Teachers will sometimes say there is no such thing as a bad (or “stupid”) question. I’d say the jury is out on that one.
Everyone, however, can agree that there is such a thing as a bad answer (see Keith’s recent post here). My next few posts will detail a particular kind of “bad answer” and propose ways of addressing it. Specifically, I will address IRS “answers” in Tax Court that appear to put absolutely no effort into investigating the facts alleged before denying them all “for lack of sufficient information.”
When my students draft a petition, it goes through multiple rounds of revision and mark-up, even on the very straightforward cases. Apart from making sure our “facts” are not just legal conclusions, I stress US Tax Court Rule 33 and its requirement to make a “reasonable inquiry.”
So it is, shall we say, a poor learning experience for my students to spend so much time on a petition only to have a pro-forma and frankly worthless answer filed in response. It has become something of a running joke in my Clinic when describing the process to clients: “we’ll file the petition, and in about 60 days the IRS will answer saying they deny literally everything because they don’t have sufficient information. The case will then sit for about five or six months until, maybe, Appeals looks at it. The wheels of tax justice grind slowly.”
But recently, I’ve been inspired to say, “no more!” I credit this inspiration to a student that has spent the better part of this academic year wondering why one of her cases still hasn’t settled, despite the obvious merits if only someone would look for a moment at the facts. (It is an instance of the IRS proposing “zero basis” on stock sales from an Automated Under-Reporter (AUR) Exam…)
I no longer have the heart to tell her, “This is simply the way things go in the tax world.” Because it need not be this way… and the administrative file may be one step towards salvation.
The Answer and the Administrative File
From time to time, I’ve gotten the feeling that the IRS has just ignored information in the administrative file when writing their answers. This is especially the case when I allege something like “the IRS issued a CP2000 Notice on [date]…” and the IRS denies for lack of sufficient information. I got to wondering whether there were any cases that looked at the importance of the administrative file during the pleading stages of litigation.
In my brief research, a case that caught my eye was Vermouth v. C.I.R., 88 T.C. 1488 (1987). Note that it is a precedential opinion.
Most of the events of Vermouth take place in the mid-1980s. For context, at the end of the 1985 fiscal year (9/30/85), I was a few months old. More relevantly, at that time the Tax Court had 72,836 cases pending. The tax shelter sweepstakes of the time undoubtedly kept IRS Counsel busy for the same 14 hours a day I spent sleeping.
And so, with that backdrop, it would not be unreasonable for IRS Counsel to move for additional time to file an answer. So it was in the case of Vermouth, where IRS Counsel had yet to receive the administrative file by the close of the first 60 days after being served with the petition. Both parties and the Tax Court agreed to give IRS Counsel another 60 days to file the answer – a third of a year from the date of being served the petition, for those keeping count.
At the end of those 120 days, however, the petitioner (and Tax Court) were no longer so amenable. Again, IRS Counsel moved for an extension to file an answer on the grounds that they still did not have the administrative file. But this time petitioner’s counsel objected, seeking sanctions.
You may be tempted to ask why it was so important to IRS Counsel that they had the administrative file in the first place. Frequently we receive answers to our petitions where counsel doesn’t yet have the administrative file. Why didn’t they just follow the common practice of “denying for lack of sufficient information?” Was it just a particularly diligent attorney?
In this case it was because the IRS had alleged an addition to tax for fraud, for which the IRS had the burden of proof. (More on that later.) You can’t deny for lack of information something that you have to affirmatively allege facts about to begin with. As Tax Court Rule 36(b) makes clear, the IRS has to provide a “clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof.”
In Vermouth, petitioner argued that IRS Counsel couldn’t properly allege the facts it needed to support fraud, and it shouldn’t be given 180 days to do so. The Tax Court agreed and precluded the IRS from raising the issue. In other words, petitioner won on a significant issue at the answer stage. Imagine that.
Importantly, the Tax Court found that it wasn’t enough that the IRS Counsel had “asked” (apparently multiple times) for the administrative file from IRS Appeals. Diligence required more, especially as the second extension deadline neared. The money-phrase was that respondent wouldn’t be let off the hook for “bureaucratic inertia.” IRS Counsel can’t just say “I’ve asked IRS Appeals… not my fault they haven’t responded.” A bit more diligence is required. I wonder if that still applies today…
Lessons and Broader Applicability: Burden Shifts
Ok, great. Where the IRS delays in filing an answer, you might be able to get some sanctions. But what does that have to do with the IRS filing bad answers on time?
A lot, I think. But first let me talk about where it probably doesn’t help.
The general rule is that the petitioner has the burden of proof (see Tax Court Rule 142(a)(1)). Furthermore, the notice of deficiency is presumed to be correct (see Welch v. Helvering, 290 U.S. 111 (1933)). However, the burden can shift (and the presumption of correctness can be removed) where the IRS engages in a “naked” assessment (see Prof. Camp’s article here). Though likely rare in most deficiency cases outside of the penalty context, if and when the burden is properly on the IRS a “bad” answer can result in a finding of no deficiency. See, for example, C.I.R. v. Licavoli, 252 F.2d 268 (6th Cir., 1958). These cases, however, are fairly rare.
Note that the Vermouth case was decided in 1987. This predates IRC § 7491, which was enacted in 1998 and shifts the burden of proof for certain issues where the taxpayer has introduced credible evidence. However, if you look up cases referencing IRC § 7491(a), you will find a string of opinions saying, “the burden has not shifted to the IRS in this case.” This is for many reasons, including (1) taxpayers failing to actually allege that the burden has shifted, (2) taxpayers failing to maintain required records, and (3) taxpayers failing to fully cooperate with the IRS on the issue.
Most importantly, however, I am not so sure that the burden could shift under IRC § 7491 at the answer stage of litigation anyway… But that, perhaps, is still to be tested. The few cases I found where the burden did shift under IRC § 7491(a) appear to have happened after trial occurred (Murphy v. C.I.R, T.C. Memo. 2006-243 and Struck v. C.I.R., T.C. Memo. 2007-42).
Answers and the Burden of Production
Usually when I reference IRC § 7491 it is with regards to penalties (IRC § 7491(c)) since that provision automatically shifts the burden without requiring the taxpayer to introduce evidence first. This would seem to present a gold-mine to petitioners arguing against “bad answers,” since there are so many IRC § 6662 penalties asserted on the Notice of Deficiency that just go forgotten on the answer. However, the burden shift for penalties is on the burden of production, not on the burden of proof.
Arguably (I am happy to be second-guessed on this), this means that IRS Counsel does not need to affirmatively plead facts in their answer on burden of production issues, since Rule 36(b) only requires pleading specific facts where the IRS has the burden of proof. The oft-cited penalty case of Higbee v. C.I.R., 116 T.C. 438 (2001), provides an explanation of the difference between the burden of production and the burden of proof and why it might matter.
In Higbee, Judge Vasquez clearly sees a difference between the two burdens. First, Judge Vasquez describes IRC § 7491(c) as placing “only the burden of production” (emphasis added) on the IRS with regards to penalties. Judge Vasquez further reasons that Congress intentionally decided not to place the more general “burden of proof” on the IRS in choosing the “burden of production” language. All the IRS needs to do is put forth some evidence supporting the penalty: the taxpayer still needs to persuade the Tax Court that the penalty is wrong. There are simply different considerations at play for burden of production vs. burden of proof issues. If the IRS has the burden of proof it makes sense that they should have to lay out (with some specificity) the facts they are relying on because the opposing party could prevail solely by responding to those facts – that is, by holding persuasion in equipoise. Not so if the IRS only has the burden of production.
(At least, that is my argument for why there is a meaningful difference. I welcome other’s thoughts.)
Note that the same is arguably true for contested information returns under IRC § 6201(d). That section provides that the IRS will have the “burden of producing reasonable and probative information” pertaining to the deficiency, beyond just the information return it was premised on. That sounds a lot like burden of production at play, rather than burden of proof.
Lessons and Broader Applicability: The Primacy of the Administrative File
Perhaps more important than burden shifting provisions are cases where the administrative file is or will be directly at issue before the Tax Court. I deal with this most often in IRC § 6330 Collection Due Process cases (residing in Minnesota, I am in a “Robinette/Record Rule” jurisdiction). But the administrative file is also critical in Whistleblower cases (see post here) and, more recently under IRC § 6015(e)(7) innocent spouse cases (see post here). These are the sorts of cases where you are likely to raise facts in your petition that refer to or are contained in the administrative file. Unlike deficiency cases, where the administrative file is mostly useful for penalty issues, collection cases put the administrative file front-and-center for the merits.
In collection cases where you raise facts contained in the administrative file in your petition it isn’t “burden-shift” that should require a more detailed answer from IRS Counsel. Rather, instead of Tax Court Rule 36 doing the legwork, we shift to Tax Court Rule 33 and the requirement that the IRS “reasonably inquire” before signing a pleading.
In my next post I’ll go into depth on why.