Oral Persuasion: Taxpayer Testimony and the Burden of Proof

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We welcome guest bloggers John A. Clynch, Managing Director, and Scott A. Schumacher, Faculty Director, of the University of Washington School of Law Federal Tax Clinic. John and Scott take us behind the scenes on a recent case where they successfully shifted the burden of proof and convinced the Tax Court that their client did not have income despite its appearance on a Form 1099-MISC. The facts of this case are unusual in several respects, but information return disputes are a regular issue in tax controversy practice and on this blog. Keith collected several previous PT posts here last July. Christine

Unreported income cases are a staple of low-income taxpayer clinics. Low-income individuals often have several jobs of shorter duration, move their residence more often than the general population, and may not be the most adept at recordkeeping. Handling these cases is generally straightforward – obtain the wage and income information from the IRS and match it to the return. These cases can be more challenging if the taxpayer was a victim of identity theft, and the taxpayer must prove they did not receive the income listed in the W-2 or 1099.

But what if there is no dispute that the taxpayer received the money but there is no indication of what payment is for? In Park v. Commissioner, T.C. Summ Op. 2018-46, the Tax Court decided the rather unique question of not whether the amount was received or by whom, but rather what the amount paid was for and thus whether the amount was taxable.

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The taxpayer, Jin Park, is an immigrant from South Korea, who served in the U.S. Army. Mr. Park purchased a home in 2008 and took out mortgages with Bank of America. He was paying both principal and interest on the mortgages in 2012 while on military deployment overseas.

In 2014, Mr. Park received a $13,508 check from BOA. Included with the check was a letter that provided, “based on a recent review of your account, we may not have provided you with the level of service that you deserve, and are providing you with this check.” The letter further stated that Mr. Park might wish to consult with someone about any possible tax consequences of receiving the funds, included a number for him to call if he had any questions. The letter concluded by thanking him for his military service. Mr. Park called the phone number provided on several occasions, but he was unable to obtain any further information. He filed his 2014 Federal income tax return without including the $13,508.

The IRS received a Form 1099-MISC from BOA, reporting other income of $12,789 and a Form 1099-INT from BOA, reporting interest income of $719. The IRS duly issued a Notice of Deficiency, and Mr. Park, now represented by the Federal Tax Clinic at the University of Washington, submitted a Tax Court Petition on his behalf.

In preparing the case for trial, the clinic first sought information from BOA by phone. After what appeared to be a successful telephone contact with BOA, all future calls were met with a brick wall. No one at BOA was able (or willing) to provide any information regarding the payments. The clinic subsequently served a subpoena for records on BOA. The bank declined to produce any records, even after being ordered by the Court. In response to the subpoena, BOA stated, “the bank is unable to locate any accounts or records requested with the information provided.” This is quite surprising, especially given that the Bank Secrecy Act requires banks to maintain records for at least five years.

The case proceeded to trial without any further information from BOA. The issue for the Tax Court to decide was whether any part of the $13,508 received by Mr. Park was income. At trial, the IRS relied on the general presumption of correctness afforded a Notice of Deficiency and on the Form 1099-MISC. At trial, Mr. Park presented testimony that he had been making payments to BOA of interest and principal and that the check received from the bank could be a non-taxable return of overpayment of principal.

The case thus, as in many cases like this, turned on the burden of proof. As readers of PT know, section 7491 places the burden of proof on the IRS, subject to several very important conditions, including the requirement that the taxpayer introduce “credible evidence” to dispute the factual issue. Section 6201(d) further provides that if a taxpayer asserts a “reasonable dispute” with respect to any item of income reported on an information return, the IRS has the burden of producing “reasonable and probative information” concerning the deficiency, over and above the information return.

The specific question before the Court was whether Mr. Park produced “credible evidence” that raised a “reasonable dispute” as to the accuracy of the Form 1099-MISC. The Court held that Mr. Park met his burden. The Court held that his testimony “was subjected to cross-examination and was both plausible and credible.” Further, the Court held that BOA’s letter admitted it was correcting a wrong it had committed regarding Mr. Park’s accounts and was returning his money and the interest that had accrued on it. The Court further noted that the IRS did not offer any argument to the contrary and appeared instead to rely on the presumption of correctness. The Court accordingly held that the $12,789 received from BOA was a nontaxable return of principal.

The facts of Park are unique and are unlikely to repeat, although with banks, one never knows. However, the larger lesson from the case is that credible testimony from the taxpayer can be effective in meeting the burden of proof or shifting it to the IRS. Oftentimes it is the only evidence.

Comments

  1. Was it a burden of proof case? (You say: “The case thus, as in many cases like this, turned on the burden of proof.”

    I think Judge Gerber indicated that the taxpayer’s “testimony was subjected to cross-examination and was both plausible and credible.”

    If that is correct, any assignment of burden to the taxpayer (whether by presumption or otherwise) was irrelevant. Here is a snippet from my Federal Tax Procedure book:

    Most trial observers feel that it is rare that a trier–whether judge or jury–is in this state of equipoise so that the assignment of the burden of persuasion may not ultimately be that important an issue, but it is important in framing and trying a case, of course. fn

    fn Schaffer v. Weast, 546 U.S. 49 (2009) (“In truth, however, very few cases will be in evidentiary equipoise.”); see also Justice Ginsburg’s dissent in Schaffer, p. 68 (“And judges rarely hesitate to weigh evidence, even highly technical evidence, and to decide a matter on the merits, even when the case is a close one. Thus, cases in which an administrative law judge (ALJ) finds the evidence in precise equipoise should be few and far between.”); Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998) (“The shifting of an evidentiary burden of preponderance is of practical consequence only in the rare event of an evidentiary tie . . . .”); see also Polack v. Commissioner, 366 F.3d 608, 613 (8th Cir. 2003) (citing the Cigaran case); Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2004); and Knudsen v. Commissioner, 131 T.C. 185, 188 (2008); Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005) (declining to decide who has the burden of proof (persuasion) because the Tax Court decides the case on the preponderance of the evidence). See also Neil Buchanan, The Burden of Proof and Tax Law: Deja Vu Silliness (Dorf on Law Blog 6/14/13), where Professor Buchanan notes that, although it is conceptually conceivable that there might be a 50-50 case where outcome is determined by the assignment of the burden of persuasion:
    In the real world, however, it is never that close (in tax cases, or in any other civil case, as my CivPro-teaching colleagues can attest). In fact, a study in 2008 (ten years after RRA98) showed that shifting the burden of proof under the 50%-plus-a-tiny-amount standard simply makes no difference in tax cases. The outcome is the same, no matter who formally bears the burden of proof.

  2. The reference to military service makes it sound as though this could have been part of the various settlements under the SCRA (Servicemembers Civil Relief Act) for mortgage issues. I wouldn’t think in most instances the bank would pick up somehow on the fact that not only had they harmed Mr. Park but also that he was a service member.

    If it was SCRA related . . . there were several different categories of settlements – some taxable (generally, violation of rights under SCRA), some non-taxable (resulting reduction of equity in the house). Some related to foreclosures, some not. You might check Chapter 23 in Effectively Representing.

    We have a somewhat similar 1099-MISC case where, with a lot of work on our part and a subpoena from Counsel, we were able to get more information from the bank, but it wasn’t conclusive. There was a letter from the bank to our client saying it was *probably* taxable – which appears to be based on a form letter the IRS gave the banks in question (reproduced in Effectively Representing) but unsupported by any legal reasoning or underlying guidance. I don’t give much weight to an IRS bald statement as to tax consequences in a complicated situation like that, so I’m not convinced that letter’s “probably” conclusion is accurate. Documents in the related class action case and other guidance we tracked down support a determination that it was non-taxable, we think. But it’s not entirely clear, in the sense that Counsel isn’t sure yet what the right legal answer is.

    In our case, we have as much factual information as possible, and more than in your case. Ours will be more of a legal question than factual issue.

  3. Kenneth H. Ryesky says:

    In my previous life with the IRS, I had occasion, at the examination level, to decide issues in favor of the taxpayer. In each such instance, there was (1) at least one consistent document of reliable provenance, and (2) few if any contraindications to the taxpayer’s word.

    It is, of course, best to resolve case issues at the examination level, before the taxpayer’s testimony in court ever becomes an issue. That said, in cases where the issues are partially resolved it can be helpful to the taxpayer at trial time if credible utterances and/or writings are to be found in the examination documents. Accordingly the taxpayer representative should not be reticent to provide documents reflecting the taxpayer’s credibility to the examiner, and should memorialize the fact that such documents were so provided.

    [Conversely, indicia of questionable credibility on the part of the taxpayer can come back to haunt the taxpayer in a trial or appeals situation.].

  4. I had a similar case a few years ago. My clients (no military connection) received a five-figure check from Wells Fargo, and a Form 1098 showing an interest refund. My May 2015 letter to IRS Fresno, responding to a CP-2000, explained:

    “The Form 1098 issued by Wells Fargo Bank is incorrect. The amount shown is a payment resulting from a Federal Reserve Bank investigation of Wells Fargo lending practices. It was determined that the [clients], and thousands of other borrowers, had been assessed excessive interest because of unauthorized lending practices. The payment received in 2013 represented an adjustment of the actual interest owed in previous years.

    “Since the interest owed in previous years was excessive and not actually owed, my clients chose to file amended returns to reduce their deduction. Interest is an allowable deduction only if it is owed by the taxpayers, and these amounts were not owed after the Federal Reserve Bank action. Enclosed is a copy of the Form 1040-X filed last year to reflect this adjustment for the overcharged interest in 2012. A 2011 amended return has also been prepared and will be filed pending the outcome of this correspondence.”

    My clients did not want to add the payment to income for the year received because it would also have resulted in more of their Social Security income being taxed. You can discuss whether our solution was correct, but it worked.

    My clients first notified me of the situation in 2013, when Wells Fargo was offering them a reduction in the principal of their mortgage rather than a cash payment. A couple months later, I shared this story with them:

    “I think I mentioned to you that I told another tax preparer, an online friend in rural Wisconsin, about your case. She said she had just happened to find out, the day before, that one of her clients had the same situation. Her client, though, had already mailed back the acceptance form [approving a principal reduction]. I told her I’d try to help out anyway. We filed complaints with Wells Fargo, and with the Federal Reserve Board.

    “Seven weeks later – Wells Fargo called to tell me that they are going to pay cash, not just to this elderly widow in Wisconsin I have never met, but to ALL the borrowers covered by the settlement. It’s going to take them a lot of time to recompute everything, but they said they would put this case at the top of the pile.”

    A Tax Court subpoena and $5 will sometimes get you a cup of coffee at Starbucks. In Mr. Park’s case, I would have filed a complaint with the Comptroller of the Currency. Banks pay attention to those. Of course, the lack of information may have helped Mr. Park, more than knowing what really happened.

    As to that, the bank may have identified him as a veteran if he had a VA loan. This story about a 2014 settlement between the Justice Department and Bank of America might provide an explanation, if the bank decided to favor VA loans:

    http://time.com/money/3177343/bank-of-america-mortgage-settlement/

  5. I’m not sure why no one has mentioned IRC 6201(d) which provides that:

    In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

  6. Lavar Taylor says:

    I tell my tax procedure students that the burden of proof is important, but not for reasons that they might think. The party with the burden of proof goes first. Which means that the party with the burden generally controls the order in which the evidence is presented to the Court. The order in which witnesses testify, and the order in which topics are addressed during a witness’ testimony can be important, sometimes very important. I prefer to control the order in which evidence is presented at trial. That is more important than “shifting the burden of proof.” I’m in complete agreement with Jack Townsend.

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