February 14, 2007

Tax Court Small Tax Case Procedures Do Not Apply to All Tax Cases

Houston Tax Attorney Blog

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Tax procedure, especially tax court procedure, can produce some strange results. Today’s Schwartz v. Commissioner case provides a good example of this.

The Schwartz case involves a taxpayer who, without the assistance of a tax attorney, petitioned the tax court to contest the government’s determination to proceed with collections. The taxpayer asked the tax court to conduct the tax case using the small tax case procedures.

The small tax case procedures provide relaxed evidentiary rules for tax litigation cases where the unpaid tax liability is under $50,000. The downside to the small tax proceedings (if you are the losing party) is that cases tried under the small tax case procedures cannot be appealed by either party.

In the Schwartz case the tax court looked at the different language employed by subsections (a) and (f) of IRC Section 7463. Basically these two code sections specify that the tax court has the ability to hear a tax matter using the small tax case procedures (1) for deficiency cases if the unpaid tax is less than “$50,000 for any one taxable year” and (2) for tax redetermination cases if the total unpaid tax is less than $50,000.

Deficiency cases are tax cases where taxpayers challenge the tax liability (usually because of a defect in the IRS notice of deficiency) and redetermination cases, like the Schwartz case, are tax cases where taxpayers challenge the IRS decision to proceed with collections (usually because the IRS hasn’t complied with the required collection procedures).

Both the taxpayer and the IRS consented to the tax court using the small tax case procedures. However, the tax court concluded that it was not able to hear this case using the small tax case procedures because the case was a redetermination case (not a deficiency case) and the total tax for all of the tax years involved exceeded the $50,000 limit (although the tax for any one tax year did not exceed this amount).

The court points out that neither the IRS nor the taxpayer argued that “a literal application of section 7463(f)(2) produces an absurd result, and it is certainly not unreasonable for Congress to have articulated different dollar thresholds for different types of cases.”

As a result, taxpayers who have tax liabilities under $50,000 for any one tax year will not want to consolidate multiple tax years in one petition if that would result in the overall tax liability exceeding the $50,000 limit–assuming that they want to use the small tax case procedures and they are filing a redetermination claim.

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