The Tax Court exam.
CPAs seeking a tax specialty designation, or those who just want to broaden their ability to deal with the IRS, should consider taking the Tax Court exam for non-attorneys. Anyone who passes the exam can practice in Tax Court on an equal footing with attorneys.
The exam is taken as much for the challenge as for the chance to pass. In the process of preparing for and taking the exam, "Tax Court enthusiasts" gain important knowledge of the tax litigation process.
Registering for the Exam
The exam is given biannually at the Tax Court building in Washington, D.C., in even-numbered years; the next exam is Nov. 7, 1996. The exam fee is $25.
The exam is scheduled for four hours, from noon to 4 p.m. (For CPAs from many parts of the country, it is possible to fly into Washington, take the test and be home again the same day.) At the exam, each applicant is provided with a copy of the Internal Revenue Code (the Commerce Clearing House (CCH) version was provided at the 1994 exam) and a copy of the Tax Court Rules of Practice and Procedure. Applicants are given five booklets, each with 16 pages, in which to write answers. Scratch paper, pens and pencils are also supplied. Calculators are allowed, but are of limited use.
Results are released in March. In prior years, the Tax Court curved the scores so that a little over 10% of applicants normally passed. However, beginning with the 1996 exam, any applicant who obtains a grade of 70% in each of the subjects covered will pass. In 1992, 76 applicants took the exam and only eight passed; in 1994, 127 took the exam with only 13 achieving a passing score. On request, the Admissions Office will send you a copy of your exam, a complete copy of your answers, and your grading sheet (at a cost of 50 cents per page). You can see which answers received full, partial or no credit. No official or unofficial answers are published. In addition, there is an appeals process for those applicants who did not pass.
Despite the low pass rate, Tax Court rules allow an applicant to take the exam just three times. After failing three times, an applicant is barred from taking the exam again. The legal basis for limiting the number of times the exam may be taken has not been challenged. However, an applicant who twice failed the exam unsuccessfully sued to compel admission. His case was ultimately dismissed because he had not exhausted his available remedies in Tax Court by taking the exam a third time (Reed v. Tax Court D.C. Cir., 1946).
The 1996 exam will consist of four subjects--Tax Court Procedure (25% of the test), Substantive Tax Law (40%), Evidence (25%) and Legal Ethics (10%)--with the total possible score divided evenly into 960 points, four points per minute of exam time. Partial credit is given for partially correct answers. The exams are graded by a committee (rumored to be Georgetown University LL.M. students) supervised by fax Court judges.
The procedure section tests the applicant's knowledge of Tax Court Rules of Practice, Federal Rules of Evidence, and Model Rules of Professional Conduct of the American Bar Association (ABA). Procedure questions are challenging, sometimes irrelevant, but generally straightforward.
Some procedure questions are repeated over the years. Applicants may be asked to define legal concepts such as burden of proof, hearsay, the best evidence rule, judicial notice or the scope of cross-examination. A section questioning instances of whether the Tax Court has jurisdiction in specific instances is often included. Also, there are a disproportionate number of TEFRA tax shelter procedure questions.
The exam often tests knowledge of questionable practical value. For example, the 1994 exam asked applicants to explain "the circumstances under which and the extent to which the Tax Court may award costs (including attorney's fees) to a petitioner," even though the Tax Court granted just 21 such awards in 1994. (This author prepared a motion for litigation and administrative costs just five days prior to the 1994 exam, won a rare award in 1995, but received only eight out of a possible 20 points for his answer.)
The substantive section makes the CPA exam and enrolled agent's exam seem juvenile. Questions deal with partnerships, estates and gifts, individuals, divorces, S corporations, real estate, and corporate redemptions and liquidations. There have not been any questions concerning consolidated returns, exempt organizations or foreign taxation.
The substantive section can test the obscure or the most recent developments in the tax law. For example:
Taxpayer owned at death "Project Notes" issued pursuant to [Sections]5(e) of the Housing Act of 1937. Are the fair market values of such notes includible in the gross estate of Taxpayer?" [Suggested time: 3 minutes (12 points). Source: 1988 exam.]
Taxpayer, a self-employed physician, works in three hospitals. Because none of the hospitals provides Taxpayer with an office to manage his practice, Taxpayer set up an office in Taxpayer's residence. Taxpayer maintains patient records and does all of the billing and scheduling in the office. Taxpayer also keeps a medical library in the office to keep current with professional reading. The office is used regularly and exclusively for these activities which are essential to Taxpayer's practice. No patients are seen in the office, but Taxpayer normally spends approximately two to three hours per day at the office, less than half the time spent at the hospitals. Briefly discuss whether the taxpayer is entitled to any deductions with respect to the [home office]. [Suggested time: 2 minutes (8 points). Source: 1990 exam, at which time a Jan. 18, 1990 Tax Court decision had held that Dr. Nader Soliman was entitled to a home office deduction.]
What to Study
Studying can take many months. The sources of materials from which to study vary greatly. For insight into the exam as a whole, copies of prior exams can be purchased from the Tax Court, or they can be downloaded at http://www.mindspring.com/starkman.
The procedure section entails the study of law, for which many study aids are available: Crimm, Tax Court Practice (Little Brown & Co., 1993); Tax Court Litigation, BNA Tax Management Portfolio #630; "Tax Court Jurisdiction, Procedure and Practice," Mertens Law of Federal Income Taxation, Chapter 50.
Tax Court Rules of Practice can be found in the CCH Standard Federal Tax Reporter, RIA United States Tax Reporter, and other books dealing with Tax Court practice. The unembellished rules can be purchased directly from the Tax Court. Model Rules of Professional Conduct can be purchased from the ABA. Past exams have dealt only indirectly with these rules. However, 10% of the 1996 exam will be devoted to legal ethics, including professionalism.
Federal Rules of Evidence may require a law school textbook, such as Carlson, Evidence in the 90's (Michie, 1991), or McCormick's Hornbook on Evidence (West, 1992), and a list of the rules themselves, such as Graham, Federal Rules of Evidence in a Nutshell (West,1992).
Southern New England Tax Institute (203-222-0267) offers a four day seminar on the Tax Court admissions exam; two-day and one-day seminars are offered by several organizations and individuals. Since Tax Court exam topics like Federal Rules of Evidence or the Rules of Practice and Procedure require a full semester each of study in law school, it is improbable that these seminars offer more than a review of prior exams and an overview of the subject matter.
Studying for the substantive section is harder. IRS Tax Information Publications are of little help. Reading the Internal Revenue Code from cover to cover would be more beneficial.
As mentioned earlier, recent developments are a frequent source of exam questions. The 1992 exam asked: (1) Are investment banking and legal fees deductible in a friendly takeover? (2 minutes, 8 points) and (2) May "core deposit intangibles" be amortized under Sec. 167? (3 minutes,12 points). The 1994 exam asked whether and why punitive and compensatory damages are excludible from income (3 questions, 3 minutes each, total 36 points).
Why Seek Tax Court Practice?
The Tax Court is the preferred forum for litigating tax disputes. Approximately 90% of small cases and over 50% of regular cases in Tax Court are pro se, in which taxpayers represent themselves without benefit of counsel. The exclusion of CPAs from Tax Court practice has resulted in taxpayers being underrepresented, as evidenced by the overwhelming percentage of pro se cases.
The need for greater access to representation of taxpayers is recognized by the Department of Treasury and the Tax Court. Several law schools around the country maintain tax clinics. Treasury admits law students enrolled in tax clinic programs to practice before the IRS. The Tax Court admits law students enrolled in tax clinic programs to practice under the direction of an attorney who is a member of the Tax Court Bar.
In 1983, House Ways and Means Committee Chairman Dan Rostenkowski introduced H.R. 3475, which proposed ending the Tax Court exam and allowing CPAs and enrolled agents to practice before the Tax Court in small cases. Small case practice was added to H.R. 4170, the Tax Reform Act of 1984, but was dropped in a House-Senate Conference. Recognizing the need to make taxpayer representation more available, in 1991, then Rep. Leon Panetta introduced H.R. 1485, which again proposed small case practice by CPAs and enrolled agents. This provision was never enacted.
Although CPAs are not admitted to practice, they can prepare a Tax Court petition in order to preserve a client's rights to a redetermination, provided that the Tax Court (rather than the district court or Court of Federal Claims) is the appropriate forum. For cases involving less than $10,000, the Tax Court provides a simple one-page fill-in-the-blanks form for filing a petition. A CPA admitted to practice can sign the petition. A nonadmitted CPA should have the taxpayer sign all the papers, just like a tax return. Though not recommended, the Tax Court has allowed a nonadmitted CPA to sign filing papers as the taxpayer's agent (Kraacsh, 70 TC 623 (1978)] .
After the Tax Court dockets a case, the Service assigns the case to the Appeals Division to explore settlement possibilities. At Appeals, the taxpayer can be represented by anyone admitted to practice before the IRS. I f a genuine dispute exists, Appeals will work with the practitioner to seek a settlement prior to trial. About 80% of docketed cases are settled prior to trial, but a CPA must have access to the Tax Court to reach this stage. As explained, a nonadmitted CPA can learn to access the Tax Court.
In some cases, negotiations with IRS Appeals only begin under pressure of a Tax Court docket. For example, in computer matching discrepancies, the Service often issues a 90-day letter without previously having issued a 30-day letter, thus denying the taxpayer the opportunity for an Appeals hearing. If a CPA has access to the Tax Court, his effectiveness at handling matters administratively is improved because the CPA is able to have continuity in the client relationship, even when the administrative process is interrupted by a notice of deficiency.
Most cases that go to trial do not require witnesses, and many can be argued on brief. Small cases involving factual questions, in which attorney involvement is uneconomical, are ideal for a CPA. The CPA can file in Tax Court and, provided the case has merit, can expect to settle when the case is assigned to IRS Appeals. Although this is more adversarial than a normal Appeals hearing, a CPA should feel comfortable handling such cases.
Should the case go to trial, a CPA admitted to practice can represent the taxpayer in Tax Court, just like an attorney. If the CPA is nonadmitted, the taxpayer will have to represent himself or hire an attorney. The Tax Court will allow a nonadmitted CPA to act as an adviser to the taxpayer in court, but will not allow the CPA to address the court, except as a witness.
A CPA cannot replace a lawyer when the situation demands an attorney. Even if he is admitted to practice, an untrained CPA will be ill-prepared in the preparation of witnesses, taking depositions and cross-examination. However, a CPA knows not to accept a tax engagement which he is not competent to handle. And he should prepare his client to introduce a qualified attorney if the case develops in a fashion requiring greater competence in legal matters.
On balance, practitioners should take the Tax Court exam. Odds are most will not pass. But there is a wealth of knowledge to be gained from the experience, which can be used in practice. A CPA need not be admitted to help a client prepare a Tax Court petition. And those who pass the exam will have a designated tax specialty, "Admitted to Practice, U.S. Tax Court," which should provide them with a competitive advantage.
FROM JAY STARKMAN, CPA (SOLE PRACTITIONER), ATLANTA, GA. (firstname.lastname@example.org).
Editor's note: Mr Pascarella chairs the AICPA Tax Division Tax Practice Management Committee., of which Mr Wolff is a member Mr Starkman is a member of the Tax Division Tax Executive Committee.
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|Publication:||The Tax Adviser|
|Date:||Jun 1, 1996|
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