Proving the Liability – The Presumption of Regularity

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I am not sure, but I don’t think we have written about a case from Guam since Les cited one in a post during our first month of existence as a blog.  The case of Government of Guam v. Guerrero, No. 19-16793 (9th Cir. 2021) gives us a chance to make up for lost time regarding tax law and Guam.  Perhaps the first issue to address concerns why we care about Guamanian tax issues.  We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.

At issue in the Guerrero case is whether the government of Guam kept adequate records to prove the liability it asserted and to prove that the statute of limitations remained open for it to act.  The court makes a decision regarding the presumption of regularity that could easily apply to the IRS.  For that reason, this circuit court opinion matters.

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Guam’s Department of Revenue and Taxation (DRT) determined that Mr. Guerrero owes about $3.7 million in unpaid taxes for 1999-2002.  He filed his returns late for those years.  The dispute concerns when the taxes were assessed.  The court states:

the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.

This suggests that Guam does not maintain its tax records on a computer system.  That’s surprising.  Maybe the antiquated IRS system is not the worst system in the world.

The court says that after assessment the DRT filed tax liens (I assume the court meant to say the DRT filed notices of federal tax liens) on various parcels of real property (I assume the DRT simply filed notices against Mr. Guerrero and the liens attached to his real property along with his other property.)  After filing the liens, DRT brought this case to foreclose the liens on the real property to which the liens attached.

Mr. Guerrero asserts that DRT cannot prove that it timely assessed the taxes against him.  DRT acknowledges that it does not have the original certificates of assessment, but invokes the presumption of regularity relying on the DRT procedures:

Guam’s evidence that the Department timely assessed Leon Guerrero’s taxes instead consists only of the Department’s internal documents rather than the certificates of assessment. Guam argues that these internal documents are sufficient evidence that the Department assessed Leon Guerrero’s unpaid taxes in January 2006 and sent the relevant notices before the three-year statute of limitations expired. Guam relies on the Department’s internal registers (record lists of delinquent taxpayers) known as TY53 and TY69 registers, as well as an internal transmittal sheet sent to the collections branch after the TY53 and TY69 notices were sent to Leon Guerrero, to demonstrate both that it followed standard procedure for purposes of the presumption of regularity and to show the assessment dates.

At a meeting on March 10, 2006, DRT learned that the notices of assessment did not reach Mr. Guerrero but instead went to his ex-wife’s address.  During the meeting, DRT gave Mr. Guerrero final demand and notice of intent to file a lien and he signed an acknowledgment.  This meeting took place about two weeks before the expiration of the assessment statute of limitations.  The court describes the testimony of the DRT officials who testified at the two-day trial explaining the system for making assessments and notifying taxpayer.  The statutory scheme, and much of the system, mirrors the system in the U.S. used by the IRS.

Because the assessment certificate itself is missing, DRT seeks to prove that it timely made the assessments in question by some other means, here the presumption of regularity.  The court notes:

We have held that a public actor is entitled to the presumption of regularity where there is some evidence that the public actor properly discharged the relevant official duties, which an opposing party must rebut with clear, affirmative evidence to the contrary….

As previously observed, whether the presumption applies or has been rebutted with clear and affirmative evidence to the contrary are mixed questions of law and fact that may be reviewed for clear error. The clear error standard is significantly deferential, and clear error is not to be found unless the reviewing court is “left with the definite and firm conviction that a mistake has been committed.”

Here, the 9th Circuit is not deciding the case as an initial matter but as a reviewing court.  It finds that the district court did not make clear error but it also finds that the district court’s opinion was “opaque and did not adhere to the proper steps of the analysis.”  So, the 9th Circuit sets out to explain the proper steps for making a presumption of regularity determination.

First, it should have considered if some evidence existed to support timely assessment of the taxes.  Instead, the district court determined the presumption was automatically available.  Despite this misstep, the testimony of the DRT officials did provide evidence in support of a timely assessment.  The district court should have explicitly stated that it relied upon the credibility of the DRT witnesses.

Next, the court should have examined whether Mr. Guerrero rebutted the presumption that could be drawn from the testimony.  At the trial level, he did not argue that the records presented were inaccurate.  Therefore, he waived that argument.  He failed to build the type of record he needed to build at the trial level.  The arguments he does make that are not waived by his prior actions are insufficient to cast adequate doubt on the records of the DRT.

The opinion leaves the impression that no one had a good idea what they were doing at the trial level but that DRT had enough on the ball to put into the record evidence supportive of a conclusion that a timely assessment occurred.  The presumption here is one on which the IRS may need to rely if its records are destroyed or it otherwise suffers a degradation of its system.  The court provides a bit of a roadmap for someone trying to attack a record like an assessment.  Certainly, the attack should be straightforward and clearly done at the trial level.  Mr. Guerrero should have sought the testimony of individuals who could talk about the impact of the lost records and how it cast doubt on the correctness of the entire system.  The importance of an expert testifying on this point to counteract the testimony of the government officials cannot be overstated.  Unless the government officials were destroyed on cross, Mr. Guerrero needed to give the court something to cause it to pause before presuming DRT handled the case correctly.  He gave the court nothing to go on and the 9th Circuit finds that significant.

The dissent picks up on some of the errors by DRT and offers a roadmap for how Mr. Guerrero might have attacked the validity of the assessment.  The dissent provides good lessons for those who find themselves in this situation trying to combat a presumption of this nature.  The case leaves me a little concerned about the use of the presumption of correctness in this situation to prove the timeliness of the assessments.  Like the dissent, I felt the majority made some leaps to get to the favorable result for the DRT.

Comments

  1. The Guam Department of Revenue and Taxation doesn’t collect just income taxes. It also collects sales tax and property tax, and functions as the MVD when issuing vehicle registrations and driver’s licenses. That’s a full plate for its staff of 180, even without their new duties involving the Cannabis Control Board. The island population is about 170,000 – slightly more than Alexandria, Virginia; slightly less than Newport News. Imagine each of those cities having its own federal district judge.

    Fun fact: The District Court of Guam is not an Article III court, and therefore its judges do not have life tenure. They (current occupant, “she”) serve a ten-year term.

  2. Norman Diamond says

    “We care because their tax code essentially mirrors our, similar to other territories, and procedural issues regarding their tax issues decided by the 9th Circuit could impact similar issues arising from the U.S.”

    The US’s statutory requirement for Guam to mirror the US is discussed in this article:
    Lin, Tom C. W., Americans, Almost and Forgotten (September 15, 2019). 107 California Law Review 1249 (2019), Temple University Legal Studies Research Paper No. 2019-27, Available at SSRN: https://ssrn.com/abstract=3454210

    Full text available here:
    https://poseidon01.ssrn.com/delivery.php?ID=448116089123102085101069126112097081056087054032028010066007099074002107073009122030002122118022114055124103029122082096118078014010033010014097097065095067090083095040021049070064097000068008008089004125023124077005007007008102126110065026097089113095&EXT=pdf&INDEX=TRUE

    However, the mirroring is incomplete. A US citizen who resides in Guam has to file a Guam tax return but not a US tax return. A US citizen who moves from Guam to Japan suddenly has to start filing a US tax return but not a Guam tax return.

    (In contrast, Amereican Samoan citizenship is a thing. A resident of American Samoa has to file an American Samoan tax return but not a US tax return. An American Samoan citizen who moves from American Samoa to Japan is still a US non-citizen national as shown by endorsement in their US passport, does not have to start filing a US tax return, and as far as I can tell, doesn’t have to continue filing an American Samoan tax return.)

    “The court states:
    ‘the official records are missing, likely due to water, mold, and termite damage at the storage facility where they were housed.’
    This suggests that Guam does not maintain its tax records on a computer system.”

    For 2002? Guam is not alone. I saw an indication that the IRS (in the US) is also missing a 2002 return and some of its records though the IRS has some records, the IRS refunded an overpayment, and the IRS partially collected a supposed penalty but did not refund the amount collected. The damage appears likely due to human malfeasance rather then water, mould, and termite damage.

    Now for a contrast which is not as much of a contrast as it should be. A lot of Canada Revenue Agency’s records are available online, though I’m not sure how far back they go. There is a reason why I file returns on paper instead of filing online. When CRA decided to disregard and deny my foreign tax credits for Japanese tax withheld at source from Japanese social security (and they didn’t even tell me but I figured it out), I filed a Notice of Objection. A CRA appeals officer handled the Objection properly, reinstating the foreign tax credits. However, he had to ask me to upload duplicate copies of pages that were in the original return, because he didn’t have access to the original return! I think my 2020 return isn’t missing (no need for malfeasance or mould or anything), it just isn’t computerized as much as it should be. He had access to everything that I uploaded.

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