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New Trends in Evidence at the Tax Court

We welcome back guest blogger Joni Larson. Professor Larson has graciously provided her insight again into the interpretation of rules at the Tax Court. I reached out to her after reading the opinion by Judge Carluzzo which she addresses at the end of this post. As with her previous posts found here, here, here and here, she takes us into the practical world of interpreting the rules and preparing to present evidence.  She authors the book on evidentiary issues in Tax Court with a new edition coming out shortly.  Professor Larson teaches at Indiana Tech Law School. Keith

Before the PATH Act, the Tax Court conducted trials in accordance with the rules of evidence applicable in trials without a jury in the District Court for the District of Columbia.  IRC § 7453.  The reference in Section 7453 to the District of Columbia was troubling.  Did it mean the Tax Court would apply the rules of evidence as adopted by the District of Columbia?  As interpreted by the District of Columbia?  As interpreted by the Circuit Court of Appeals for the District of Columbia?


The issue of how to interpret the statute seemed to be squarely before the court in Ad Investment 2000 Fund LLC v. Commissioner, 142 T.C. 248 (2014).  In a Son-of-BOSS tax shelter case, Judge Halpern considered the Commissioner’s motion to compel the production of opinion letters a law firm issued to the taxpayer.  The taxpayer argued the opinions were protected by the attorney-client privilege.  The Commissioner argued the privilege was waived when the taxpayer put the privileged matter in controversy when the taxpayer argued against application of the accuracy-related penalty.  The taxpayer argued it was not using the opinion letters as part of its affirmative defense but was, instead, making a generalized good faith defense.  Accordingly, it believed the opinion letters were not relevant, at issue, or discoverable.

Under Rule 501 of the Federal Rules of Evidence, the common law governs a claim of privilege.  In turn, the disagreement between the parties turned on the interpretation of the attorney-client privilege.  Thus, the disagreement was an evidentiary issue.

The attorney-client privilege exists to protect full and frank communications between attorneys and their clients.  Upjohn v. United States,  449 U.S. 383 (1981).  However, when a party puts into issue his subjective intent in deciding how to comply with the law, he may forfeit the privilege.

In determining if the party has waived, or forfeited, the privilege, the Tax Court uses a three-pronged test.  The privilege is waived if (1) assertion of the privilege was the result of an affirmative act, such as filing suit; (2) through the affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.  Johnston v. Commissioner,119 T.C. 27 (2002).

The Tax Court’s three-pronged test was endorsed by the D.C. Circuit Court of Appeals in Sanderlin v. United States, 794 F.2d 727 (D.C. Cir. 1986), but explicitly rejected by the Second Circuit in Pritchard v. County of Erie,  546 F.3d 222 (2d Cir. 2008).  Under Pritchard, to show the privilege was waived, the party had to rely on the privileged advice in claiming the defense (which the taxpayers in Ad Investment 2000 Fund LLC argued they were not doing).

The case before Judge Halpern was appealable to the Second Circuit Court of Appeals.  Under the Golsen rule which resulted from the holding in Golsen v. Commissioner, 54 T.C. 742 (1970), 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.  Or if the appellate court has not yet ruled on the issue, the Tax Court can decide on its own how to interpret the rule.  Thus, the issue seemed to be squarely before the Tax Court:  should it follow the holding of the D.C. Circuit Court of Appeals (as Section 7453 suggested) or follow the holding of the Circuit Court to which the case would be appealed, the Second Circuit (as the Golsen rule states).

Unfortunately, even though the question seemed ripe for resolution, Judge Halpern determined that, because the facts were distinguishable from those in Pritchard, the Second Circuit’s holding was neither controlling nor dispositive.

Not long after Ad Investment 2000 Fund LLC was decided, the PATH Act changed the language of Section 7453 [Pub. L. 114–113, div. Q, title IV, § 425(a), Dec. 18, 2015, 129 Stat. 3125].  During a panel discussion at the ABA Section of Taxation and the Trust and Estate Law Division Joint Fall 2016 CLE Meeting (in Boston), Judge Halpern disclosed he was the primary reason the change was made, and his participation in the change makes sense, given the issue potentially before him in Ad Investment 2000 Fund LLC.  The statute no longer contains a reference to the U.S. District Court for the District of Columbia.  However, even so, there seems to still be disagreement over what the new statutory language means.

I have read a lot of Tax Court cases addressing the rules of evidence (perhaps all of them, to one degree or another) and can offer some thoughts about them.  I am not aware of any case in which the Tax Court turned to the U.S. District Court for the District of Columbia or its Circuit Court of Appeals for guidance on evidentiary issues.  There are a small number of cases where the Tax Court looked to the Circuit Court to which the case would be appealed for guidance.  Most often, the Tax Court decided the evidentiary issue without citing any appellate court authority.  Moreover, there are very few cases in which the appellate court reversed an evidentiary decision made by the Tax Court.

I believe the court will use Golsen, just as it has in the past, to resolve issues where the appellate courts disagree, with no deference to the D.C. Circuit Court of Appeals on evidentiary issues.  It did not show any deference when the statutory language suggested it should, so there is no reason to think it would do so now.

A look at the most recent Tax Court cases bears this out and suggests a new trend.  Unlike past cases, the Tax Court now is citing to district court opinions, often from the jurisdiction to which the case would be appealed, and to relevant appellate court opinions.  Citation to district court opinions makes sense, as it is the trial court that is making the evidentiary decision.  And, to the extent the district court has not been overruled by the appellate court, this law would be the controlling law in the jurisdiction.

For example, in CNT Investors, LLC v. Commissioner, 144 T.C. 161 (2015) the venue for appeal was either the Ninth Circuit or the D.C. Circuit Court of Appeals (the court declined to resolve the issue as the holding would be the same regardless of appellate venue).  The court noted that it may take judicial notice of appropriate adjudicative facts at any stage in a proceeding, citing to Rule 201 of the Federal Rules of Evidence.  It then stated that a court may take judicial notice of public records not subject to reasonable dispute, such as county real property title records.  In support of this position, it cited two California district court opinions.  It further noted that it could rely on electronic versions of public records, citing two district court opinions and an Eighth and Sixth Circuit Court of Appeals opinion.  The cited authority allowed the court to consider the online grantor/grantee records of the county in California that showed the LLC held legal title to four parcels of real property in the county.

In determining where certain LLCs were formed, it looked at the online records in each state and found one LLC was formed in Delaware and one in California.  It noted who was listed on the records as the agent for service of process, the entity’s address, and that there was no indication the LLC had been dissolved.  As the basis for taking judicial notice, it cited to three district court opinions in which such judicial notice-taking was permitted.

In Bunch v. Commissioner, T.C. Memo. 2014-177, in explaining the extent to which the court could take judicial notice of pleadings and court orders in related proceedings, the Tax Court cited to appellate and district court opinions, none of which were in D. C.

In S cases, the judges also seem to be willing to turn to holdings in the local jurisdiction for guidance on admissibility of evidence.  This is a curious development, since the Rules of Evidence generally do not apply to small, or “S” cases.  [IRC § 7463; Tax Court Rule 174(c)]  In Lopez v. Commissioner, the taxpayer possessed notarized written statements from her customers and had presented them to the Commissioner during the audit of her returns.  The taxpayer offered the documents at trial, and the Commissioner objected.  The Tax Court admitted the documents, noting that under New York law, if “a document on its face is properly subscribed and bears acknowledgment of a notary public, there is a ‘presumption of due execution, which may be rebutted only upon a showing of clear and convincing evidence to the contrary,’” citing New York state court opinions.  Because the Commissioner had not offered any evidence to rebut the presumption, the notarized statements were admissible.

It seems most likely that the trend of citing to local authority, or at a minimum district court opinions, will continue, and holdings and differences among federal district courts or appellate courts will become even more important when determining evidentiary issues in the Tax Court.

New Tax Court Rules

On March 28, 2016, the Tax Court promulgated  new interim and proposed rules in response to the legislation Congress passed at the end of 2015.  Congress had trained us that it did not really legislate anymore and suddenly it had a burst of activity passing the Bipartisan Budget Act of 2015, The Fixing America’s Surface Transportation Act and the Protecting Americans from Tax Hikes Act of 2015.  Embedded in each piece of legislation was something, or many things, that impacted the Tax Court.  The announcement from the Court included notification it was adopting certain interim rules without giving the opportunity for public comment because of the immediate need for rules while it also announced proposed amendments on which it invited comments.  This post will briefly touch on most of the rule changes and follow the order in which the changes appear in the rules.


Rule 13 relating to the Court’s jurisdiction is changed to reflect the inclusion of innocent spouse and collection due process (CDP) cases in the types of cases impacted by the automatic stay in Bankruptcy Code 362(a)(8).  In 1978 when Congress created the current bankruptcy code it imposed the stay on Tax Court proceedings singling out the Tax Court among all courts for this treatment.  I covered this issue previously in discussing the legislation.  At that time Congress created BC 362(a)(8) the Tax Court did not have standalone innocent spouse jurisdiction and did not have CDP jurisdiction.  The reference in BC 362(a)(8) did not include these types of cases and the scope of the stay regarding these cases was unclear.  In the PATH legislation, Congress extended the stay to these types of cases and the Court rules now include this change.  So, starting on December 18, 2015, a taxpayer cannot bring a Tax Court proceeding to determine innocent spouse status or to challenge a CDP determination if the taxpayer is in a bankruptcy proceeding in this the automatic stay is in existence.  Similarly, if a Tax Court proceeding under the innocent spouse or CDP provisions is ongoing at the time the taxpayer files a bankruptcy petition and creates the automatic stay, the Tax Court proceeding will be suspended until the stay terminates by operation of law or by bankruptcy court order.  This change creates a parallel structure for different types of Tax Court proceedings stopping all of them when a bankruptcy occurs

Rule 143 changes as a result of a PATH act provision because Congress changed the applicable rules of evidence for Tax Court cases.  Guest Blogger Joni Larson discussed this change.  See her post here.

Rule 255.1-.6 address changes to partnership actions brought about by Bipartisan Budget Act.

Rule 280 changes to address the new path to Tax Court jurisdiction created by the PATH act.  Taxpayers seeking interest abatement now have an ability to get into Tax Court that follows the path some taxpayers take to District Court in refund suits.  Instead of waiting for a notice from the IRS as a ticket to Tax Court, the failure of the IRS to act on the interest abatement request within 180 days after the filing of the claim opens the doors of the Tax Court to judicial review of the issue.

Rule 281 sets out the information a petitioner seeking interest abatement should include in the petition

Rules 350 through 351 address the new Tax Court jurisdiction to rule on the revocation of passports.  See our post by guest blogger Ken Weil on this issue here.   We wait anxiously to see the first one of these petitions.  Because petitions to reverse the revocation of a passport present an entirely new basis for jurisdiction of the Tax Court, the procedures set out in the proposed rule change and the proceedings brought under the new code provision will create a whole new body of case law.  It may take the next couple of decades for this to fully play out just as the CDP legislation in 1998 is still creating new wrinkles for the Court to address.

Congress seems to want to load the Tax Court with more and more types of cases.  When will it decide that the Tax Court can handle refund cases?


Changes to the Rules of Evidence Applied in the Tax Court

We welcome back guest blogger Joni Larson.Joni has graciously provided her insight again into the interpretation of rules at the Tax Court. This time she provides insight into the impact of recent legislation on those rules. As with her previous posts found here, here and here, she takes us into the practical world of interpreting the rules and preparing to present evidence.  She authors the book on evidentiary issues in Tax Court.  Professor Larson has moved schools since she wrote for us last and now teaches at Indiana Tech Law School.

The recently-enacted tax bill (Protecting Americans From Tax Hikes Act of 2015) includes a provision that Tax Court proceedings will be conducted in accordance with the Federal Rules of Evidence. There has been a positive response to this change.  Moreover, academic types breathed a sigh of relief.  But, to be honest, only because the change brought form into line with substance.

Before the change in the law, the Tax Court conducted trials in accordance with the rules of evidence applicable in trials without a jury in the United States District Court of the District of Columbia. The change removed the reference to the rules used in the District of Columbia.  By uncoupling the rules from one specific jurisdiction, the Tax Court can now look for guidance on application of the rules of evidence to the Circuit Court of Appeals to which the case is appealable.


This change makes a lot of sense. When a case is appealed to a Circuit Court of Appeals, if there is an issue about whether the Tax Court properly admitted (or considered) evidence, the appellate court will rely on its own interpretation of the rules of evidence.  But this is, as a practical matter, what has been happening all along.  A practitioner would be hard-pressed to find a case in which the Tax Court or an appellate court looked to the District of Columbia for guidance on how to apply a rule of evidence.  To the contrary, there are plenty of cases in which the appellate court looked to its own interpretation to resolve an issue.

Where this law-change places the Tax Court is under the Golsen rule [Golsen v. Commissioner, 54 T.C. 742 (1970)]. And this is where it has been all along.  It is just there officially now.

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.  Or if the appellate court has not yet ruled on the issue, the Tax Court can decide on its own how to interpret the rule.

Having conflicting rules at the appellate level is nothing new. The Golsen rule’s very existence is built on the fact that the appellate courts often disagree.  What the new statutory amendment does is to officially recognize that such disagreements extend to more than substantive law and that the appellate courts also can take evidentiary differences into consideration.

While evidentiary issues often take a back seat to the substantive issues, it is not unheard of for the evidentiary issue to control the outcome of the case. For example, a number of recent Tax Court opinions have addressed whether the taxpayer was entitled to claim a charitable contribution deduction for donating an easement.  The value of the easement, generally, is determined by comparing the value of the property before the grant to the value after the grant, with the decrease in value being what was given up, or the value of the easement on the property.  At trial, experts provide testimony about the before and after values.

Under Federal Rules of Evidence 702, a party offering the testimony of an expert witness must establish that the witness is qualified as an expert. The court must assess the reliability of proffered testimony before admitting it into evidence, making sure the expert testimony conforms with Daubert v. Merrell Dow Pharmaceuticals, Inc. (finding that trial courts must perform as gatekeepers, excluding unreliable expert testimony) [509 U.S. 579, 590–93 (1993)].

However, in the area of easement valuation, the reliability of some experts was not only called into question, but the experts were accused of aiding in the understatement of tax by overvaluing façade easements. Eventually, the experts entered into a settlement with the IRS, admitting to violating Circular 230 by failing to exercise due diligence in preparing the valuation reports and failing to determine the correctness of their written representations.  [News Release, IR-2014-31] While the experts were not identified, it is unlikely their clients were successful in obtaining the claimed charitable contribution deductions.

Another area of evidentiary tension is in the privileges found under Rule 501, specifically the work-product privilege. In United States v. Textron, Inc. [577 F.3d 21 (1st Cir. 2009], the IRS requested Textron’s tax accrual work papers. The papers were prepared by its lawyers (and others) to support Textron’s calculation of tax reserves for potential liabilities for further taxes. In turn, Textron claimed it did not have to provide the work papers as they were protected by the work-product privilege.

The work product privilege protects tangible documents, mental impressions, personal beliefs, and other material prepared by an attorney in anticipation of litigation or trial. The scope of protection under the work product privilege is broader than that under the attorney-client privilege. It protects documents prepared in anticipation of litigation if prepared by, or at the direction of, the party’s attorney or the party. To come within the privilege, the taxpayer must demonstrate that the document was created with reference to a specific claim, supported by concrete facts, and likely to lead to litigation. Because the privilege protects only documents prepared in anticipation of litigation, it does not protect documents prepared in the ordinary course of business or for other non-litigation purposes.

Textron was statutorily required to prepare the tax accrual work papers for financial reporting purposes. As part of its analysis, Textron had to consider prospects for litigation related to each position. Nevertheless, the First Circuit held that, because the papers were prepared for financial reasons, and not for use in litigation, they were not protected from disclosure.

The Fifth Circuit previously reached a conclusion similar to the First Circuit [United States v. El Paso, 682 F.2d 530 (5th Cir. 1982)], finding that tax work papers were not protected by the work-product privilege.

While these controversies over the protection of tax accrual work papers began in district courts, the Tax Court has previously had to grapple with the protection afforded by the work product privilege. Given the lengthy dissent in Textron and lack of guidance from most of the other appellate courts, it is unlikely that this issue has been played out. However, if a similar version of the issue reaches the Tax Court, it is now free to overtly look to the relevant appellate court for guidance on how to resolve this issue. As it will be able to do on all other evidentiary issues.

New Notice Requirement for Issuing Non-Party Subpoenas Read Into the Tax Court Rules

Today returning guest blogger, Joni Larson, writes about a recent Tax Court order issued by Judge Holmes involving the interpretation of Tax Court Rule 147.  Joni has graciously provided her insight again into the interpretation of rules. As with her last two posts, here and here, she takes us into the practical world of interpreting the rules and preparing to present evidence.  She authors the book on evidentiary issues in Tax Court.  She teaches at Western Michigan University – Cooley Law School where she is also the Director of the Graduate Tax Program.

As we have discussed before, the orders of the Tax Court contain important decisional law of the Court yet are often overlooked. We deeply appreciate the work of Carl Smith who regularly reads and analyzes the orders posted each day and alerts us to the ones of significance. Because the Tax Court has made it easy to search its orders and because of the otherwise unpublished nature of some important, if non-precedential decisional law there, we recommend searching the order tab on the Tax Court’s web page if you have a matter that might get decided by an order – which could be many types of matters. As you will see below, the order here could have lasting impact on one aspect of practice before the Tax Court. Keith

In Kissling v. Commissioner, the taxpayers discovered the Commissioner had served at least one nonparty subpoena.  The taxpayers wanted access to not only the subpoena and information received in response, but to know if other nonparty subpoenas had been issued and the response to those subpoenas.  Not surprisingly, the Commissioner considered the subpoena and information received in response to be part of his trial preparation that was not to be shared with the taxpayers.


To determine if the taxpayers were entitled to notice of nonparty subpoenas, the Tax Court looked to the rules.  The Tax Court has its own rules of civil procedure.  (Section 7453 provides that proceedings of the Tax Court be conducted in accordance with such rules of practice and procedure as the Tax Court may prescribe.  These Rules are easily accessible from the Tax Court’s website, see

The Court began its analysis where the taxpayers suggested, by considering Rule 21, Service of Papers.  While that Rule did list a number of documents to be filed with the court or served on another party, nonparty subpoenas are not included in the list.  The Court then turned its attention to Rule 147, Subpoenas, and found it contained no notice requirement.

When called upon to interpret its rules, the Tax Court has looked to the Notes of the Rules Committee for any available explanation (see, e.g., Dvorak v. Commissioner, 64 T.C. 846 (1975)).  Where there is no guidance in its own Notes, the Tax Court has looked to cases decided under the Federal Rules of Civil Procedure (FRCP) for guidance on interpretation of similarly-constructed rules (see, e.g., Grant v. Commissioner, T.C. Memo. 1999-115).  Finally, when the Tax Court Rules do not contain the necessary rule, the Court has looked to the FRCP to fill that gap (see, e.g., Settles v. Commissioner, 138 T.C. 372 (2012) (in determining whether review of collection action could be dismissed, the Tax Court looked to the Federal Rules of Civil Procedure) and Brannon’s of Shawnee, Inc. v. Commissioner, 69 T.C. 999 (1978) (when the Tax Court Rules did not contain a provision governing disposition of void decisions, the Tax Court looked to the Federal Rules of Civil Procedure)).  This use of the Federal Rules of Civil Procedure is supported by the Court’s own Rule 1(b), which provides “where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.”

Undeterred by the lack of a notice requirement in Rule 147, Judge Holmes looked to its history.  At the time it was enacted, the stated goal was to have a rule substantially similar to FRCP Rule 45.  In 1991, a notice requirement was added to FRCP Rule 45.  Even though no similar change had been made to Rule 147, Judge Holmes decided that the rules were intended to be the same: “it’s just an example of the two sets of rules drifting apart over time.”  Accordingly, Judge Holmes concluded that Tax Court Rule 147’s implementation should track that of FRCP Rule 45’s and read the notice requirement into Rule 147.

By Order, Judge Holmes held that, while he would not find the Commissioner violated the rules, he adopted the notification requirement as a modification to the pretrial order.  He granted the taxpayer’s motion to compel; the Commissioner was required to provide all nonparty subpoenas and responses to those subpoenas and give notice of such subpoenas in the future.

Summary Opinions for the second half of May

Here is part two of the items from May we didn’t otherwise cover.  We’ll have the June items shortly, and then July.  Hopefully, I’ll get back on track for weekly summaries in the near future.

  • The Sixth Circuit in Ednacot v. Mesa Medical Group, PLLC affirmed the lower court tossing a physician assistant’s claim that an employer wrongfully withheld employment taxes.  The Court determined this was tantamount to a refund suit, which required the taxpayer to first file an administrative claim for refund with the IRS prior to bringing suit.  There seems to be a lengthy past between the parties in this case.  The petitioner brought up a valid seeming point that she did not know if the withholdings were paid to the IRS, and therefore wasn’t sure if the refund was appropriate, but the Court held that Section 7422 was designed to funnel these issues through the administrative process.
  • Couple interesting privilege cases recently, including the Pacific Management Group decision blogged by Joni Larson for us.  In a case that may have a somewhat chilling effect on making reasonable cause claims, the Tax Court has held that claiming reasonable cause to the substantial valuation misstatement penalty waived attorney client privilege and the work product doctrine for certain communications between the taxpayer and its lawyer and accountant.  See Eaton Corp. and Sub. v. Comm’r.  This holding was the affirming of a motion for reconsideration.  The Court found that although there was an objective determination under Section 6662(e)(3), whether relying on the advice on Section 482 was based on the facts and circumstances, including the advice of the lawyer.  By claiming reasonable cause, the privileges were waived for that issue.
  • Taxpayer was successful arguing against the substantial understatement penalty in Johnston v. Comm’r, but it was because the taxpayer didn’t actually owe the tax.  The IRS had argued that a debt between the taxpayer (an executive of a telcom company) and his company was discharged by his employer when he moved to a related entity.  There was credible evidence that it was not discharged and payment continued.  There was the pesky issue that the loan wasn’t paid until the IRS audited the individual, but the Court found that the audit prompted the company to do something with the loan and it hadn’t been tax avoidance…must have been persuasive testimony.
  • LAFA issued guidance on the effect on the limitations period on assessment for payroll tax when the wrong form is filed. (LAFA 20152101F).  Employers are generally required to file quarterly returns on Form 941 for employment taxes when they are paid in that period.  A different form, Form 944 is used for certain employers with little  employment tax liability, and that is required annually.  The statute generally runs from the date of the deemed filing of employment tax returns, which is April 15 the following year.  See Section 6501(a)&(b).  The LAFA reviews the following three situations:
  1. Employer is required to file Form 944, but instead timely files four quarterly Forms 941.

  2. Employer is required to file Form 944, but timely files Form 941 for the first and second quarters of the year instead, and files nothing for the third or fourth quarters of the year.

  3. Employer is required to file quarterly Forms 941, but timely files annual Form 944 instead.


The quick conclusions were:

  1.  Assuming the Forms 941 purport to be returns, are an honest and reasonable attempt to satisfy the filing requirements, are signed under penalty of perjury, and can be used to determine Employer’s annual FICA and income tax withholding tax liability, the Forms 941 meet the Beard formulation and should be treated as valid returns for purposes of starting the period of limitations on assessment.

  2.  An argument can be made that the Forms 941 for the first and second quarters of the tax year constitute valid returns under the Beard formulation since they purport to be returns and are signed under penalty of perjury. However, given that Employer’s FICA and income tax withholding tax liability for the third and fourth quarters will not necessarily be equal to that reported for the first two quarters, the Forms 941 arguably are not sufficient for purposes of the determining Employer’s annual FICA and income tax withholding tax liability and may not be honest and reasonable attempts to satisfy the tax law.

  3.  Assuming the Form 944 purports to be a return, is an honest and reasonable attempt to satisfy the filing requirements, can be used to determine Employer’s annual FICA and income tax withholding tax liability, and is signed under penalty of perjury, Employer’s Form 944 meets the Beard formulation and should be treated as a valid return for purposes of the period of limitations on assessment.

  • A taxpayer in a chapter 11 case, Francisco Rodriquez (not the current Brewers closer who pitched for the Mets before choking out his relative in the clubhouse) was successful in avoiding a lien under 11 USC 506 on property held by the taxpayer that was already underwater with three prior liens.  In re Rodriguez, 115 AFTR2d 2015-1750 (Bktcy D MD 2015).  Section 506 allows liens to be stripped if the property lacks equity, which was what the taxpayer was attempting.  SCOTUS in Dewsnup v. Timm held that  a chapter 7 debtor cannot “strip down” an allowed secured claim (clearly, I was not the debtor, otherwise SCOTUS would have tossed on some Its Raining Men, and granted my right to strip down—I only did it to pay for college, I swear—and yet, still so many student loans).  Various other cases have held that Dewnsup does not extend to other chapters in bankruptcy, and the District Court held that lien stripping was appropriate in chapter 11 under the taxpayer’s circumstances.
  • The Tenth Circuit continues its clear prejudice and hatred towards Canadians (I completely made that up and that link is NSFW) in Mabbett v. Comm’r, where it found the Tax Court properly tossed a petition as being untimely that was filed by a resident of the US, who was a Canadian citizen.  The Court found the Service had properly sent the stat notice to the taxpayer at her last known address (and even if that was not the case, her representative had forwarded her a copy well before the due date of the petition).  The taxpayer also claimed that she was entitled to the 150 day period to file her petition to the court under Section 6213(a) because she was a Canadian citizen.  The Court stated, however, that the statute was clear that the 150 day rule only applies when “the notice is addressed to a person outside the United States.”  The taxpayer had been traveling, and was Canadian, but failed to show she was outside of the United States at the time the notice was sent.
  • In case you haven’t seen, the Service has started a cybercrimes unit to combat stolen ID tax fraud.  In my mind, this is sort of like the IRS and Tron having a lovechild, which I would assume to look like this.  Jack Townsend has real coverage on his Federal Tax Crimes Blog.
  • Jack also has coverage of the new IRS FBAR penalty guidance, which can be found here


Failing to Prove the Attorney-Client Privilege Applies

Today returning guest blogger, Joni Larson, writes about a recent Tax Court case involving a failure to successfully invoke the attorney-client privilege.  As with her last post, she takes us into the practical world of transforming information into evidence.  Sheis the perfect person to discuss the privilege because she authors the book on evidentiary issues in Tax Court.  She teaches at Western Michigan University – Cooley Law School where she is also the Director of the Graduate Tax Program. Keith

One of the most well-known privileges is the attorney-client privilege.  Rule 501 of the Federal Rules of Evidence allows common law privileges, such as the attorney-client privilege, to be claimed in the Tax Court (see also IRC section 7453).  The privilege protects communications made in confidence by a client to an attorney when the client is seeking legal advice.  It also applies to confidential communications made in the opposite direction, from the attorney to the client, if the communications contain legal advice or reveal confidential information on which the client sought advice.  The purpose of the privilege is to allow for full and frank communications between attorneys and their clients—the client is able to fully inform the lawyer and the lawyer can be frank and honest with his advice to the client. See Upjohn Co. v. United States, 449 U.S. 383, 389-90 (1981).

The privilege is not an absolute privilege that covers every communication between the attorney and the client.  It does not apply to underlying facts, business or other non-legal advice given by the attorney (see Ford v. Commissioner, T.C. Memo. 1991-354), information received from third parties, information given to the attorney that the attorney is expected to disclose to a third party, the identity of a client, or the fact that an individual has become a client.


If a party wants to claim that a communication is covered by the attorney-client privilege, he has the burden of establishing it applies. See Fu Inv. Co. v. Commissioner, 104 T.C. 408, 415 (1995).  “Blanket claims of privilege without any allegations that the production of documents requested would reveal, directly or indirectly, confidential communications between the taxpayer and the attorney, or without any allegations that the particular documents were related to the securing of legal advice, are insufficient. . . .”See Bernardo v. Commissioner, 104 T.C. 677, 682 (1995).

The privilege may be waived.  If the client voluntarily discloses the information or fails to take precautions to preserve the confidentiality of the privileged material, the privilege is waived.  See Moore v. Commissioner, T.C. Memo. 2004-259.  While disclosing the actual communication with the attorney will waive the privilege, disclosing only the subject of the communication will not.  See WFO Corp. v. Commissioner, T.C. Memo. 2004-186.

This tension between, on the one hand, disclosing enough information to satisfy the burden of proving the privilege applies and, on the other, not disclosing so much information that the privilege is considered waived, provides an interesting challenge for those claiming the privilege.  In Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, this tension was the focus of the Tax Court’s decision regarding a motion to compel production of documents.

In 1999 the taxpayers met with an attorney, Mr. Ryder, who pitched to them a program designed to minimize their tax liability; the taxpayers elected to participate.  Several years down the road, the Commissioner contended the program lacked economic substance, the taxpayers disagreed, and the parties ended up in Tax Court.

Over the years, Mr. Dunning, an attorney, had provided legal, corporate, and business advice to the taxpayers.  Prior to trial, counsel for Commissioner served a Subpoena Duces Tecum on Mr. Dunning.  He appeared at trial and produced some of the requested documents but declined to produce all.  He claimed the documents he did not produce (mostly emails), were protected by the attorney-client privilege.  For the 2,000 or so emails he claimed were privileged, he supplied a privilege log that stated who the email was from, name or email address of to whom it was sent, name or email address of who was copied, and the date and time sent.  No other information was provided.

A few days into the trial, the Commissioner filed a Motion to Compel Production of Documents Responsive to a Subpoena Duces Tecum Served on Steven Dunning and the court heard oral arguments on the motion.  Judge Lauber indicated he was inclined to grant the motion because the privilege log was inadequate.

To be adequate, a privilege log must set forth each element of the privilege and be sufficient to establish that the confidence was by a client to an attorney for the purpose of obtaining legal advice or by the attorney to the client where the communication contains legal advice or reveals confidential information about the client’s request for advice.  Mr. Dunning’s log did not contain any information about the subject of the email, describe the contents of the email, or include facts as to why the communication was intended to be confidential.

Mr. Dunning was in the courtroom on the first day of trial to hear counsel for Commissioner state he was going to challenge the log as insufficient, effectively alerting Mr. Dunning to the fact that he needed to prepare a more detailed log.  During the oral arguments, Judge Lauber noted that Mr. Dunning had been put on notice that the Commissioner considered the log inadequate and that Mr. Dunning had been given a second bite at the privilege log apple, but had chosen not to take it.

Because Mr. Dunning was the corporate and general business attorney for the taxpayers and had served as such for a long time, it was possible the email communications contained general business advice or discussed transactional matters.  If they did, because they did not contain legal advice, the communications would not be protected.  The minimal information supplied in the privilege log made it impossible for the Court to determine what the communications were about.  Having failed to meet his burden of proof, Mr. Dunning’s emails were not protected by the attorney-client privilege and the Commissioner’s Motion to Compel was granted.

It could be that Mr. Dunning decided not to provide a more detailed privilege log because, even if he had, the emails would not have been protected.  In its opinion, the court noted that the Commissioner also had argued that the taxpayers had waived the privilege, presumably by disclosing the information to a third party.  No further information about the suggested waiver was provided.

Noteworthy, the privilege also would have been waived by the taxpayers if they affirmatively placed Mr. Dunning’s advice at issue.  The Tax Court uses a three-prong test to determine if the privilege is waived by a taxpayer’s affirmative actions.   First, the taxpayer’s assertion of the privilege must have been the result of some affirmative act, such as the taxpayer filing suit in Tax Court.  Second, through this affirmative act, the taxpayer put the protected information at issue by making it relevant to the case.  Finally, application of the privilege would have denied the Commissioner access to information vital to his defense. See Karme v. Commissioner, 73 T.C. 1163, 1184 (1980), aff’d 673 F.2d 1062 (9th Cir. 1982); Hartz Mountain Industries, Inc. v. Commissioner, 93 T.C. 521, 522–23 (1989).

With few facts about the underlying controversy in Pacific Management disclosed in the opinion, it is not possible to determine if the communications had been disclosed to third parties or if the taxpayers had placed Mr. Dunning’s advice at issue.  Perhaps most curious of all is the fact that Mr. Ryder, presumably the same Mr. Ryder who pitched the tax-savings structure, is representing the taxpayers before the Tax Court.  It will be interesting to see how his role in the case plays out.


Proposal to Amend Section 7453 to Provide that the Tax Court Apply the Federal Rules of Evidence

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.”


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.



Commenting on the Blog Posts

We have many followers who get posts delivered and on top of that have many more readers who come to the site to read particular posts. Our readership has grown exponentially in the just over one year period that the blog has been in existence. Many of you post comments on the blog but most do not. For those who have never gone to our comment section, we wanted to make you aware of the sometimes lively discussion occurring there and to encourage you to comment or at least browse the comments because the commenters often have important things to say that we miss in the blog post itself. 

Listed below are the comments on two of our most recent posts. The first set of comments was made in response to the post on August 11 by Carl Smith entitled In Some Cases IRS Seeks to Conflict Out Lawyers Who Represented Taxpayers in CDP Hearings. The day of that post our blog set a record for site visits. Our site continues to grow and we have set the record several times over the past few months but Carl’s post put our site visits to a new level. We attribute it to the quality of his post. 

The second set of comments was made in response to the post on August 1 by Professor Joni Larson. She wrote about IRS Treatment of Penalties Following a Substitute for Return. Joni’s post was also a very popular post that drew many insightful comments. 

If you have not taken the time to look at the comment section of the blog before, please do. If a post raises an issue on which you can further enlighten our readers, please add a comment. If we made a mistake or missed something, we also welcome corrections. We write the posts with some haste and know we are going to make mistakes and miss important issues. Your contributions can help make the experience richer for all. Thanks to our many commenters and to our many readers. 


Comments to the post on August 11 by Carl Smith entitled In Some Cases IRS Seeks to Conflict out Lawyers Who Represented Taxpayers in CDP Hearings: 

Jim Malone says:

August 11, 2014 at 12:27 pm

Great post. A real potential trap. I have heard some suggest that you bring an unaffiliated person with you to avoid the problem.

Kathleen Adcock says:

August 11, 2014 at 5:14 pm

Great advice for papering the trail, as it were. Might I also suggest two mundane suggestions to the process: (i) all correspondence be sent certified with proof of delivery, with an exterior reference code to the letter within and keep copies of the envelopes, and (ii) add a standard paragraph requesting that the agent please respond with any discrepancies to the summary provided within 30 days of the signed receipt.

David C. Dodge says:

August 11, 2014 at 6:19 pm

To avoid this mess, simply do what I do on all IRS cases, conduct all IRS hearings/conferences in-person and audio record every hearing/conference as federal law permits, so that a truthful administrative record is consummated. 26 U.S.C. § 7521. In doing so, we lawyers create a 100% truthful administrative record consisting mostly of correspondence letters and the remainder audio recorded hearings/conferences which are court reporter transcribed into a written hearing transcript. Tax Court judges will be impressed, clients too will be impressed, we as tax defense lawyers need not testify as fact witness because the audio recordings and transcripts may be introduced into the evidence record. Seems to me that leaves IRS’ lawyers no ability to motion for removal/disqualification due to purported conflicts

Frank Agostino says:

August 11, 2014 at 8:40 pm

Carl writes: “Unfortunately, taxpayers represented by attorneys in CDP cases can’t all count on Frank being present at their calendar calls.” In New York City, you can – whether its me or another volunteer from the NYCLA calendar call program, we can generally get representation to assist an attorney that needs to testify on behalf of a taxpayer in a CDP case. Thank you for the kind words.

Michael Breslin CPA, Esq. says:

August 12, 2014 at 12:19 am

I handled a case in Manhattan last year and the IRS attorney was gunning to have me removed as I’d represented the client through the OIC and CDP processes. Fortunately, the judge managed the situation well and just told me to do my best to refrain from testifying at trial.

Bob Kamman says:

August 12, 2014 at 10:22 am

WWLLD? Considering the futility of CDP hearings and Tax Court cases based on IRS definition of due process, I wonder why cases are not just submitted on a written record to SO’s, who have little or no discretion anyway when it comes to following the decision-making matrix. The difference between IRS procedural formalities and kabuki is that everyone at the Japanese theatre admits that it’s just a dance.

AJ Decaria EA says:

August 12, 2014 at 12:37 pm

Another option would be to have a non-attorney, an EA or CPA, handle the administrative actions such as representing in the OIC or CDP process. I do work for several attorneys who subcontract with me for assistance in administrative matters. It would seem that would leave them free to represent in Tax Court. 

Comments to the post on August 1 by Professor Joni Larson entitled IRS Treatment of Penalties Following a Substitute for Return: 

Carl Smith says:

August 1, 2014 at 12:59 pm

Professor Larson writes something that I am litigating, so I want to alert people. She writes: 

“Procedurally, there is an order for how contesting the penalties will play out in court. First, the taxpayer must put the penalties at issue. Usually he does this in the petition. Because Mr. Robertson questioned all the penalties in his petition, the Tax Court moved to the next step. (If he had failed to put them at issue, he would have been deemed to have conceded the penalties and the argument would have been over and the penalties would have been applicable.) ” 

What Professor Larson states is what the Tax Court has held as to the interaction of section 7491(c) (putting the initial burden of production on penalties on the IRS) with Tax Court Rule 34(b)(4) (providing that any issue not pleaded is conceded). In Funk v. Commissioner, 123 T.C. 213 (2004), and Swain v. Commissioner, 118 T.C. 358 (2002), the Tax Court held that the failure to mention penalties in the petition or later in the case constitutes a concession of all penalties, excusing the IRS from meeting any burden of production on penalties under 7491(c). 

In posts here in March and June, I have discussed the follow-up to the Rand case, where it appears many Tax Court judges are fixing the penalty base (per Rand) in cases where the petitions did not even mention penalties — thus, perhaps ignoring or in their minds, sub silencio, distinguishing Funk and Swain. Further, Judge Gale explicitly held, in unpublished orders in three such cases, that Funk and Swain do not apply where evidence in the record indicates that the penalty was miscomputed. Thus, sua sponte, he reduced or eliminated penalties that improperly included disallowed refundable tax credits, even though the petitions in the cases never even mentioned the penalties. 

There are two companion cases in the 9th Circuit in which I am litigating the issue of the Tax Court’s refusal to fix the Rand computational issue where the taxpayers raised a contest to penalties generally, but not as to the specific lack of underpayment issue posed in Rand, Morales v. Commissioner (discussed in these prior two posts). In Morales, the briefs are all in and we are awaiting oral argument. One of our arguments, however, is that the Tax Court’s Funk and Swain holdings are wrong. Pro se taxpayers rarely mention penalties in their Tax Court petitions. We think that Congress knew this when it enacted 7491(c) and meant 7491(c) to put the burden of production on the IRS with regard to penalties any time an individual taxpayer attaches a notice of deficiency containing penalties to her Tax Court petition — even though she does not mention the penalties in her petition. We think section 7491(c) trumps Tax Court Rule 34(b)(4)’s pleading rules. After all, section 7491(c) applies “notwithstanding any other provision of this title”, and only section 7453 of Title 26 allows for the Tax Court to promulgate rules of practice and procedure. No court of appeals has ruled on this pleading question. When the 9th Cir. does rule, I will send another post to be put up here. 

Bob Kamman says:

August 1, 2014 at 9:36 pm

Has anyone actually seen a Substitute for Return? All I have seen — but this is not recent — is a transcript showing return filed with zero tax (150 transcript code) and then a subsequent assessment, in the amount of the Notice of Deficiency computation (the transcript code is in the 300 series). I think this has more to do with the decrepit IRS computer system, than anything that actually is backed up by paper documents. In fact, the Intenal Revenue Manual explanation of the Automated Substitute for Return program states: (05-19-2009)

Preparing and Processing ASFR Dummy Return 

ASFR generates a TC 971 AC141 which triggers a dummy return to post to the module. No paper return exists. Do not attempt to request the DLN from files or try to associate anything with it. 

Jason T. says:

August 2, 2014 at 3:21 am

The IRS’s “Substitute for Return” is a misnomer. In fact, its existence violates the law. 

No law allows the IRS to create a mere “Substitute for Return.” Indeed, the very nomenclature is nonsensical. The taxpayer files no return. That means nothing exists for which something else can act as a “substitute.” 

In any event, if a person fails to file a required return (or files a false or fraudulent one), the IRS “shall make such return” from its own knowledge and the information it can obtain. I.R.C. § 6020(b). Cf. I.R.C. § 6012(a)(certain persons “shall” make income tax returns). 

Despite the command (or even the authorization) of 6020(b), however, the IRS NEVER makes an individual income tax return for a non-filer. I have never been able to figure out why. What the IRS does, as Professor Larson indicates, is place the individual’s name and address on a Form 1040 and make a few “0” entries. That “Substitute for Return” shows no tax at all. If a tax protester filed such a return, then the IRS would declare it frivolous. 

To answer Bob Kamman’s query, yes, I have seen many SFRs. His IRM reference, however, is only to the ASFR, i.e. the “Automated” Substitute for Return. The ASFR is the SFR’s equally bogus cousin. 

The IRS’s deliberate failure to make an actual individual income tax return on Form 1040 for a non-filer has fueled tax protesters’ beliefs for decades. They say if the federal income tax was mandatory, then the IRS would actually make a 6020(b) return for the non-filer. And the tax protesters have a point. For all taxes, except for the federal income tax, the IRS makes a return for a non-filer that it calls a “6020(b) return.” In contrast, for the federal income tax alone, the IRS calls its creation a “Substitute for Return.” It may sometimes add in “under 6020(b),” but the point is the same: why does the IRS not make full federal income tax returns for non-filers? 

To approach Professor Larson’s specific point, the courts say the presence or absence of an SFR is irrelevant to a deficiency determination. In 1996, however, it became very relevant to deficiency cases. That year, Congress enacted what is now I.R.C. § 6651(g). That section requires that the IRS make an I.R.C. § 6020(b) return before a non-filer can be liable for the I.R.C. § 6651(a)(2) addition to tax, which applies to a failure to “pay a tax shown on a return.” And as Carl Smith points out, I.R.C. § 7491(c) places the burden of producing evidence in support of that tax addition on the IRS. But the IRS still produces only the largely blank Form 1040, an examination report, and a “certification” that the whole paper pile (somehow) constitutes an actual 6020(b) return. 

Full disclosure: I am well versed on this subject for a good reason. I assisted the taxpayer in the Spurlock 6020(b) cases, 118 T.C. 155 (2002) and TC Memo. 2003-124.

The latter Spurlock case compelled the IRS to stop asserting the I.R.C. § 6651(a)(2) addition to tax in all non-filer cases for nearly a year. In that time, the IRS scrambled to figure out how it could still assert that addition to tax—without, again for whatever reason, completing a Form 1040. So it added to its conglomeration of papers two “certification” forms; one for SFRs, one for ASFRs. According to the IRS, and now the Tax Court, either form produces a real 6020(b) return. Nonsense. 

If the Professor, or anyone else, wishes to learn more about why the IRS approaches the 6020(b) return/6651(a)(2) issue in the way it does, then please read the Spurlock cases first. After you do that, please read Chief Counsel Notices CC-2003-019, CC-2004-009, and CC-2007-005. At least in part, Spurlock inspired each Chief Counsel Notice. 

In closing, I must say I am alarmed at Professor Larson’s implication that the IRS should be able to rely on secondary evidence to meet its I.R.C. § 6651(a)(2) production burden. The failure to file a return and the failure to pay estimated tax additions are much different from a failure to pay a tax shown on a return addition. The first two tax additions require the IRS to show it possesses neither the person’s return nor any of his estimated tax payments. As applied to non-filers, however, I.R.C. section 6651(a)(2), is much different. That addition to the tax arises only when the IRS has made a return under I.R.C. section 6020(b). Without that return, though, how is the Court to determine (a) the return exists, (b) a tax is shown on that return, and (c) the exact tax amount shown on that return? 

In short, evidence that an event occurred must be stronger than the evidence that an event did not occur. Account transcripts do not make the grade. As I see it, the IRS has made its “Substitute for Return” bed; now it must “lie” in it. 

Joni Larson says:

August 2, 2014 at 2:04 pm

It is noteworthy that nothing in Robertson v. Commissioner suggests that whether a substitute for return can or cannot exist was at issue. The Court simply noted that one had not been entered in evidence. (However, by suggesting the IRS needed to have one in evidence to have the penalty imposed seems to suggest the court had no issue with the idea that one could exist.)

There also seems to be some confusion about the rules of evidence versus the burden of proof or burden of persuasion. FRE Rule 1004 provides a means for having secondary evidence admitted into evidence when the original writing is not available. It is an evidentiary rule. It in no way impacts or alters a party’s burden of proof or burden of persuasion. 

JT says:

August 4, 2014 at 6:51 pm

In I.R.C. § 6651(a)(2) cases, FRE 1004 is irrelevant. Professor Larson merely assumes “the original writing is not available.” Her assumption is the IRS actually made a “Substitute for Return” (the purported 6020(b) return), but it could not locate it. In Robertson, the Commissioner made no such claim. In fact, I don’t know of one case since 1996, the enactment year for I.R.C. section 6651(g), in which the Commissioner made that claim. 

The IRS simply failed to complete the required 6020(b) certification. Bob Kamman alludes to the reason: the IRS computed Robertson’s deficiency automatically, based on information returns others filed with respect to him; it did nothing else. See Robertson at *3. 

I’m still mystified why Professor Larson thinks it good tax practice to weaken the taxpayer’s protection that I.R.C. § 7491(c) embodies. 

Dermot Kennedy says:

August 4, 2014 at 8:55 am

On a tangential but related matter while I.R.C. § 6651(a)(2) which applies to a failure to pay a tax shown on a return and other code section refer to “addition to tax”, I have noticed the IRS Chief Counsel attorney in her/his Answer filed to my recent Petitions is “Denying” that there is an addition to tax and pleading instead there is a “penalty” pursuant to whatever section is listed on the Stat Notice and suggesting they will file a 37(c) Motion if I do not file a Reply to the Answer. Regardless whatever nomenclature is given to this, so long as it placed at issue in the Petition I do not see this as changing a party’s burden of proof or burden of persuasion. Has anybody seen a different outcome? 

Carl Smith says:

August 4, 2014 at 10:43 am

7491(c) puts the burden of production on the IRS “in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title”. So, it shouldn’t matter whether an item is a penalty or addition to tax for 7491(c) to apply. 

JT says:

August 4, 2014 at 7:07 pm

I can’t imagine that the “addition to tax” v. “penalty” distinction alone would warrant a reply, let alone a Rule 37(c) motion to compel one. As Carl Smith points out, under 7491(c), the distinction makes no difference to the production burden. 

In my experience, when a SNOD asserts a 6651(a)(2) amount, that notice shows it as an “addition to tax.” You do not, though, expressly state that your SNOD mentions 6651(a)(2). 

I suspect, then, that you are disputing either a 6662 (accuracy-related) or 6663 (fraud) amount(s). The Code does denominate each of those impositions as a “penalty,” rather than as an addition to tax. Again, though, it makes no difference to the Commissioner’s burden of producing evidence to support an accuracy-related penalty. On any fraud penalty, however, the Commissioner bears the burden of proving it by clear and convincing evidence. 

Bob Kamman says:

August 7, 2014 at 12:00 pm

I admit that in the tax seas where I swim, automated SFR’s are the only fish. I suspect that’s true of cases that come to taxpayer clinics, also. Do field and ACS collection employees actually prepare any of these manually? 

Jason T. says:

August 9, 2014 at 2:34 am

I have seen ROs prepare actual 6020(b) returns, i.e. on completed Forms 940, 941. Examiners prepare manual SFRs, generally in “high income non-filer” cases. The Examiner will correspond with the reported payor(s) to verify the accuracy of the filed information returns (because of the 6201(d) burden of production requirement). The amount(s) the payor(s) verify results in the starting point for the Substitute for Return. But you’ll never see an amount shown on the Examiner’s Form 1040 that he or she supposedly “makes” for the taxpayer under 6020(b). To me, that omission renders the resulting 6651(a)(2) failure to pay addition to tax invalid….no tax shown on a return = no addition to tax for failure to pay a tax shown on a return.