We welcome guest bloggers John A. Clynch, Managing Director, and Scott A. Schumacher, Faculty Director, of the University of Washington School of Law Federal Tax Clinic. John and Scott take us behind the scenes on a recent case where they successfully shifted the burden of proof and convinced the Tax Court that their client did not have income despite its appearance on a Form 1099-MISC. The facts of this case are unusual in several respects, but information return disputes are a regular issue in tax controversy practice and on this blog. Keith collected several previous PT posts here last July. Christine
Unreported income cases are a staple of low-income taxpayer clinics. Low-income individuals often have several jobs of shorter duration, move their residence more often than the general population, and may not be the most adept at recordkeeping. Handling these cases is generally straightforward – obtain the wage and income information from the IRS and match it to the return. These cases can be more challenging if the taxpayer was a victim of identity theft, and the taxpayer must prove they did not receive the income listed in the W-2 or 1099.
But what if there is no dispute that the taxpayer received the money but there is no indication of what payment is for? In Park v. Commissioner, T.C. Summ Op. 2018-46, the Tax Court decided the rather unique question of not whether the amount was received or by whom, but rather what the amount paid was for and thus whether the amount was taxable.
read more...The taxpayer, Jin Park, is an immigrant from South Korea, who served in the U.S. Army. Mr. Park purchased a home in 2008 and took out mortgages with Bank of America. He was paying both principal and interest on the mortgages in 2012 while on military deployment overseas.
In 2014, Mr. Park received a $13,508 check from BOA. Included with the check was a letter that provided, “based on a recent review of your account, we may not have provided you with the level of service that you deserve, and are providing you with this check.” The letter further stated that Mr. Park might wish to consult with someone about any possible tax consequences of receiving the funds, included a number for him to call if he had any questions. The letter concluded by thanking him for his military service. Mr. Park called the phone number provided on several occasions, but he was unable to obtain any further information. He filed his 2014 Federal income tax return without including the $13,508.
The IRS received a Form 1099-MISC from BOA, reporting other income of $12,789 and a Form 1099-INT from BOA, reporting interest income of $719. The IRS duly issued a Notice of Deficiency, and Mr. Park, now represented by the Federal Tax Clinic at the University of Washington, submitted a Tax Court Petition on his behalf.
In preparing the case for trial, the clinic first sought information from BOA by phone. After what appeared to be a successful telephone contact with BOA, all future calls were met with a brick wall. No one at BOA was able (or willing) to provide any information regarding the payments. The clinic subsequently served a subpoena for records on BOA. The bank declined to produce any records, even after being ordered by the Court. In response to the subpoena, BOA stated, “the bank is unable to locate any accounts or records requested with the information provided.” This is quite surprising, especially given that the Bank Secrecy Act requires banks to maintain records for at least five years.
The case proceeded to trial without any further information from BOA. The issue for the Tax Court to decide was whether any part of the $13,508 received by Mr. Park was income. At trial, the IRS relied on the general presumption of correctness afforded a Notice of Deficiency and on the Form 1099-MISC. At trial, Mr. Park presented testimony that he had been making payments to BOA of interest and principal and that the check received from the bank could be a non-taxable return of overpayment of principal.
The case thus, as in many cases like this, turned on the burden of proof. As readers of PT know, section 7491 places the burden of proof on the IRS, subject to several very important conditions, including the requirement that the taxpayer introduce “credible evidence” to dispute the factual issue. Section 6201(d) further provides that if a taxpayer asserts a “reasonable dispute” with respect to any item of income reported on an information return, the IRS has the burden of producing “reasonable and probative information” concerning the deficiency, over and above the information return.
The specific question before the Court was whether Mr. Park produced “credible evidence” that raised a “reasonable dispute” as to the accuracy of the Form 1099-MISC. The Court held that Mr. Park met his burden. The Court held that his testimony “was subjected to cross-examination and was both plausible and credible.” Further, the Court held that BOA’s letter admitted it was correcting a wrong it had committed regarding Mr. Park’s accounts and was returning his money and the interest that had accrued on it. The Court further noted that the IRS did not offer any argument to the contrary and appeared instead to rely on the presumption of correctness. The Court accordingly held that the $12,789 received from BOA was a nontaxable return of principal.
The facts of Park are unique and are unlikely to repeat, although with banks, one never knows. However, the larger lesson from the case is that credible testimony from the taxpayer can be effective in meeting the burden of proof or shifting it to the IRS. Oftentimes it is the only evidence.
