Tax litigation in the United States: overview

A Q&A guide to civil and criminal tax litigation in the United States.

This Q&A provides a high level overview of the key practical issues in civil and criminal tax litigation, including: pre-court/pre-tribunal process, trial process, documentary evidence, witness evidence, expert evidence, closing the case in civil and criminal trials, decision, judgment or order, costs, appeals, and recent developments and proposals for reform.

To compare answers across multiple jurisdictions, visit the Tax Litigation: Country Q&A tool.

The Q&A is part of the global guide to tax litigation. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxlitigation-guide.

Hope P Krebs and Thomas W Ostrander, Duane Morris LLP
Contents

Overview of tax litigation

Issues subject to tax litigation

1. What are the most common issues subject to tax litigation in your jurisdiction?

There is a significant amount of criminal and civil tax litigation in the US. Typically, the issues in dispute concern the omission of income or the availability of deductions or credits. The proper venue for tax litigation depends mainly on the type of tax at issue. As taxes in the US can be imposed at each of the US federal, state and local levels, litigation associated with those taxes must be brought in the proper court for resolving these disputes.

This chapter will focus only on the US federal rules for litigating US federal civil and criminal income tax matters. While each of the 50 states in the US (and many localities within each of those states) has its own set of distinct income taxation rules, as well as rules of tax litigation practice and procedure, the magnitude of these rules puts them well beyond the scope of this chapter.

 

Legislative framework

2. Outline the legislative framework and principal pieces of legislation governing both civil and criminal tax litigation.

Civil tax litigation

The US rules governing federal income tax matters (including civil and criminal tax litigation) are primarily contained in Title 26 of the United States Code (USC). This Title is commonly referred to as the Internal Revenue Code of 1986, as amended (IRC). Title 28 of the USC contains statutes and rules governing civil litigation, including tax-related litigation. Interpretive guidance regarding the IRC is issued by the various US federal courts with jurisdiction over federal income tax matters, the US Treasury Department and the US Internal Revenue Service (IRS).

Criminal tax litigation

Title 18 of the USC contains statutes related to criminal matters. US federal criminal tax offences are primarily contained in Chapter 75 of the IRC. Tax crimes contained within the IRC include:

  • The attempt to evade or defeat tax (IRC § 7201).

  • The wilful failure to collect or pay tax (IRC § 7202).

  • The wilful failure to file return, supply information or pay tax (IRC § 7203).

  • Fraud and false statements (IRC § 7206).

  • Providing fraudulent returns, statements or other documents (IRC § 7207).

Tax crimes can also be prosecuted under various other US federal criminal statutes. For example, Title 18 of the USC is titled "Crimes and Criminal Procedure" and contains a number of related offences that can be charged in criminal tax cases, including:

  • Conspiracy to commit an offence against the US and conspiracy to defraud the US (18 USC § 371).

  • Making false statements or using false documents within the jurisdiction of any department or agency of the US (18 USC § 1001).

  • Making false claims for a tax refund (18 USC § 287).

  • Money laundering (18 USC §§ 1956 and 1957).

  • Violations of the Racketeer Influenced and Corrupt Organizations Act (18 USC § 1961 to 1968).

  • Perjury (18 USC § 1621).

  • Mail fraud (18 USC § 1341).

  • Bribery (18 USC § 201).

  • Aiding and abetting the commission of a federal crime (18 USC § 2).

 

Tax evasion and other criminal tax offences

3. What are the key elements that constitute tax evasion and other main criminal tax offences in your jurisdiction?

The most typical criminal tax offences and their elements are:

  • Tax evasion (26 United States Code (USC) § 7201). To establish the offence of attempting to evade and defeat tax, the government must prove beyond a reasonable doubt that:

    • a substantial income tax was due and owing from the defendant in addition to that declared in the defendant's income tax return;

    • the defendant made an affirmative attempt in any manner to evade or defeat an income tax; and

    • the defendant wilfully attempted to evade and defeat the tax.

  • Fraud or false statements (26 USC § 7206). To establish a violation of section 7206, the government must prove beyond a reasonable doubt that:

    • the defendant signed an income tax return that contained a written declaration that was made under penalties of perjury;

    • the defendant made a statement in the return;

    • the defendant knew that the statement was false or that the false statement was material; and

    • the defendant made the statement wilfully (that is, with the intent to violate a known legal duty).

  • Attempts to interfere with the administration of internal revenue laws (26 USC § 7212). To establish the offence of attempting to interfere with the administration of internal revenue laws, the government must prove beyond a reasonable doubt that the defendant in any way corruptly endeavoured to obstruct or impede the due administration of the internal revenue laws. "Corruptly" means to act with the intent to secure an unlawful advantage or benefit either for oneself or another. An "endeavour" is any effort or any act or attempt to effectuate an arrangement or to try to do something, the natural and probable consequences of which is to obstruct or impede the due administration of internal revenue laws. To "obstruct or impede" is to injure or prevent, check, stop, retard the progress of, or make accomplishment difficult and slow.

 

Pre-court/pre-tribunal process

Assessment, re-assessments and administrative determinations in civil law

4. Outline the procedure for tax assessments, re-assessments and administrative determinations in civil law.

The Internal Revenue Service (IRS) cannot:

  • Assess a tax liability (other than a self-assessed liability for the tax reported on a tax return) without first going through certain administrative procedures.

  • In many cases, assess a tax (a prerequisite to collection) until a court has made a determination that the taxpayer is liable for the tax.

In most cases, an assessment of additional tax liability is not made until after an examination of a taxpayer's tax return for the year at issue has been commenced. Generally, the IRS can assess any additional tax liability for tax returns filed:

  • Within the past three years.

  • Within the past six years, if there is a "substantial" understatement of gross income (that is, an understatement exceeding 25%).

  • At any time, if the IRS can prove that the taxpayer filed a fraudulent tax return or no return was filed.

Before the assessment of a tax liability can be made, the taxpayer has the right to meet with the examining agent's manager. If a resolution cannot be obtained at this level, the taxpayer can have his additional tax liability considered by the IRS Office of Appeals. The Office of Appeals is an independent body within the IRS which conducts the examination of tax returns.

 

Resolving disputes before commencing court proceedings

5. What are the main procedures used to resolve disputes before commencing proceedings in a civil court/tribunal?

There are several options for resolving proposed additional tax liabilities before resorting to litigation. The Internal Revenue Service (IRS) offers various forms of alternative dispute resolution both during the examination process and at the appeals level, as follows:

  • Fast-track settlement. This is a way to resolve audit issues during the examination process. Taxpayers can use the settlement authority and mediation skills of the IRS Appeals Office to shorten the overall examination process.

  • Fast-track mediation. The taxpayer and the IRS have the opportunity to mediate disputes through an IRS Appeals officer who acts as a neutral party. Fast-track mediation is designed to expedite the resolution of disputes that arise during examination or collection actions.

  • Early referral. This is a process under the jurisdiction of both the examination and collection divisions of the IRS through which the taxpayer can request a transfer of a developed but unagreed issue to the IRS Appeals Office. Examination or collections personnel continue to deal with issues that are not referred to the IRS Appeals Office.

  • Post-appeals mediation. This is available after appeals settlement discussions are unsuccessful and, generally, when all other issues are resolved, except for the issues for which mediation is being requested. Mediation is a non-binding process that uses the services of a mediator, as a neutral third party, to help the IRS Appeals Office and the taxpayer reach their own negotiated settlement. To reach this goal, the mediator acts as a facilitator in defining the issues and promoting settlement negotiations between the Appeals Office and the taxpayer. The mediator does not have settlement authority in the mediation process and does not render a decision regarding any issue in dispute.

  • Arbitration. Arbitration is available for certain cases within the IRS Appeals Office's jurisdiction which meet the requirements of the arbitration programme. Generally, the programme is available for cases in which a limited number of factual issues remain unresolved following settlement discussions with the Appeals Office. The Appeals Office and the taxpayer are bound by the arbitrator's finding. The arbitration process uses the services of an arbitrator either from within the Appeals Office or from an outside organisation.

 

Elements of the offence in criminal law

6. What are the elements of the main criminal law offences in tax litigation?

See Question 3 for details on the most typical criminal tax offences and their elements.

Typical defences to tax crimes include proof that:

  • The failure to comply was not wilful but due to negligence or error.

  • The compliance requirement was not met by another person, such as an accountant or bookkeeper.

  • The taxpayer lacked the mental capacity to commit a crime.

On some occasions, the defence is that the government acted improperly in laying the charges because of the taxpayer's race or religion, or that the government induced (entrapped) the taxpayer to commit the offence.

 

Early resolution

7. What are the main procedures used for the early resolution of criminal law offences before trial?

It is very common for defendants in criminal tax cases to enter into a plea agreement and plead guilty to a specific crime. About 90% of all criminal cases in the US, including tax cases, are resolved through a plea. The available pleas under the federal system are "not guilty", "guilty" or "nolo contendere" (that is, the defendant neither disputes nor admits to the criminal charges).

An Alford plea is a guilty plea whereby the defendant denies his guilt at the same time. As a matter of policy, the Department of Justice does not agree to pleas of nolo contendere or Alford pleas. The courts must accept any plea other than a plea of not guilty.

Rule 11 of the Federal Rules of Criminal Procedure outlines the procedures for plea agreements. Where the defendant pleads guilty or nolo contendere, a plea agreement can specify that the government will agree to one of the following options:

  • Not bring or move to dismiss the other charges.

  • Recommend or agree not to oppose the defendant's request that a particular sentence or sentencing range is appropriate. The agreement can also specify that a particular provision of the Sentencing Guidelines, policy statement or sentencing factor applies or not.

  • Agree that a specific sentence or sentencing range is the appropriate disposition of the case. The agreement can also specify that a particular provision of the Sentencing Guidelines, policy statement or sentencing factor applies or not.

The policies set out in the Department of Justice Tax Manual provide that a plea must be to the "major count" asserted in the indictment. The Department of Justice also has an expedited plea programme that allows for the quick disposition of a criminal investigation through a process that results in a defendant's guilty plea. This programme reduces the length of the criminal investigation and resolves the matter promptly for both the taxpayer and the government.

 

Trial process

Format of the hearing/trial

8. What format does the hearing/trial take?

Both civil and criminal cases can be heard before a judge alone. Trials before juries are also available. All trials, both civil and criminal, are open to the public. Taxpayers cannot request a private hearing. A trial cannot generally take place if a party fails to attend.

Appeals against the outcome of a trial are on the record of the trial and are generally resolved on the written submissions of the parties, combined with the record of the trial, which typically includes all the pleadings filed by the parties, the documents and other matters admitted into evidence, and the transcript of the proceedings.

 

Role of the judge/arbitrator/tribunal members

9. What is the role of the judge/arbitrator/tribunal members in both civil and criminal tax litigation?

Civil tax litigation

Civil cases are typically heard by a judge, but a jury trial is available in some circumstances. Where the case is heard by a jury, the judge controls the trial process, overseeing the selection of the jury, determining the schedule, ruling on the admissibility of evidence submitted by the parties and "charging" (explaining the law) to the jury.

Criminal tax litigation

Most criminal tax cases are heard before a jury. However, the defendant has the option of waiving trial by jury and, if the prosecution does not object, of having a judge serving as the finder of fact.

At the completion of a criminal case, the judge sentences the defendant, if the defendant has been convicted.

 

Commencement of proceedings: civil law

10. What is the procedure for commencing tax litigation proceedings in civil law and/or a taxpayer appealing a decision of the tax authority?

In the civil system, proceedings are traditionally commenced after the Internal Revenue Service (IRS) issues a notice of deficiency and the taxpayer files a petition in the US Tax Court challenging the IRS's determination.

In the context of refund proceedings, the process typically begins after filing a refund claim. From there, the next step involves filing a complaint either in a US district court or the US Court of Federal Claims.

Fees are payable for commencing proceedings in all courts. The most typical time limit to file a petition in the US Tax Court is within 90 days of the receipt of a notice of deficiency.

 
11. Must a taxpayer pay the disputed tax before leave to appeal the tax authority's decision is granted?

The majority of income tax matters are resolved through the deficiency determination process, under which the taxpayer does not pay the disputed tax liability before proceeding to the US Tax Court. However, for some taxes (such as excise) and penalties (such as trust fund recovery penalty), the taxpayer must pay all or some portion of the tax before the liability can be challenged in court. Interest and penalties continue to accrue until the final liability is determined and paid.

 

Commencement of proceedings: criminal law

12. What is the procedure for commencing tax litigation proceedings in criminal law?

Taxpayers are initially investigated by special agents of the Internal Revenue Service (IRS), Criminal Investigation. These agents investigate tax crimes administratively or through the use of a grand jury. When the investigation is completed, the Department of Justice Tax Division must approve the tax prosecution. Once approval has been secured, assuming that the defendant taxpayer is not initially willing to enter into a plea (see Question 7), the normal way to charge the taxpayer/defendant is through an indictment issued by the grand jury. The indictment provides a general outline of the facts supporting the government's case and the particular statutes that the taxpayer is alleged to have violated.

A taxpayer can also be charged by way of a complaint, which consists of a written statement of the essential facts constituting the offence charged.

Where a defendant taxpayer has agreed to enter into a plea, the charge is typically in the form of an information, as opposed to an indictment. The information need not be secured from the grand jury and is only available if the defendant has agreed to waive indictment by the grand jury.

 

Government response

13. How has the government responded to recent civil and criminal law cases to improve the court procedure?

The procedure in the US for both civil and criminal tax cases has been in place for many decades, and no significant substantive changes in the core elements of the process have occurred in recent years.

 

Burden of proof

14. What is the burden of proof in both civil and criminal tax litigation proceedings?

Civil law

The burden of proof rests with the taxpayer in the US Tax Court, federal district courts and Court of Federal Claims. The taxpayer must demonstrate by a preponderance of evidence that the Internal Revenue Service's (IRS's) suggested adjustments are incorrect or, in the case of a refund, that the taxpayer's position is correct.

Criminal law

In the criminal context, the government has the burden of proof to prove every element of the offence beyond a reasonable doubt.

 

Main stages

15. What are the main stages of typical court proceedings for tax disputes?

Civil law

In deficiency litigation, the process starts with the taxpayer filing a petition with the US Tax Court. The Internal Revenue Service (IRS) files an answer in response to the petition and, if the IRS raises "new matter", the taxpayer files a reply. Discovery then ensues. That process involves requests for the production of documents, interrogatories and requests for admissions. Depositions in the Tax Court are not typical and occur only with the court's permission or the other party's consent. The Tax Court also requires detailed stipulations of fact.

Motions for summary judgment can be appropriate before trial. If the matter is not disposed of at this stage, the case proceeds to trial. On completion of the trial, the parties submit detailed briefs in support of their position and the court renders a decision based on these briefs.

The procedure is similar in the Federal Court of Claims and in trials before district court judges where a jury trial has been waived. Where there is a jury trial in federal courts, the proceeding is generally the same with the major exception that the jury is the finder of fact.

Criminal law

In criminal cases, the proceedings start with the arraignment of the defendant where a plea of not guilty or guilty is entered. In either case, the court sets the conditions for the defendant's release (bail), although in unusual circumstances the defendant can be detained pending trial. Criminal cases involve very limited discovery regarding the government's case. After pre-trial motions are resolved, the matter proceeds to trial. If the defendant is convicted, the court renders a sentence, which is usually followed by an appeal.

 

Documentary evidence

Disclosure of documents in civil proceedings

16. What documents must the parties disclose to the other parties and/or the court in civil proceedings? Are there any detailed rules governing this procedure?

In the civil context, discovery in the Tax Court is governed by the Tax Court's Rules of Practice and Procedure. The Tax Court places a strong emphasis on informal discovery, including the production of documents under the Branerton rules. If a party refuses to participate in this informal process, that party will not be permitted to engage in formal discovery (Branerton v Commissioner 61 T.C. 691 (1974)). However, the Tax Court's Rules provide for requests for the production of documents and requests for admissions.

The Federal Rules of Civil Procedure provide for a broad range of discovery tools in the federal district courts and the Court of Federal Claims. A party can request the production of a broad range of documents from any other party (rule 34, Federal Rules of Civil Procedure).

 

Special rules/considerations

17. Are there any special rules or considerations concerning the disclosure or discovery of documents in civil tax litigation?

Documents protected from disclosure include:

  • Documents covered by some form of privilege (such as attorney-client privilege, patient-physician privilege or priest–penitent privilege).

  • Testimony from a spouse, based on a spousal privilege.

  • The thought process of counsel, under the work-product doctrine.

  • Communications with federally authorised tax practitioners, to the extent that these communications would be protected if they had been with an attorney (section 7525, Internal Revenue Code). However, this is subject to significant exceptions. For example, the privilege is not available in criminal matters, and is only available in matters involving the Internal Revenue Service and only applies in relation to communications concerning tax advice.

 

Disclosure in criminal proceedings

18. What documents must the parties disclose to the other parties and/or the court in criminal proceedings? Are there any detailed rules governing this procedure?

Discovery in criminal cases is generally governed by rules 16 and 26.2.5 of the Federal Rules of Criminal Procedure. These rules incorporate disclosure rules under:

  • Brady v Maryland, 373 U.S. 83 (1963). Brady requires prosecutors to disclose any material information that is known or reasonably known to them that may be exculpatory.

  • Giglio v United States405 U.S. 150 (1972). Giglio requires disclosing material that may be used for impeachment.

  • The Jencks Act (18 United States Code (USC) § 3500). This Act requires that prosecutors, on request of the opposing party, must provide statements of government witnesses in their possession relating to the subject matter of their testimony on direct examination.

To satisfy their Brady, Giglio and Jencks Act obligations, some prosecutors will provide an "open file" discovery. This allows the defence access to the prosecutor's entire file with the exception of certain privileged and other documents. Although this may appeal to the defence, cases can involve a massive amount of documentary evidence and lead to a search for a "needle in a haystack" (United States v Skilling, 554 Fed. 3d 529 5th Cir. (2009)).

Under normal circumstances, a defendant is not required to provide information to the government. However, defendants who request certain types of information from the government must also provide "reciprocal discovery" at the government's request (rule 16, Federal Rules of Criminal Procedure).

In US criminal tax matters, there is no provision for the deposition of the defendant. However, in some cases, "material witnesses" can be deposed (18 USC § 3144). Depositions can also be taken to authenticate foreign documents (18 USC § 3493). Additionally, depositions are available in order to preserve the testimony of a witness for trial (rule 15, Federal Rules of Criminal Procedure).

 

Special rules/considerations

19. Are there any special rules or considerations concerning the disclosure of documents in criminal tax litigation?

The grounds for not disclosing documents in criminal cases are generally the same as in civil cases (see Question 17).

 

Witness evidence

Trial considerations

20. Do witnesses of fact give oral evidence or do they just submit written evidence? Is there a right to cross-examine witnesses of fact?

In both civil and criminal cases, absent an agreement of the parties, almost all witness evidence is given through oral testimony.

Civil law

In civil cases, where a witness has been deposed, that witness's testimony can, under certain circumstances, be presented through the admission into evidence of the transcript of the witness's deposition. All witnesses are subject to cross-examination and, frequently, the judge can ask questions to a witness.

Criminal law

In criminal cases, the right to confront an accuser is protected by the US Constitution, and it would be highly unusual for a defendant to waive the right to request the government to present live witnesses. All witnesses are subject to cross-examination and, frequently, the judge can ask questions to a witness.

 

Witness preparation

21. Provide a brief outline of the procedure for preparing witnesses in both civil and criminal cases. Are there any special or unique features to consider for witness evidence in criminal cases?

In both civil and criminal cases, witness preparation is critical to the successful outcome of a case. A witness, particularly the taxpayer, must be fully aware of all of the facts and documents that will be used during the taxpayer's testimony. This includes the documents that are likely to be used during the taxpayer's cross-examination. Credibility of the witness is critical. A finder of fact is entitled to disbelieve all of a witness's testimony if they conclude that any part of the witness's testimony was untrustworthy.

Taxpayers can invoke their constitutional privilege against self-incrimination. This right can be invoked for any part of the taxpayer's testimony that they feel could establish a "link in the chain" of evidence required to prosecute them. However, in civil cases, invoking this right carries the risk that the court will draw an adverse inference against the taxpayer.

 

Hearsay evidence in civil and criminal trials

22. Are there any rules concerning the introduction of hearsay evidence in civil and criminal trials?

In both civil and criminal cases, hearsay is "a statement, other than one made by the declarant testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted" (rule 801(c), Federal Rules of Evidence). The following is excluded from the definition of hearsay (rule 801(d), Federal Rules of Evidence):

  • Certain prior statements of the witness giving testimony.

  • Certain admissions of a party opponent.

Hearsay is inadmissible unless a federal statute, the rules of evidence or the rules prescribed by the Supreme Court provides otherwise (rule 802, Federal Rules of Evidence). There are 23 exceptions to the hearsay rule that apply regardless of whether the declarant is available as a witness (rule 803, Federal Rules of Evidence). When a hearsay statement has been admitted into evidence, the declarant's credibility can be attacked as if he had taken the stand (rule 806, Federal Rules of Evidence). Rule 807 provides for additional residual exceptions to the hearsay rule.

Additionally, there is an exception to the hearsay evidence rule for declarants who are unable to take the stand (rule 804(b)(1), Federal Rules of Evidence). In a criminal setting, this rule may violate the US Constitution Confrontation Clause, which provides that the accused in a criminal prosecution has the right to be confronted with any witnesses against him (see Crawford v Washington, 541 US 36 (2004)).

 

Expert evidence

Expert reports in civil trials

23. What are the rules concerning the introduction of expert reports in civil trials?

Rules 701 to 706 of the Federal Rules of Evidence govern the testimony of expert witnesses. Expert witnesses can be presented by either party to the proceedings in the Tax Court. The court can appoint an expert witness with the parties' permission or on its own initiative (rule 706, Federal Rules of Evidence).

The expert must prepare a written report containing their qualifications and opinions, supported by relevant facts and data (rule 143, Tax Court Rules). The report is intended to serve as the expert's direct testimony. The court also has discretion to admit additional testimony to clarify or emphasise matters in the report or provide information on relevant events following a report's preparation.

 

Expert evidence in civil trials

24. What are the rules concerning the introduction of expert evidence in civil trials?
 

Expert evidence in criminal trials

25. What are the rules concerning the introduction of expert evidence in criminal trials? Is it possible to introduce expert reports?

In criminal cases, expert witness evidence and expert reports are governed by rule 16(a)(1)(G) of the Federal Rules of Criminal Procedure. This rule allows the defendant to request from the government a written summary of any expert testimony that the government intends to use during its case in chief. The summary must describe the witness's opinions, their basis and the witness's qualifications. Similarly, the government can request the defendant for a written summary of any testimony the defendant intends to use at trial (rule 16(b)(1)(C), Federal Rules of Criminal Procedure). This rule only applies if the defendant has either:

  • Already requested and received certain information from the government.

  • Provided notice of an intent to present expert evidence regarding the defendant's mental condition.

 

Special considerations

26. Are there any special considerations for introducing expert evidence/reports in both civil and criminal trials?

Special consideration must be given to testifying and non-testifying witnesses. Testifying witnesses can be subjected to depositions and any information transmitted to them by counsel can be subject to discovery. Where an expert is not expected to testify, issuing a Kovel letter may preclude them from being deposed by the government. A Kovel letter allows an attorney to extend the protection of the attorney-client privilege to an expert, provided that the expert is retained by the attorney (rather than the client) to assist the attorney in providing legal services to the client.

 

Closing the case in civil trials

27. What are the rules governing the submission of both written and oral argument in closing a civil trial?

Where the trial has been conducted before a jury, closing arguments are invariably presented orally.

"Bench trials" or cases tried before a judge without a jury can have oral closing arguments, which are invariably followed by written presentations. The plaintiff usually opens and closes the argument in civil cases. However, when the burden of proof rests with the defendant, the court can allow the defendant to make the initial and final arguments in the proceeding.

The sequence of the opening or closing arguments is a matter within the court's discretion. For a non-jury trial, the court has broad discretion in deciding whether to hear oral arguments. In most cases, the court can set a time limit for the closing arguments. As a general rule, closing arguments should never encourage a jury to depart from the principle of neutrality when deciding the case on the available evidence. Rather, an effective closing argument should summarise the facts, discuss the evidence and emphasise their probative value. The jury can also be asked to make reasonable inferences based on the facts of the case. However, attorneys cannot:

  • Argue questions of law to the jury, as these must be addressed to the court.

  • Discuss matters that have not been introduced as evidence during the trial.

Other prohibited arguments include:

  • Personal attacks on opposing counsel.

  • Asking the jury to put themselves in the parties' shoes.

  • Suggesting that jurors would suffer financially if they decide in the favour of a party.

An attorney cannot vouch for the credibility of a witness or assert personal opinions regarding the justice of the cause. An attorney cannot ask the jury to serve as the conscience of the community or otherwise appeal to a regional bias.

 

Closing the case in criminal trials

28. What are the rules governing the submission of both written and oral argument in closing a criminal trial?

In criminal cases, closing arguments proceed in the following order (rule 29.1, Federal Rules of Criminal Procedure):

  • The government presents its argument.

  • The defence argues its case.

  • The government delivers a final rebuttal.

 

Decision, judgment or order

Civil law cases

29. What are the rules governing the issuance of a decision in civil cases?

The court's findings and conclusions are governed by rule 52 of the Federal Rules of Civil Procedure. For actions tried on the facts without a jury or with an advisory jury, the court must make separate findings of fact and law. Judicial decisions can either:

  • Be stated on the record following the close of proceedings.

  • Appear in an opinion or memorandum decision filed by the court.

The ultimate result of tax litigation is a judgment rendered by the court. Judgments can be entered after a trial and verdict by either the jury or trier of fact. Typically, and especially in the US Tax Court, the court renders an opinion setting out in detail the factual and legal basis for the court's conclusion.

Rule 55 of the Federal Rules of Civil Procedure contains the procedure for entering a default judgment. Rule 56 sets out the procedure for summary judgment, where the moving party can show that there is no genuine dispute as to any material fact and the moving party is entitled to a judgment as a matter of law.

 

Criminal law cases

30. What are the rules governing the issuance of a decision in criminal cases?

In the criminal context, it is possible to bring a motion for a judgment of acquittal (rule 29, Federal Rules of Criminal Procedure). This motion can be brought before or after the government closes its case, after the close of all evidence or before the submission of the matter to the jury, where there is insufficient evidence to sustain a conviction.

A defendant can also bring a post-trial motion for an acquittal (rule 29(c), Federal Rules of Criminal Procedure). Such a motion must be brought within 14 days after a guilty verdict has been rendered or after the court discharges the jury.

Whenever a defendant is convicted in a criminal case, the court's judgment of conviction must set out the:

  • Plea.

  • Jury verdict or court's findings.

  • Adjudication.

  • Sentence.

If the defendant is found not guilty or entitled to a discharge, the court must so order. After a judge signs the judgment, the final step is for the clerk of the court to promptly enter the judgment.

 

Costs

31. How is the issue of costs determined in both civil and criminal cases?

Civil law

At the conclusion of a proceeding, a party can seek reimbursement of costs under limited circumstances. The ability to recover costs in tax cases is somewhat limited. In any administrative or court proceeding that is brought by or against the US in connection with the determination, collection or refund of any tax, interest or penalty under Title 26 of the United States Code, the successful party can be awarded judgment or a settlement for (section 7430, Internal Revenue Code):

  • Reasonable administrative costs incurred in connection with administrative proceedings within the Internal Revenue Service.

  • Reasonable litigation costs incurred in connection with such court proceedings.

Reasonable litigation costs are only awarded where the court is satisfied that the prevailing party first exhausted the available administrative remedies. Costs are typically not awarded to parties that unnecessarily increase the length of proceedings. Costs will only be awarded where the party has substantially prevailed with respect to the amount in dispute or most significant issue(s). There are also specific net worth requirements that can apply. Individuals' net worth cannot exceed US$2 million. Likewise, corporations and other organisations cannot have more than 500 employees and a net worth in excess of US$7 million.

Costs can be awarded in federal district courts against a defendant that has been held in default for not appearing (rule 55(b)(1), Federal Rules of Civil Procedure). If the party noticing a deposition fails to appear and proceed with the deposition, or fails to serve a subpoena on a non-party deponent who does not attend, then a party can recover reasonable expenses for attending, including attorneys' fees (rule 30(g), Federal Rules of Civil Procedure). Where a party fails to meet disclosure requirements or to co-operate in discovery, the opposing party can recover reasonable costs (rule 37, Federal Rules of Civil Procedure). However, under normal circumstances, each party is responsible for their own costs. Interest accrues on judgments until paid (28 USC § 1961).

Criminal law

In the criminal context, the Hyde Amendment allows the prevailing party to recover attorneys' fees and litigation expenses from the government where the government's position was frivolous or in bad faith.

 

Appeals

Right to appeal in civil law

32. What are the main grounds for appealing a civil law decision?

Final decisions of federal district courts, the Federal Court of Claims and the US Tax Court can be appealed as a matter of right to the appropriate court.

The US Court of Appeals has jurisdiction to review decisions of the Tax Court. An adverse judgment entered by the trial court in a tax refund action can be appealed as a matter of right to the relevant US circuit court of appeals. The judgment of a district court must be appealed to the court of appeals for the circuit in which the district court is located. A judgment of the Court of Federal Claims must be appealed to the US Court of Appeals for the Federal Circuit.

Both questions of law and the determination of facts are appealable.

 

Procedure to appeal in civil law

33. What is the procedure for appealing a civil law decision?

The appellant must file a timely notice of appeal with the clerk of the trial court. In tax refund actions, this notice must be filed within 60 days after entry of the judgment. An appeal against a judgment of the US Tax Court must be filed within 90 days of the entry of the judgment (Rule 90(a), Tax Court Rules). The notice of appeal must specify the:

  • Party bringing the appeal.

  • Judgment appealed.

  • Name of the court to which the appeal is taken.

The appellant must also designate the record on appeal and assist the trial court's clerk in assembling and transmitting the record to the appellate court. The record on appeal generally consists of the original papers and exhibits filed in the trial court, the transcript of the proceeding and a certified copy of the docket entries prepared by the clerk of the court. Unless the entire transcript is ordered, the appellant must file a statement of the issues to be presented on the appeal within 14 days after the notice of appeal is filed. The appellant must also order from the court reporter any transcript of any part of the proceedings not already on file that is considered necessary for inclusion in the record on appeal. When the record is complete for the purposes of appeal, the trial clerk transmits it to the clerk of the appeals court and the appeals court dockets the appeal. The appeals court will then issue a briefing schedule to the parties.

 

Right to appeal in criminal law

34. What are the main grounds for appealing a criminal law decision?

Defendants convicted in a criminal case are guaranteed the right to appeal that conviction by the US Constitution and Rule 4(b) of the Federal Rules of Criminal Procedure. Common grounds for appeal include:

  • Errors in law (typically, in how the judge instructed the jury or errors in the exclusion of evidence).

  • Claims of prosecutorial misconduct.

  • Government's failure to meet its burden of proof.

 

Procedure to appeal in criminal law

35. What is the procedure for appealing a criminal law decision?

The procedure for processing an appeal in the criminal context is essentially the same as in the civil context (see Questions 33 and 34).

However, the defendant must file a notice of appeal within 14 days after the later of the (rule 4(b)(1)(3) and (4), Federal Rules of Appellate Procedure):

  • Entry of either the judgment or order being appealed.

  • Filing of the government's notice of appeal.

Within 14 days after filing a notice of appeal, the appellant must place an order for the transcript and file a copy of the order with the clerk.

A defendant can file an appeal after being convicted and sentenced to a prison term in a criminal trial. In this case, the defendant must be detained unless the court finds both:

  • By clear and convincing evidence, that the person is not likely to flee or pose a danger to the safety of any other person or the community if released.

  • The appeal is not for the purpose of delay and raises a substantial question of law or fact likely to result in:

    • reversal;

    • an order for a new trial;

    • a sentence that does not include a term of imprisonment; or

    • a reduced sentence to a term of imprisonment less than the total of the time already served plus the expected duration of the appeals process.

 

Recent civil law developments and proposals for reform

36. Outline the main recent civil law developments in tax litigation in your jurisdiction. Are there any proposals to reform civil law tax litigation?

Scope of discovery

Amendments to rule 26 of the Federal Rules of Civil Procedure modify terms that were often used to argue that the scope of discovery should be broad, including the expression "reasonably calculated to lead to the discovery of admissible evidence". Rule 26(b)(1) now includes proportionality considerations in the definition of the scope of discovery and reinforces parties' obligations to consider proportionality in making discovery requests, responses and objections. The rule now states that parties can request discovery regarding matter that is "proportional to the needs of the case". This rule elevates the proportionality factors previously found under rule 26(b)(2)(C), although in a different order, and adds as a factor "the parties' relative access to relevant information". Additionally, rule 26(c)(1)(B) authorises courts to issue cost-shifting orders, determining the "allocation of expenses" for certain discovery.

Preservation of electronically stored information (ESI)

The amended rule 37(e) of the Federal Rules of Civil Procedure provides broad discretion for courts to cure prejudice caused by loss of ESI and resolves a circuit split as to when courts can impose more severe sanctions for failures to preserve ESI. Rule 37(e) provides that, as a first step, a party seeking sanctions or curative measures for failure to preserve ESI must show that:

  • Relevant ESI "should have been preserved in the anticipation or conduct of litigation".

  • Relevant ESI was lost because the party charged with safeguarding the lost ESI "failed to take reasonable steps to preserve" the information.

  • The lost ESI "cannot be restored or replaced through additional discovery".

On this showing, the court can either (rule 37(e)(1) and (2), Federal Rules of Civil Procedure):

  • On finding prejudice to another party from loss of the information, order measures no greater than necessary to cure the prejudice.

  • Only on finding that the party acted with the intent to deprive another party of the information's use in the litigation, impose more severe sanctions enumerated in the rule.

The amendments are effective from 1 December 2015.

 

Recent criminal law developments and proposals for reform

37. Outline the main recent criminal law developments in tax litigation in your jurisdiction. Are there any proposals to reform criminal law tax litigation?

Amendments to the US Sentencing Guidelines entered into force on 1 November 2015. The Sentencing Commission made several important changes to the Guidelines, including:

  • Jointly undertaken criminal activity. The Commission voted to promulgate an amendment to "set out more clearly the three-step analysis the court applies in determining whether the defendant is accountable for acts of others in the jointly undertaken criminal activity". The three-step analysis requires that before a court can consider the acts and omissions of others, it must find that those acts and omissions were:

    • within the scope of the jointly undertaken activity;

    • in furtherance of that criminal activity; and

    • reasonably foreseeable in connection with that criminal activity.

    The commentary makes clear that if one of those criteria is not met, the conduct is not relevant conduct under the jointly undertaken provision.

  • Inflationary adjustments. The Commission voted for the first time to amend the monetary tables to account for inflation. This means that it will take larger amounts of loss to trigger enhanced offence levels. For example, it will take a loss amount of more than US$40,000 (instead of US$30,000) to trigger a +6 enhancement under the Guidelines. This amendment also increases the fines tables.

 

Online resources

Internal Revenue Service (IRS)

W www.irs.gov

Description. This is the official website of the IRS. It provides information for individuals, businesses and government entities regarding publications and forms, tools for taxpayers and hot topics. This website is maintained by the IRS.

Cornell Legal Information Institute: Internal Revenue Code

W www.law.cornell.edu/uscode/text/26

Description. This website is maintained by the Legal Information Institute, a research, engineering and editorial group housed at Cornell Law School in Ithaca, New York. It is a not-for-profit group that provides public legal information.

US Tax Court

W www.ustaxcourt.gov

Description. This is the official website of the US Tax Court. It provides electronic access to dockets, forms, listing of judges, rules of practice and procedure. Information is up to date and maintained by webmaster@ustaxcourt.gov.



Contributor profiles

Hope P Krebs, Partner, Co-chair International Practice Group

Duane Morris LLP

T +1 215 979 1964
F +1 215 689 2902
E hpkrebs@duanemorris.com
W www.duanemorris.com

Professional qualifications. Admitted to practise law; New York, Pennsylvania, US Tax Court

Areas of practice. International tax law.

Non-professional qualifications. BS in Business Administration, Drexel University; JD, University of Villanova School of Law, 1987; LLM in Taxation, New York University School of Law, 1992

Thomas W Ostrander, Partner

Duane Morris LLP

T +1 215 979 1802
F +1 215 689 3639
E ostrander@duanemorris.com
W www.duanemorris.com

Professional qualifications. Admitted to practise law, Commonwealth of Pennsylvania, US District Court for the Eastern District of Pennsylvania, Supreme Court of Pennsylvania, US Court of Appeals for the Third Circuit, Supreme Court of the United States, US Tax Court, US Court of Claims

Areas of practice. Taxation; civil and criminal tax controversies; white collar criminal defence.

Recent transactions

  • Represented a Swiss financial intermediary in negotiating a resolution of multi-count indictment charging various federal tax offences involving US taxpayers hiding assets in Switzerland. Negotiated a plea to a single count of conspiracy; bail package arranged permitting client to return to Switzerland pending sentencing.

  • Has represented over 400 individuals in IRS voluntary disclosure matters since March 2009.

  • Represented a prominent member of the New York art community in resolving issues concerning use tax on works of art. Representation resulted in no criminal prosecution or penalties.

  • Represented a Forbes 400 client in complex IRS matter resulting in over US$10 million savings.

  • Represented a world top ten reinsurance company in a multi-issue IRS appeal resulting in virtual full concession by IRS on all issues.

Languages. English

Professional associations/memberships.

  • Criminal Justice Section and Committee on Criminal and Civil Tax Penalties of Taxation Section, American Bar Association.

  • Criminal Law and Tax Law Sections, Pennsylvania Bar Association.

  • Tax Section, Philadelphia Bar Association.

  • National Association of Criminal Defence Lawyers.

Publications

  • Co-author (with Duane Morris colleague, Hope Krebs), USA Chapter, Tax Litigation - Jurisdictional Comparisons, 1st Ed 2013, Thomson Reuters- European Lawyer Reference Series.

  • Co-author, U.S. Accounts to be Disclosed under U.S.-Swiss Settlement Agreement, Practical US/International Tax Strategies, 15 September 2009.


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