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February 14, 2007

Years Combined for U.S. Tax Court Small Case Limit

Tax Litigation

Houston Tax Attorney

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The U.S. Tax Court’s rules allow taxpayers to elect small case status to avoid some of the technical litigation rules that they may not be familiar with.  To qualify for small case status, do you combine the amounts from all open tax years in determining whether small case status is available?  The court addressed these rules in Schwartz v. Commissioner, .  

Facts & Procedural History

The taxpayer who represented themselves without the assistance of a tax attorney.  They filed a petitioned the U.S. Tax Court to contest the IRS’s determination to proceed with collections.  The taxpayer asked the tax court to conduct the case using the small tax case procedures.  Both the IRS and the taxpayer agreed that the small tax case procedures should be used.  The U.S. Tax Court did not agree.

The Small Tax Case Election

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

The $50,000 Limit

The $50,000 limit is set out in Section 7463(a) and (f). These two subsections grant the U.S. Tax Court the ability to hear a tax matter using the small tax case procedures for:

(1) deficiency cases if the unpaid tax is less than “$50,000 for any one taxable year” and

(2) 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 the IRS assessed the wrong amount of tax) 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).

The Limit is Cumulative for Redetermination Cases

The U.S. Tax Court noted that this was a redetermination case.  It also noted that the language in Section 7463 saying that “the total unpaid tax is less than $50,000” is not the same as the language for deficiency cases, which is “is less than “$50,000 for any one taxable year.”

Thus, the court noted that the language Congress chose to use in Section 7463 makes redetermination cases cumulative.  As such, the 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.”

Taxpayers who have tax liabilities under $50,000 for any one tax year may need to try to petition the court separately for each year, if they intend to use the small case procedures.

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