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.