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Sources of Tax Law and the Role of Courts

29 July, 2015 - 17:25

Enforcement of the Tax Laws and Court Review

The IRS, a part of the Department of the Treasury, enforces the federal tax code. It follows various procedures in examining tax returns – and we will leave that to a course on tax practice and procedure or to a tax clinic. When it is time to go to court because there is no resolution of a problem, a taxpayer has three choices:

  1. Tax Court: The Tax Court is a specialized court comprised of nineteen judges. It sits in panels of three judges. There is no jury in Tax Court cases. Taxpayer does not have to pay the amount of tax in dispute in order to avail himself/herself of court review in Tax Court. Appeals from Tax Court are to the United States Court of Appeals for the Circuit in which the taxpayer resides.
  2. Court of Claims. The Court of Claims hears cases involving claims – other than tort claims – against the United States. It sits without a jury. Taxpayer must pay the disputed tax in order to avail himself/herself of review by the Claims Court. Appeals from a decision of the Court of Claims are to the United States Court of Appeals for the Federal Circuit.
  3. Federal District Court. Taxpayer may choose to pay the disputed tax and sue for a refund in the federal district court for the district in which s/he resides. Taxpayer is entitled to a jury, and this is often the driving motivation for going to federal district court. Appeals are to the United States Court of Appeals for the federal circuit of which the federal district court is a part.

Think of the sources of tax law and their authoritative weight as a pyramid. As we move down the pyramid, the binding power of sources diminishes. Moreover, every source noted on the pyramid must be consistent with every source above it. Inconsistency with a higher source is a ground to challenge enforcement.

At the pinnacle of the pyramid is the United States Constitution. Every source of tax law below the United States must be consistent with the Constitution. Immediately below the Constitution is the Internal Revenue Code. Courts may construe provisions of the Code. Depending on the level of the court and the geographic area (i.e., federal circuit) subject to its rulings, those decisions are binding constructions of the Code’s provisions. 1 The IRS may announce that it does or does not acquiesce in the decision of a court other than the Supreme Court.

Immediately below the Code are regulations that the Secretary of the Treasury promulgates. These regulations are generally interpretive in nature. So long as these regulations are consistent with the Code 2 and the Constitution, they are law. The same subsidiary rules of court construction of the Code apply to construction of regulations.

A revenue ruling is a statement of what the IRS believes the law to be on a certain point and how it intends to enforce the law. Since the tax liability of a taxpayer is (generally) the business of no one but the taxpayer and the IRS, 3 this can be very valuable information. A revenue procedure is an IRS statement of how it intends to proceed when certain issues are presented. The IRS saves everyone the expenses of litigating such questions as whether an expenditure is “reasonable,” “substantial,” or “de minimis” in amount. Revenue rulings and revenue procedures are not law, and courts may choose to ignore them.

A private letter ruling is legal advice that the IRS gives to a private citizen upon request (and the fulfillment of other conditions). These rulings are binding on the IRS only with respect to the person or entity for whom the IRS has issued the letter ruling. Publication of these rulings is in a form where the party is not identifiable. While not binding on the IRS with respect to other parties, the IRS would hardly want to establish a pattern of inconsistency.

Other statements of the IRS’s position can take various forms, e.g., technical advice memoranda, notices. These statements are advisory only, but remember: the source of such advice is the only entity who can act or not act on it with respect to a particular taxpayer.