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

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.”

My reading of the rules leads me to believe that the literal interpretation could in fact lead to an absurd result.

Imagine a taxpayer wants to bring both a redetermination claim and a deficiency claim in a case where the amounts in dispute are similar to Schwartz, i.e., the tax liability for each individual year is under $50,000 but the total tax for all tax years exceeds $50,000.

The Tax Court Practice and Procedure Rules specify that taxpayers can bring to separate claims in one tax court petition (Rule 31(c) specifies that “A party may set forth two or more statements of a claim or defense alternatively or hypothetically” and “A party may state as many separate claims or defenses as the party has regardless of consistency or the grounds on which based”).

Taxpayers who do not hire a tax attorney to assist them may end up checking both the “lien and levy” box and the “redetermination of deficiency” box on the tax court’s sample small tax case tax petition form that is available on the tax court website (perhaps the tax court should amend or footnote this sample form).

If a taxpayer did bring both claims and the claims are joined in one case, then, according to the court’s ruling, one of the taxpayer’s claims would be heard under the informal small tax case procedures and the other claim would be heard under the normal tax court procedures. It seems that this would require the tax court to split the case into two separate hearings (and separate pleadings may be necessary), one hearing being formal and one being informal.

Moreover, the non-prevailing party – be it the taxpayer or the IRS – would only be able to appeal the tax court’s determination for the deficiency claim and not the redetermination claim.

As a result of today’s ruling, 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.

This puts taxpayers in the position of having to figure out if not bringing a claim for one or more tax years could be problematic for them or if they should contest the government’s request to consolidate claims.

Having taxpayers figure out whether they should file separate petitions is wasteful and the result of filing both claims in one petition could produce absurd results.

I, personally, think the court should have exercised its discretion to overrule the express language in the statute in this case as this issue directly impacts the courts ability to carry out its judicial function.

I am not persuaded that the legislature intended to create this disparate treatment for these two types of claims. I am more inclined to believe that it was a Congressional oversight (although, I have not pulled the legislative record to verify this – assuming that one even exists for this issue).