Tax courts in the United States follow a clear hierarchy of legal authority that determines which prior decisions they should follow. U.S. Federal courts generally follow binding precedent from their own prior decisions, the relevant Circuit Court of Appeals, and the Supreme Court of the United States.
Each Trial Level Court is generally required to follow the decisions of the Circuit Court of Appeals to which the case is appealable, as well as the Supreme Court.
Taxpayers should look into the precedent that the court followed in deciding the case. For example, it would make no sense to take a case to the U.S. Federal Court if the court has already addressed the issue in prior decisions and consistently held against the taxpayer. Instead, the taxpayer should look to other courts’ decisions and choose a favorable forum, if any exists.
The United States Tax Court follows a unique rule: it must apply the legal precedent of the appellate court that would hear the case on appeal, as per Golsen vs. Commissioner. This is true even if the Tax Court might personally disagree with that precedent.
The U.S. Tax Court is required to follow the decisions of the Court of Appeals in the regional circuit in which the taxpayer resides or has the principal place of business.
Within the Tax Court, there are two main types of decisions: Tax Court Opinions and Tax Court Memoranda. Let’s discuss them separately, which are as follows:
Tax Court Opinions address new, unusual, or broadly important legal issues. They are officially published and serve as binding precedent that other courts and future Tax Court cases should generally follow.
Tax Court Memorandum applies well-established law to the specific facts of a particular case. They are not technically binding precedents, but they are still regularly cited and relied upon by taxpayers and the IRS for their detailed analysis and practical guidance.
The United States District Court is required to follow binding circuit precedent but need not follow decisions of other judges within the same District Court. However, U.S. District Courts do not often hear enough tax cases to develop a significant body of precedent.
The United States District Courts generally follow decisions of the appellate courts in their regions, as well as rulings of the Supreme Court of the United States. Since the federal court system is divided into 94 districts across 12 regional circuits, courts in different parts of the country can reach different conclusions on the same tax issue. This makes the choice of where to file a case an important strategic decision.
The United States Court of Federal Claims will follow the decisions of the Court of Federal Claims and its predecessors, namely the Court of Claims and the Claims Court.
Appeals from this court go to a single nationwide appellate court: the United States Court of Appeals for the Federal Circuit. Because one appellate court reviews all such cases, the legal precedent is applied consistently across the country.
Apart from court decisions, various forms of IRS and Treasury guidance also influence tax litigation. Treasury Regulations carry the force of law and generally receive the greatest judicial deference. They are issued under specific statutory authority and the Treasury Department’s broader rulemaking power under Internal Revenue Code §7805.
Other IRS guidance plays a more limited role. Revenue Rulings explain how the IRS applies tax law to specific fact patterns and are considered more carefully reasoned than informal guidance, though courts are not required to follow them. Revenue Procedures, Notices, and Announcements provide additional administrative direction but carry progressively less authority.