Relationship Between Tax Court and Refund Fora - Burden to Prove Fraud (10/20/12)

In my Federal Tax Procedure course (and I presume similar courses taught by others), we cover the principal fora to litigate tax disputes.  Historically, tax disputes were litigated in the district courts and sometimes in the predecessor to the Court of Federal Claims.  With the enactment of the broader based income tax after the 16th Amendment, Congress felt that there were two key problems with the refund fora -- (i) the requirement of prepayment and (ii) the sometimes daunting technicalities of pleading and proof particularly in the district courts prior to adopt Federal Rules.  Accordingly, Congress created the Board of Tax Appeals to offer a prepayment tax litigation forum and a less technically daunting litigation experience.

The Board of Tax Appeals and its predecessor Tax Court occasionally struggled with the issue of the precise relationship of its jurisdiction to resolve tax disputes in comparison to that of the district court.  This struggled evidenced itself in the issue of whether the Tax Court had jurisdiction to consider equitable concepts such as equitable recoupment that district courts could apply in resolving tax disputes.  In our class, I assign Estate of Branson v. Commissioner, 264 F.3d 904 (9th Cir. 2001) here, that presents this issue well.  The Branson decision is by Judge Sneed (Wikipedia entry here), formerly a tax professor at several law schools and then Dean at Duke before being appointed to the Ninth Circuit.  There are technical jurisdictional issues involved because the Tax Court is a court of limited jurisdiction whereas the district court is a court of general jurisdiction.  However, I thought the issue should always turn upon whether, given the purpose of the Tax Court (and its predecessor Board of Tax Appeals), different substantive results should obtain in the district court than in the Tax Court when these equitable concepts otherwise could apply.  I think that there is no evidence that Congress intended such different results.  The Tax Court now has these powers.

Regarding the differences in the Tax Court and the refund fora, I just re-read a delightful decision by Judge Henry Friendly of the Second Circuit Court of Appeals.  Judge Friendly was one of the leading jurists of all time (Wikipedia entry here).  In Paddock v. United States, 280 F.2d 563 (2d Cir. 1960), here, the Court held that the same requirement that the Government prove fraud applied in the district court as applied in the Tax Court.  Congress expressly so provided as to the Tax Court in the predecessor to Section 7454(a) but did not make that provision applicable to the other fora.  So, in this refund case, the Government rotely chanted the "money had and received" refund burden in Lewis v. Reynolds, 284 U.S. 281 (1931), here, that the taxpayer must prove the right to refund, including the amount, and thus argued that the taxpayer must prove the absence of fraud where the taxpayer wants a refund of a civil fraud penalty he paid.  Essentially, working in the reverse, Judge Friendly was persuaded that Congress could not have wanted the IRS to bear that burden in a Tax Court case but not in a refund suit.