the amount of any refund due to the taxpayer and cannot be affirmatively recovered from the taxpayer. To the extent that the total amount of setoffs asserted by the government exceeds the amount of the taxpayer's claimed refund, the excess will be barred from collection by the expiration of the period of limitations and will not generate any additional tax liability for the taxpayer. After the government has raised a setoff, the taxpayer is entitled to raise any counter-setoffs that were not raised in a timely claim for refund, but only for purposes of reducing the effect of the government's setoffs.

The government has a right to conduct discovery to investigate the existence of potential offsets. The Claims Court, however, has held that the use of discovery for this purpose is permitted only in instances where the government possesses "concrete and positive evidence before it initiates discovery relevant to establishment of offsets." Mahoney v. U.W., 80-1 U.S.T.C. par. 9359 (Ct. Cl. 1980). No such general limitation against "fishing expeditions" by the government has yet been formulated by any district court.

Forum Shopping

Although taxpayers have wide discretion in selecting a forum in which to litigate a federal civil tax disputes, the decision is largely irrevocable once made. After a petition is filed in the Tax Court, no voluntary dismissal is possible, and the entry of any final order by the Tax Court operates as an absolute prohibition against any further judicial consideration of the taxable periods that were before that court.

In limited contrast, the procedural rules of both refund forums do permit a taxpayer-plaintiff to dismiss an action without prejudice where the government has not yet filed a response to the complaint or where a joint stipulation of dismissal is filed. This option is rarely available as a practical matter, however. Normally, circumstances that suggest that another refund forum would have been a better choice do not develop until after the filing of a responsive pleading, and the government is unlikely to agree to any transfer that is not in its own interest. This limitation cannot be circumvented by filing simultaneous refund suits in both the Claims Court and the District Court, a situation that by statute, (28 U.S.C. Sec. 1500), automatically strips the Claims Court of jurisdiction.




The procedural rules of the Claims Court are based on the Federal Rules of Civil Procedure with modifications to reflect the absence of any right to a jury trial. By contrast to the general practice of the Tax Court, cases are assigned to a particular judge immediately after the filing of a complaint, with the result that all pretrial procedural matters are handled by the same individual who will hear the trial. Like the Tax Court, trials are held either at the Claims Court in Washington, or, upon request of the parties, at locations nationwide. Indeed, the Claims Court in a single case can hold multiple trial sessions at various locations around the country where this is requested by the parties in order to present evidence in the most economical fashion. Also like the Tax Court, but contrary to the District Courts, the Claims Court has nationwide subpoena power to compel the attendance of witnesses at trial.

General Pretrial Procedures

The Claims Court has developed, in Appendix G to its Rules of Procedure, an extensive pretrial procedure that is designed to facilitate an expeditious hearing. Appendix G prescribes a short timetable within which the parties are required to confer and to propose to the court a schedule for discovery, the filing of dispositive motions, and an evidentiary hearing. In short, the parties are required to meet within 15 days after the pleadings are filed and within 30 days after that to file a Joint Preliminary Status Report with the court. This report must identify all issues, propose a schedule for any dispositive motions, state the prospects for settlement, set forth a proposed discovery schedule, and note the desirability of an expedited trial schedule. In other words, the parties are given unparalleled latitude to custom design a trial schedule subject to court approval. Under the new Rules' procedure for expedited trials, the court will limit discovery not only as to time, but also as to volume, with each party limited to five depositions and 30 interrogatories, including subparts, in appropriate cases.

The Claims Court will approve or modify the parties' proposed pretrial schedule and thereafter continue to monitor the progress of the case by regular status conferences or on an as needed basis. Most status conferences are handled by telephone conference call, even when counsel for both parties are located in Washington. The Court also establishes a date for a final pretrial conference prior to which the parties will be requied to file Memoranda of Contentions of Fact and Law, Proposed Findings of Fact, and a witness list.

Under these procedures, the Claims Court's emphasis is on pretrial presentation of a case, and post-trial briefs are not permitted except upon specific order of the trial judge. This pretrial practice differs significantly from that of the Tax Court where there generally is less pretrial involvement by the court and the emphasis is on post-trial briefing. Perhaps because of these differences, cases in Claims Court are often more quickly decided than in Tax Court. A typical case that is tried in Claims Court will be decided approximately one year after it is filed. A case that is handled under the expedited trial procedure can take three to five months less.


Discovery in tax refund suits in the Claims Court, like that in the District Court, is much broader in scope and more frequently used by the government than is discovery in the Tax Court. Unlike Tax Court proceedings where the emphasis is on developing a stipulated record and formal discovery is prohibited until after the stipulation process is exhausted, a taxpayer in the Claims Court should expect to undergo extensive discovery by the government in the form of interrogatories, depositions, requests for the production of documents, and requests for admissions. These efforts are, of course, subject to judicial review, but the burden will be on the taxpayer to show that any requested discovery should be limited by a protective order.

One discovery advantage that a taxpayer gains in tax refund litigation is more extensive access to the government's expert witnesses. This is a two-way street, but because the taxpayer's expert is generally hired earlier in the process than is the government's, there can be a significant advantage is deposing the government's expert prior to trial. Although since July 1990 the Tax Court has permitted depositions of expert witnesses where both parties consent, there is no such restriction in tax refund litigation.

The Claims Court also has a discovery device available to taxpayers that is unique to that forum. Under 28 U.S.C. Sec. 2507(a), a taxpayer can "call" upon any department or agency of the U.S. to produce unprivileged information or documents. Although this procedure is only infrequently invoked in tax refund litigation, in appropriate circumstances it can be used to acquire evidence that might otherwise require disproportionate efforts.

Settlements Process

Pursuant to Sec. 7122(a), settlements of Claims Court tax refund cases, like the trials of such cases, are solely within the authority of the Tax Division of the Department of Justice. This is to be contrasted with Tax Court litigation that is entirely under the jurisdiction of the Office of Chief Counsel of the IRS.

Chief Counsel attorneys do play a role, however, in the settlement process for tax refund litigation. Following the filing of a tax refund suit, a Chief Counsel attorney reviews the IRS administrative file for the taxable periods placed in issue and prepares a "defense letter" recommending legal arguments for the Justice Department Tax Division to use in defending the case. At the same time, Chief Counsel classifies the case as either "standard" or under the Settlement Option Procedure ("SOP"). An SOP case generally involves routine factual issues or legal issues of little precedent value and can be settled without any consultation with the IRS. A standard case, on the other hand, requires that the Justice Department obtain the recommendations of the IRS with respect to any settlement, even though the final decision remains with the Justice Department.

The number of levels of review within the Justice Department that evaluate a particular settlement offer depends upon the amount of the proposed government concession. Tax Division section chiefs generally are authorized to concede up to $200,000 (including interest and penalties), while amounts in excess of $ 750,000 require approval by the Assistant Attorney General, with two intermediate levels of review.

To facilitate the settlement process, the Claims Court in General Order No. 13, has adopted a formal procedure under which two alternative dispute resolution techniques -- mini-trials under the jurisdiction of a new judge and settlement judges -- can be invoked by the parties. These procedures are encouraged in larger cases where the amount in controversy is greater than $ 100,000 and trial is expected to last more than one week. Use of these procedures is voluntary and, if they fail, the case is returned to the original judge for trial. Although arbitration of federal civil cases in general is gaining wider use in District Courts and the Tax Court has recently adopted a new procedure for voluntary binding arbitration, the Claims Court procedures are the most complete presently available in tax cases. The Justice Department to date has not been enthusiastic about alternative dispute resolution in the Claims Court, but it remains an alternative for the appropriate case, such as when the principal issue in dispute is one of valuation.

Regardless of the procedures employed, most cases in the Claims Court do settle. In one recent year, of the 242 tax cases disposed of by the Claims Court only eight were the subjects of trial. While some of the others were the subjects of dispositive motions, the balance was largely comprised of settled cases.


The factors that enter into a taxpayers' choice of forum for litigating a civil tax controversy are many, with no one factor being determinative. However, because of the procedural requirements that must be satisfied as a jurisdictional matter in a tax refund suit and the evidentiary effects of representations that are made during the administrative audit and review process, taxpayers and their counsel who face the prospect of litigation should consider the alternatives as early in the administrative process as possible. Accountants who represent taxpayers during this administrative process should also be aware of these alternatives and should work with the taxpayer's litigation counsel in developing a strategy to follow.

The Claims Court's smaller docket and customized pretrial procedures suggest that it be seriously considered by any taxpayer evaluating the prospects of civil tax litigation. This is particularly true with the introduction of the Claims Court's new expedited trial procedure, whereby government discovery is limited and the time-table for a decision is accelerated. Although no forum can match the technical expertise provided by the Tax Court, the Claims Court should be especially attractive to taxpayers who desire a prompt decision by a court that is accustomed to dealing with the U.S. as a civil defendant and that is no stranger to civil tax issues.

Gerald A. Kafka, JD, LLM, is a Partner with the law firm of Steptoe & Johnson, Washington, DC. He is the co-author of the treatise, Litigation of Federal Tax Controversies, and an adjunct professor of tax practice and procedure (litigation) in the LLM (Taxation) program at the Georgetown University Law Center.

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