The Tax Court Exam

Originally, certified public accountants were admitted to practice before the Board of Tax Appeals, the U.S. Tax Court's predecessor. In 1942, the Tax Court restricted automatic admission to attorneys. CPAs were required to pass an exam before being allowed to represent clients before the court.

The exam requirements are onerous and difficult to fulfill. Very few CPAs overcome the extraordinary hurdles the Tax Court has placed in their path. But the rewards to those few who succeed, and even to those who make a serious try, make the effort worthwhile.

CPAs seeking a tax specialty designation, and those who just want to broaden their ability to deal with the Internal Revenue Service, should consider taking the tax court exam for non-attorneys. Anyone who passes the exam can practice in U.S. Tax Court on an equal footing with attorneys. Admitting non-attorneys by examination is authorized by IRC Sec. 7452, which states that practice before the Tax Court shall not be denied because of failure to be a member of any calling or profession.

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 bi-annually at the Tax Court building in Washington, D.C. around the end of October of even numbered years (though it can be given annually). The next exam will be given on Wednesday, November 14, 2012. Applications will be accepted from June 1 to October 5, 2012. The exam fee is a nonrefundable $75. Download an application and instructions from the Admissions Section, or write to Admissions Section, United States Tax Court, 400 Second Street, NW, Room 111, Washington, DC 20217, or call 202-606-8736 for an application.

The exam is scheduled to last four hours, beginning at 12:15 pm. From many parts of the country, it's possible to fly into Washington and home again the same day, without an overnight stay. At the exam, an applicant may use the Internal Revenue Code, Tax Court Rules of Practice and Procedure, and American Bar Association Model Rules of Professional Conduct. The Court has provided these reference books to applicants during prior exams. Applicants are given five booklets, each with sixteen pages, in which to write answers. Scratch paper, pens and pencils are also supplied. Calculators are allowed, but they are of limited use.

Results are released in March. Prior to 1996, the Tax Court curved the scores so that a little over 10% of applicants normally passed. In 1992, 76 applicants took the exam and only eight passed. In 1994, 127 took the exam with only thirteen achieving a passing score. Beginning with the 1996 exam, any applicant who obtains a grade of 70% in each of the subjects covered will pass. 175 applicants took the 1996 exam, and just fourteen (8%) passed!

Upon request, if you did not pass, 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. There is an appeals process for those applicants who did not pass.

Under threat of lawsuit, the Tax Court announced on July 3, 1996 that it was lifting the limit on the number of times an applicant can take the written admissions exam. Prior to that, Tax Court Rule 200(a)(3) limited an applicant to taking the exam just three times in his lifetime. Upon failing the third time, an applicant was barred from retaking the exam again. (See Reed v. Tax Court, 46-2 USTC 9339 (CA-DC), applicant who twice failed the exam could not sue to compel admission because he had not exhausted his available remedies in Tax Court by taking the exam a third time.)

In Sidney H. Goldin v. United States, (unpublished opinion, USDC-DC, 96 CV 00658, case dismissed 3/10/97; appeal dismissed CA-DC 3/17/98), a 1994 applicant whose exam was graded erroneously, and who achieved higher grades than passing candidates who took the 1990 and 1992 exams could not sue to compel admission because he had not exhausted his available remedies. Citing Reed, the Court ruled that he could take the exam again, and "reexamination provides an adequate means of exposing grading errors", Whitfiled v. Illinois Board of Law Examiners, 504 F. 2d 474, 478 (CA-7, 1974). In dismissing his case, the Courts denied Mr. Goldin any hearing and exposed the Tax Court exam process as an unfair quota system, not open to scrutiny or challenge.

Also unchallenged is T.C. Rule 200(a)(2) which admits attorneys without examination. For admission to practice before similar tribunals, like patent cases before the Board of Patent Appeals and Interferences, one must pass an examination demonstrating proficiency in substantive and procedural patent law and establish that he possesses the requisite scientific and technical training. Attorneys, scientists, and engineers and must fulfill the same requirements. Like the Tax Court, adverse patent decisions of the Board of Patent Appeals and Interferences may be appealed to the United States Court of Appeals. Unlike the Tax Court, no preference to practice is given attorneys. 37 C.F.R. 10.5, 10.6 and 10.7.

Exam Structure

Since 1996, the exam has consisted 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, 4 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 Universuity LLM students) supervised by Tax Court judges.

The procedure section tests the applicant's knowledge of Tax Court Rules of Practice, Federal Rules of Evidence, and ABA Model Rules of Professional Conduct of the American Bar Association. 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. Prior to 1996, there was an obsession with TEFRA tax shelter procedure questions. The 1996 exam was obsessed with cross-examination, devoting 8 out of 20 questions on evidence to that subject.

The exam often tests knowledge that is of questionable practical value. For example, the 1994 exam asked, "Explain the circumstances under which and the extent to which the Tax Court may award costs (including attorney fees) to a petitioner," even though the Tax Court granted just 21 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 5(e) of the Housing Act of 1937. Are the fair market values of such notes includable 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 1/18/90 Tax Court decision had held that Dr. Nader Soliman was entitled to a home office deduction.]

Though a lucky percentage passes, the exam is purposely intended to exclude nonattorneys from practice. Few attorneys could answer the 1996 accounting and tax question, "Define and distinguish, for federal income tax purposes, the following doctrines: (1) 'constructive receipt' and (2) 'cash equivalence'." (4 minutes); And, given the way it is graded, few CPAs could get full credit.

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.starkman.com.

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, 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 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 for $14.00 per copy by writing to the Tax Court's Administrative Office (Room 150), at 400 Second Street, N.W., Washington, D.C. 20217. The Tax Court Rules of Practice and Procedure have been extensively amended, effective August 1, 1998. Model Rules of Professional Conduct can be purchased from the American Bar Association. Past exams have dealt only indirectly with these rules. However, 10% of the 1996 exam was 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. Max's Taxes offers a 30 module home study course (408-554-1040; maxeduc@aol.com). 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 each require a full semester 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 little help. Reading the Internal Revenue Code cover-to-cover would be more beneficial.

As mentioned earlier, recent developments are a frequent source of exam questions. The 1992 exam asked: Are investment banking and legal fees deductible in a friendly takeover (2 minutes, 8 points), and may "core deposit intangibles" be amortized under Section 167 (3 minutes, 12 points)? The 1994 exam asked whether and why punitive and compensatory damages are excludable from income (3 questions, 3 minutes each, total 36 points). The 1996 exam asked for "check-the-box" proposed regulations.

Origin Of The Tax Court Exam

The Board of Tax Appeals, predecessor to the Tax Court, was created in 1924. Both attorneys and CPAs were admitted to practice. At that time, the income tax was only eleven years old, and accountants dominated tax practice. Some argued that Congress had created a court, albeit naming the tribunal a "Board", and that court practice should be limited to attorneys.

This was a period of friction between accountants and lawyers over whether tax practice by CPAs constituted the unlicensed practice of law. The educational standards of CPAs were weak at the time and many CPAs were not even high school graduates. Members of the Board of Tax Appeals were virtually all lawyers, thus biased in favor of admitting only attorneys.

In 1942, the Board was renamed, Tax Court of the United States. Fearing that the Court would restrict practice to attorneys, Congressman John Dingell (father of today's Congressman John Dingell) inserted a provision in the 1942 Act, "No qualified person shall be denied admission to practice before [the Tax Court] because of his failure to be a member of any profession or calling." Today, this provision remains codified in IRC Sec. 7452, virtually unchanged since 1942. Following passage of the Dingell amendment, the Tax Court announced that since it could not bar any individual from practice, it would set examinations for admission to practice. Attorneys were exempted from this examination.

The impact of the exam can be seen in who is admitted to practice before the Tax Court today. There are over 130,000 attorneys admitted to the Tax Court bar, but only 202 non-attorneys have been admitted to practice since the exam began in 1943. 7,310 CPAs and 28,707 attorneys were admitted to practice before the Board of Tax Appeals. Thus, CPAs lost their equal position with attorneys in the important forum of the Tax Court.

Under the current system, a patently unfair situation has developed. Attorneys are exempt from demonstrating knowledge of tax law or the Tax Court's special rules of practice and procedure, while CPAs and enrolled agents must not only demonstrate extensive knowledge of court procedure and extraordinary proficiency in tax law, but be in the top ten percent or better of those taking the exam (achieving a score of 70%, beginning in 1996)! As a result, Tax Court practice is effectively limited to attorneys.

Today, the Tax Court remains a hybrid between a court and a tribunal. It is established under Article I of the U.S. Constitution as part of Congress' taxing power, rather than Article III which deals with Federal courts. The Tax Court is under the jurisdiction of the House Ways and Means and Senate Finance Committees, codified in Title 26 (Internal Revenue Code), rather than the Judiciary Committees and Title 28 (judiciary laws). In Tax Court, the government is represented by IRS District Counsel which reports to the IRS Chief Counsel's Office under the Treasury Department. In tax cases in other courts, the government is represented by the Tax Division of the Justice Department.

Why Seek Tax Court Practice?

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, meaning that taxpayers represent themselves without benefit of counsel. The exclusion of CPAs from Tax Court practice has resulted in underrepresentation of taxpayers, 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 school students enrolled in tax clinic programs to practice before IRS under Circular 230, section 10.101. Tax Court admits law school 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. It proposed repealing the Dingell Amendment, thus ending the Tax Court Exam, and allowing CPAs and enrolled agents to practice before the Tax Court in small cases under Section 7463. Dingell repeal was dropped. 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, Congressman Leon Panetta introduced H.R. 1485, which again proposed small case practice by CPAs and enrolled agents. This provision was never enacted.

Though not admitted to practice, a CPA can prepare a Tax Court petition in order to preserve a client's rights to a redetermination, provided that Tax Court (rather than 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 non-admitted CPA should have the taxpayer sign all the papers, just like a tax return. Though not recommended, the Tax Court has allowed a non-admitted CPA to sign filing papers as agent. Kraacsh, 70 TC 623 (1978).

After the Tax Court dockets a case, IRS assigns the case to the Appeals Division to explore whether a settlement is possible. At Appeals, the taxpayer can be represented by anyone who is admitted to practice before the IRS under Circular 230. If 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 Tax Court to reach this stage. As explained, a non-admitted CPA can learn to access the Tax Court.

In some cases, negotiations with IRS Appeals only begins under pressure of a Tax Court docket. For example, in computer matching discrepancies, IRS 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, where involvement of an attorney is uneconomical, are ideal for a CPA. The CPA can file in Tax Court and, provided there are good merits to the case, expect to settle when the case is assigned to IRS Appeals. Though 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 non-admitted, the taxpayer will have to represent himself or hire an attorney. The Tax Court will allow a non-admitted 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 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 for 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.

Here's my advice: Take the Tax Court Exam. Odds are you won't pass. But there's a wealth of knowledge to be gained from the experience, which can be used in your practice. You need not be admitted to help a client prepare a Tax Court petition. And if you pass the exam, you will have a designated tax specialty: "Admitted to Practice, U.S. Tax Court," which should give you a competitive advantage.

Jay Starkman is a sole practitioner in Atlanta. This is an updated version of the article originally published in The Tax Adviser, June 1996.
© American Institute of Certified Public Accountants.