New Trends in Evidence at the Tax Court

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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.


  1. I am much older than Professor Larson, so I remember reading a few (mot many) opinions in which the Tax Court, before the latest amendment to section 7453, had sometimes specifically relied on D.C. Circuit precedents for evidentiary rulings, contrary to what she states in the post. Thus, the recent amendment was a useful one to clarify conflicting Tax Court case law. Indeed, as I pointed out in an extended quote in a post written by Keith on Feb. 20, 2015 (when the legislation was being marked up), when I was a law clerk at the Tax Court, I assisted Judge Nims in his researching and drafting the opinion in Pacella v. Commissioner, 78 T.C. 604 (1982). There, Judge Nims cited to the D.C. Circuit’s Frye case standard for deciding the admissibility of expert testimony (in the Pacella case, ink analysis), though a number of other Circuits had rejected the Frye standard. The Pacella case was appealable to the Second Circuit. Ultimately, a decade later, the Supreme Court resolved the Circuit split by rejecting the Frye standard in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993).

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