Choice of Forum in Federal Excise Tax Refund Cases

by McDermott Will & Emery
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To challenge an administrative determination and assessment of federal excise tax, taxpayers in refund cases have a choice of two different federal courts to bring an action:  the U.S. federal district court and the U.S. Court of Federal Claims.  This installment to our regular column describes these fora and provides some practice points.  The choice of forum is one of the most significant decisions that must be made when tax litigation is imminent.

In deciding whether to seek a refund in the District Court or the Court of Federal Claims, a taxpayer should consider several issues in determining the most advantageous forum.  The most important consideration in choosing a forum is the controlling case law.  When the case presents an issue of first impression, the taxpayer should look more generally to the recent tax decisions in these courts as well as other factors, including the potential for a jury trial, whether the cases will be decided on motions for summary judgment and potential for government offsets.

Is There Any Controlling Judicial Precedent?

One of the primary considerations in determining which court to litigate your refund case is the existence of any controlling legal authority.  All courts must follow a controlling decision of the U. S. Supreme Court. Similarly, each federal district court must follow the legal precedent announced by the U.S. Circuit Court of Appeals to which an appeal would lie.

Can You Litigate By Paying Only Part of the Tax?

Generally, a federal district court or the U.S. Court of Federal Claims does not have jurisdiction over a tax refund suit unless the taxpayer has fully paid the amount of the tax assessment.  Importantly, a different rule applies to a divisible tax.  The taxpayer with a divisible tax is considered to make full payment for purposes of the court’s jurisdiction if the taxpayer pays the tax for a single transaction during the applicable period.

Can the Government Assert Additional Tax Liability?

Once the period for assessment has expired, the government cannot assess additional amounts of tax, but if the taxpayer has filed a refund suit for the same tax period, the government can assert an offset up to the amount of the taxpayer’s refund claim.

What Are the Settlement Procedures?

The Tax Division of the Department of Justice has settlement authority in cases litigated in the Court of Federal Claims and federal district courts.  There is, however, a required additional level of review by the Joint Committee on Taxation for any settlement providing for a refund in excess of $2,000,000.

How Do District Courts and Court of Federal Claims Differ? 

In a suit filed in the federal district court, the taxpayer or the government may ask for a trial by jury.  Juries are not available in suits filed in the Court of Federal Claims.

1.      Place of Trial

A federal district court may present a more convenient forum for the taxpayer because the taxpayer’s principal place of business is located in proximity to the court.  The Court of Federal Claims is located in Washington, D.C.

2.      Discovery

The Court of Federal Claims and the federal district courts permit all typical forms of discovery.  For example, both courts permit the taking of depositions, formal requests for information and documents, and the issuing of subpoenas to third-parties.

3.      Rules of Evidence

Litigants in the Court of Federal Claims are bound by the rules of evidence applicable in the Federal Circuit.  Similarly, the federal district courts follow the Federal Rules of Evidence and the case law stated by the applicable court of appeals with appellate review.

4.      Government Counsel

In cases lying in both the Court of Federal Claims and the federal district courts, attorneys in the Department of Justice Tax Division represent the government.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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