Today’s post explores in greater detail a topic briefly covered last month as part of a broader discussion of proposed legislative changes with respect to the Tax Court. First time guest blogger, Joni Larson, is the perfect person to discuss the proposed change in the application of the rules of evidence because she wrote the book on evidentiary issues in Tax Court. She has clerked in the Tax Court for Judge Irene Scott, she has worked in the Office of Chief Counsel, IRS and for over a decade she has taught at Western Michigan University – Cooley Law School where she is also the Director of the Graduate Tax Program. Keith
The Tax Court has always been an interesting and challenging forum in which to litigate. Because the judges circuit ride, a different judge might preside over each trial calendar, making it nearly impossible to anticipate any judge’s preferences, idiosyncrasies, or tendencies. These differences can show up in anything from how they handle calendar call to how they deal with evidentiary issues. And, depending on the issue to be presented, evidentiary issues can have a big impact. With no jury, the judge is the arbiter of the facts. When deciding whether evidence is admissible, some judges stick close to the bright lines offered by the Federal Rules of Evidence. Others give a passing nod to the rules and err on the side of allowing in most proffered evidence with the caveat that it will be considered “for what it is worth.”read more...
But it isn’t just the judges’ application of the rules that might make you scratch your head. There has long been an application issue lurking within the Code section that makes the Federal Rules of Evidence applicable in Tax Court. Section 7453 provides “the proceedings of the Tax Court and its divisions shall be conducted in accordance with . . . the rules of evidence applicable in trials without a jury in the United States District Court of the District of Columbia.” Tax Court Rule 143(a) echoes this rule: “Trials before the Court will be conducted in accordance with the rules of evidence applicable in trials without a jury in the United States District Court for the District of Columbia.” This seems to suggest that the Tax Court look to the District of Columbia District Court (and its appellate court), and not the Circuit Court of Appeals to which the case could be appealed, for interpretation of the rules.
This result is in direct contrast to the Tax Court’s Golsen rule. Under the Golsen rule, when there is a disagreement among appellate courts, the Tax Court will follow the opinion of the Circuit Court of Appeals to which the case could be appealed. But, what about instances where the appellate courts disagree on the application of a rule of evidence? Section 7453 was enacted long before the Tax Court adopted the Golsen rule, and a judicial rule cannot take precedence over a statutory provision.
One evidentiary rule where there is disagreement among the appellate courts is Rule 106. If a party introduces a writing or a portion of a writing, the opposing party may require the introduction of any other part of the writing or any other writing that in fairness ought to be considered at the same time. The conflict between the appellate courts is whether the other part or other writing must satisfy the rules of evidence to be admissible. Four appellate courts, including the District of Columbia (and the First, Third and Seventh Circuits) will admit the other part if fairness requires its admission. In contrast, four different appellate courts (the Second, Fourth, Sixth, and Ninth Circuits) require the other part or writing to satisfy the rules of evidence before it can be admitted, finding that Rule 106 does not make admissible what is otherwise inadmissible. Curiously, a case being tried in the Tax Court and appealable to the Second, Fourth, Sixth, or Ninth Circuits would seem to require the Tax Court to apply the contrary interpretation of the District Court of the District of Columbia.
Admittedly, an issue involving Rule 106 arises infrequently and the potential differential treatment is unlikely significant enough to create a demand for change. Rule 301 is at the opposite end of the spectrum. It is implicated in many more cases and, because it is so intertwined with substantive rules applied by the courts, demonstrates the unworkability of the Golsen rule and Section 7453 operating simultaneously.
The determination made in the notice of deficiency is presumed correct, and, generally, the taxpayer has the burden of proof by a preponderance of the evidence. Rule 301 provides that the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption. However, the courts have that that if the Commissioner has determined the taxpayer has unreported income, he must introduce substantive evidence linking the taxpayer to the income. For example, the Commissioner may establish a link between the taxpayer and the alleged business activity that generated the income. Or he may establish a link between the taxpayer and the unreported income, such as through a source and application of funds analysis, without necessarily making a link to the alleged activity that generated the income. The appellate courts disagree on whether, to be considered, the evidence used by the Commissioner to establish the link must satisfy the rules of evidence. In the Second Circuit, a statutory notice of deficiency based on such inadmissible evidence is arbitrary, the notice is not entitled to the presumption of correctness, and the burden of production shifts to the Commissioner. In the Fourth, Seventh, and Ninth Circuits, inadmissible evidence may be considered in determining if the Commissioner has established the requisite link.
Burden of proof issues can be difficult. Moreover, the substantive opinions of the appellate courts that shift the burden of production to the Commissioner are intertwined with evidentiary rules and there is no easy way to separate the two avenues of analysis. When is the court making a substantive ruling and when is the court applying the rules of evidence? More specifically, from the Tax Court’s perspective, when is the Goslen rule applicable and when are the rules from the District of Columbia District Court applicable? Of course, exasperating the problem is the lack of any tax case arising in the Tax Court that specifically has looked to the District Court of the District of Columbia for assistance in interpreting an evidentiary issue.
On February 11 the Senate Finance Committee marked up 17 miscellaneous tax bills, one of which would provide that the Tax Court apply the federal rules of evidence applicable in the Circuit Court to which the case is appealable. Not only is it difficult to imagine anyone who would object to the passing of this rule, but the proposed change makes sense. It would place the Code section in line with what the Tax Court and appellate courts are already doing and make application of the rules of evidence consistent with the Golsen rule.