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Describe the procedure for the passage and adoption of tax bills.
The bill is written by the House Ways and Means Committee. The committee conducts hearings and then sends the amended bill to the House. The adopted bill is then sent to the Senate Finance Committee for study and amendments. The amended bill is then forwarded to the Senate for passage. A joint conference committee of members from both the House and Senate develops a compromise version of the bill if material differences exist between the two versions. If the compromise version passes both the House and Senate, the bill is then sent to the President.
Joe Smith runs an independent trucking company out of Wilmington, Delaware. He travels the Wilmington-New Jersey-New York route. The New Jersey state legislature enacted tough new safety measures for trucks including lower weight limits than those of the surrounding states. Joe decided that it was cheaper for him to continue to use the same heavier trucks and pay a fine in New Jersey for the weight violation, rather than to use numerous smaller trucks to carry his loads. Joe deducted the fines paid on his federal income tax return as an ordinary and necessary business expense. Joe was audited by the IRS and the agent denied the deduction for the fines. The agent denied the deduction on the grounds that the Internal Revenue Code prohibits such a deduction. (Focus on the tax procedure and not on the issue of whether the fines are actually deductible.)
a. What alternatives are now open to Joe (1) administratively, within the Internal Revenue Service, and (2) through the courts? 
b. Suppose Joe selects the Tax Court, and the Tax Court allows his deduction. What effect does this have on (1) the Internal Revenue Service, and (2) Bill Zilch, whose company is based in San Francisco and who has a problem similar to Joe's on the San Francisco-Oregon route? 
c. Assume Joe lost his case in the Tax Court and he appeals to the Third Circuit Court of Appeals, which allows the deduction. What is the effect on (1) the Internal Revenue Service, (2) Roy Jones, a competitor of Joe's in Wilmington, who runs the same route as Joe and also deducted the fines, and (3) Bill Zilch? 
d. Assume Joe's original case reaches the Supreme Court of the United States, which allows the deduction. What is the effect on (1) the Internal Revenue Service, (2) Roy Jones, and (3) Bill Zilch?
- Joe will probably request an appeals conference. Assuming no agreement is reached, the IRS will send a statutory notice of deficiency for tax due. Joe now has 90 days to decide whether to pay or file suit. If he does not make a decision, the IRS may assess, obtain a judgment, and seize his property.
- Joe could file suit in the U.S. Tax Court. He pays no tax before the court (non-jury) decides the case. If Joe loses in the Tax Court, he can appeal to the court of appeals in his circuit (12 circuit courts), and finally, he can request the U.S. Supreme Court to hear the case. On the other hand, Joe could pay the tax due and sue for a refund in a U.S. district court. The district court judge decides the issue of law as to whether fines may be deductible as a business expense. If Joe loses on the legal issue, he may appeal to the Court of Appeals, and if he loses again, he may request the U.S. Supreme Court to hear the case. Appellate courts review only questions of law, not of fact. Or, Joe could pay the tax due and sue the government for a refund in the U.S. Court of Federal Claims. The Court of Federal Claims hears suits for tax refunds only. An adverse decision may be appealed to the Court of Appeals for the Federal Circuit and then on to the U.S. Supreme Court. Since the Supreme Court has discretion over cases it takes, it is unlikely the average case will be reviewed. Joe will decide which court to sue in depending on the following considerations: precedent decisions of that particular court payment of tax before or after suit need for jury on sympathetic factual issue
- The Internal Revenue Service is not bound by this decision in other similar cases even though Joe Smith is entitled to the deduction. The IRS may appeal a decision to the Third Circuit Court of Appeals. The IRS publishes lists of Tax Court cases to which it acquiesces or nonacquiesces. 2. If Bill Zilch takes a deduction, the IRS will probably deny it. Bill must pay the tax or institute suit in one of three courts. Bill would probably choose the Tax Court because of the favorable precedent. The U.S. Supreme Court, as its name implies, is the final authority as to any question of federal law.
c.The Internal Revenue Service is not bound by this decision in other similar cases outside the Third Circuit, even though Joe's deduction was allowed in that circuit. The IRS will follow this decision in all Third Circuit cases. Roy Jones, who has the same truck route, could take the deductions knowing the IRS would not litigate. If Bill Zilch takes the deduction, the IRS will probably deny it. He must pay the tax or institute suit. If the IRS is upheld by the Ninth Circuit Court of Appeals (which covers Bill's area), then there is a conflict in the circuit courts. When this situation arises, it is more likely that the Supreme Court will grant a review.
D.When the Supreme Court decides the case, all parties— Joe, Bill, Roy, and the IRS— are bound to follow the decision. The Supreme Court will hear appeals, in most cases, only where there is a conflict between decisions of lower courts, where the decision is probably in conflict with significant existing precedent, or where the issue is considered of major importance. The Supreme Court can choose (with few exceptions) which cases it will or will not hear. In other words, it can decline to hear the appeal by denying the petition for review. The U.S. Supreme Court, as its name implies, is the final authority as to any question of federal law.
Explain what is meant by a determination letter.
Determination letters are written by IRS officials within specific operating divisions. They are written in regard to various transactions to be reflected on returns that will be filed by various types of taxpayers and organizations. They are issued only if the answer to the question presented is covered specifically by statute, Treasury decision, or regulation, or specifically by a court decision or ruling opinion published in the Internal Revenue Bulletin. Determination letters contrast with revenue rulings in that such letters are never issued about unclear points of law.
When there is a conflict between a taxpayer and the IRS with regard to the amount of tax owed, explain the statutory procedure for resolution of the conflict.
If a taxpayer disagrees with the IRS concerning the amount of tax owed, he or she may request a hearing before the IRS Appeals organization. While the dispute with IRS is being considered, the appeals officers are not permitted to engage in substantive discussions regarding the specific case with other IRS officials in the absence of the taxpayer or his or her representative. In addition, the taxpayer may request that the issue be referred to the National Office staff for technical advice if there is a lack of uniformity in the disposition of the issue or if the issue is significantly complex or unique. Dispute resolution methods in Appeals now also include mediation and arbitration.
If the conflict is not resolved, how may an appeal be taken to the courts?
If the taxpayer and the IRS are not able to resolve their conflict in Appeals, statutory notice of deficiency is issued by the IRS Commissioner. Following this notice, taxpayers have 90 days to file a petition with the U.S. Tax Court to have their cases heard. If the 90 days pass without either the tax being paid or suit being filed, the IRS can assess a tax deficiency, enter judgment, and seize the taxpayer's property to collect the deficiency. However, no tax need be paid in advance for cases to be litigated in the Tax Court. Once a case has been docketed there, an appeals officer is assigned to the case and given exclusive authority to settle within a 4-month period. If no settlement is reached in that time, the case is scheduled for trial. Alternatively, the taxpayer may choose to pay the tax deficiency and then file a claim for a refund with the IRS. Unless a notice of claim disallowance is sent before 6 months expire, the taxpayer must wait that time period before he or she can file suit for a refund in either the U.S. District Court or the U.S. Court of Federal Claims.
Distinguish between the three courts that have original jurisdiction to hear tax matters.
The U.S. Tax Court was established for taxpayers who seek a redetermination of a deficiency asserted against them but do not wish first to pay the deficiency. Trial by jury is not available in the Tax Court. Questions of law and fact are decided by Tax Court judges.
The U.S. District Court can only hear tax cases in which the taxpayer has first paid the deficiency and has been denied a refund by the IRS. The District Court is the only court in which a taxpayer may request a jury trial. In a case where there is a jury, the jury decides questions of fact; the judge decides questions of law.
The U.S. Court of Federal Claims, like the U.S. District Court, can only hear tax cases in which the taxpayer has first paid the deficiency and has been denied a refund by the IRS. The Court of Federal Claims is a trial court that became operative on October 1, 1982, when the U.S. Court of Claims ceased to exist as such.
What avenues of appeal exist if a taxpayer loses a tax case in a trial court?
Appeals from the Tax Court by an unsuccessful taxpayer are heard by the U.S. Court of Appeals in the region of the country in which the taxpayer resides. If there is a difference of opinion in the various courts of appeal, the Tax Court follows the decisions of that Court of Appeals to which the taxpayer may appeal. Appeals from the Court of Federal Claims are heard by the Court of Appeals for the Federal Circuit, while appeals from a U.S. District Court are heard by that particular court's corresponding U.S. Court of Appeals.
Appeals from a U.S. Court of Appeals or the Court of Appeals for the Federal Circuit are taken to the highest court in the land, the U.S. Supreme Court.