Frequent guest blogger Carl Smith alerted us to the importance, from a tax procedure perspective, of the recent death of former Congressman James Traficant of Ohio. Congressman Traficant played an instrumental role in the passage of one of the mosre heavily discussed but little used provisions of RRA 98. Carl’s discussion below lays out the history and comes from a handout he gave to his tax procedure class. You will never think of this code provision the same after reading this post. Keith
Section 7491 was added to the Code by the IRS Restructuring and Reform Act of 1998 to shift the burden of proof to the IRS in some civil tax cases. To understand why it was enacted and why it is deliberately so ineffective, one needs to know a little history – particularly that of former Congressman James Traficant of Ohio.
read more...Traficant had been a college football star. Later, he worked as the head of a drug program in a county in Ohio for almost a decade. In 1980, he was elected sheriff of Mahoning County, Ohio. While running for sheriff, he took bribes from two different branches of organized crime to look the other way about their illegal activities should he be elected. Unfortunately for Traficant, the FBI caught him on tape taking some of the bribes. When the FBI played the tape to him, Traficant signed a confession. In 1983, the federal government charged him under RICO, for a pattern of bribe-taking, and, under Code section 7206(1), for filing a false 1980 income tax return. Despite the evidence against him, Traficant decided to fight the charges in court before a jury. He moved to suppress both the FBI tape and confession and lost both motions. United States v. Traficant, 558 F. Supp. 993 and 558 F. Supp. 996 (N.D. Ohio 1983). Though not a lawyer, he then decided to represent himself at trial. Shockingly, a jury of his constituents found him not guilty of all charges. The fame of his single-handedly beating a RICO charge endeared him to his constituents as a lovable rogue. So, in 1984, they elected him to Congress.
The federal government did not take its criminal litigating loss lying down. Instead, in 1984, it issued a notice of deficiency to Traficant determining additional income taxes for 1980 on $108,000 of unreported bribes and a civil fraud penalty. In Tax Court, Traficant admitted to taking a much smaller amount of bribes. He also was permitted to take the Fifth Amendment when asked certain questions by IRS counsel. The Tax Court held that under its Rule 142(a), Traficant had the burden of proving the exact amount of the bribes and that his failure to testify was not affirmative evidence meeting that burden. The Court upheld the deficiency. It also ruled that under Code section 7454(a) and Rule 142(b), the IRS had the burden of proving fraud by clear and convincing evidence, and that the IRS had met that burden. The Court rejected Traficant’s argument that his criminal acquittal barred the IRS from seeking the tax or penalty as a civil matter. Traficant v. Commissioner, 89 T.C. 501 (1987), affd. 884 F.2d 258 (6th Cir. 1989).
Traficant was furious about this loss, and decided to make it his personal crusade to shift the burden of proof to the IRS on all issues in civil tax cases. Thus, he wanted to make it the IRS’ burden in Tax Court to, say, disprove that you made the charitable contribution of $5,000 that you listed on Schedule A of your income tax return – even if you had thrown out all your records and cancelled checks and were uncooperative with the IRS in the audit. His bill, H.R. 367, introduced in the 105th Congress in 1997, proposed a new Code subsection, which would read simply: “Notwithstanding any other provision of this title, in the case of any court proceeding under this title, the burden of proof with respect to all issues shall be upon the Secretary.”
In Congress, Traficant was famous for his unorthodox behavior and speech, his bad and badly-fitting clothes, and, most of all, his terrible bouffant gray hair. Traficant also loved to go to the well of the House at night and make one-minute speeches to the empty chamber railing against government waste and, most especially, the IRS. He peppered his speeches with the famous phrase from “Star Trek”, “Beam me up!” The speeches were so unusual that they got quite a following on C-Span. It was like watching a terrible “American Idol” audition or a car wreck. You knew you shouldn’t, but it was hard to resist. But, the speeches had the effect Traficant desired. Eventually, over years, members of Congress from all over the country got more and more constituent mail demanding that the burden of proof be shifted to the IRS in civil tax cases. To give you an idea of Traficant speeches on this subject, below are two that had been delivered from the well of the House, quoted from his website (which has since been taken down):
September 23, 1997:
Mr. Speaker, according to news reports, the IRS has a quota system. IRS agents got bonuses for ripping off taxpayers. And many times, taxpayers settled their cases, even though they were innocent. What is so shocking about that? The American people have known this for years. And the American people have been telling us, ‘The IRS is incompetent. The IRS is arrogant. The IRS has abused their powers.’ It has gotten so bad, the IRS is even above the law. That is right: In America, the accuser has the burden of proof, but not in a civil tax case. The IRS accuses; the taxpayer must prove their case. Beam me up! Let me say this: There can be no true reform in American tax law without changing the burden of proof. It is time to handcuff them to a chain link fence and flog them with their own hefty Tax Code. I yield back their unauthorized seizures and excessive penalties.
See Congressional Record 105th Congress. For video footage, see “September 23, 1997 House Session,” C-SPAN, at 00:03:30.
October 6, 1997:
Madame Speaker, asking the Congress to stay out of it, the IRS is promising to reform themselves. Like a wounded TV evangelist, the IRS is begging the American people for forgiveness. They said, ‘This time we really mean it. Cross our hearts. Hope to die.’ Spare me, Mr. Speaker. Who is kidding whom? Allowing the IRS to reform themselves would be like allowing Jeffrey Dahmer to head up the Boy Scouts. The IRS is guilty, guilty, guilty! And every time they get caught with their finger in our 1040’s, they plead for forgiveness. Enough is enough! I say it is time to kick these computer cowboys right up their hard drives. Pass H.R. 367 and change the burden of proof in a civil tax case. That will get it done. With that, I yield back all those crocodile tears at the Internal Revenue Service.
See Congressional Record 105th Congress. For video footage, see “October 6, 1997 House Session,” C-SPAN, at 00:05:10.
Knowledgeable members of the private sector and the government resisted Traficant, knowing that if his proposal were adopted, the IRS would probably never win another case in the Tax Court. Not only revenue from tax deficiencies would disappear, but revenues from voluntary reporting of taxes would tumble. So, for a time in 1997, there was a stalemate. On September 11, 1997, Traficant lashed out at his critics with another speech from the well of the House:
Mr. Speaker, the American Bar Association does not want it. Former IRS Commissioners do not want it. The current IRS Commissioner does not want it. Tax attorneys do not want it. IRS collection agents do not want it. All of these bureaucrats and special interest people do not want Congress to change the burden of proof in a civil tax case. Some surprise, Mr. Speaker. All of these bureaucrats and special interest people have one major thing in common: They all make big bucks off the backs of the American people. Beam me up! I must admit: The only people in America that support changing the burden of proof in a civil tax case are the American people, in record numbers, and it is very simple: They are taxed off. They are fed up. And they want Congress to right this major wrong. Congress was not elected to represent special interest bureaucrats and the IRS.
See Congressional Record 105th Congress. For video footage, see “September 11, 1997 House Session,” C-SPAN, at 00:04:45.
Eventually, the drafters of the 1998 IRS Restructuring and Reform Act knew that they would have to include a provision which they could say to their constituents shifted the burden of proof to the IRS in civil tax cases, without its really doing so in the vast majority of cases. So, Congress enacted Code section 7491. The section is largely cosmetic. It is deliberately designed to fail nearly all the time because of the conditions attached therein before the burden is shifted. Essentially, section 7491 almost always requires a taxpayer to prove his or her case the same way as in the old days. Only then, after proving the case, the burden shifts to the IRS. But at that point, the IRS usually has nothing to introduce as contrary evidence, so the taxpayer wins, and the burden shift is irrelevant.
And what became of Congressman Traficant? First, he claimed victory in section 7491. Second, he continued his corrupt ways while in Congress: He demanded thousands of dollars in goods and services from businessmen in return for official favors, including contacting the Director of the FAA, the Secretary of State, and the King of Saudi Arabia. He paid inflated salaries to his staffers, who were required to kick back the difference to him. He even forced his Congressional staffers to bale hay, repair plumbing, and reinforce barns at his show-horse farm.
In May 2001, an Ohio federal grand jury indicted Traficant for bribery, obstruction of justice, conspiring to defraud the United States, filing false tax returns, and RICO. Once again, Traficant defended himself in court. This time, he wasn’t so lucky. He was convicted, expelled from Congress, and, in 2002, sent to jail. See United States v. Traficant, 368 F.3d 646 (6th Cir. 2004). The national news media had great fun covering his second trial, his expulsion from Congress, and even his release from jail on September 2, 2009. (When he was released, he immediately did all the Cable TV news shows.) But the media found that the biggest story of all was in publishing his prison mug shot. Only then was it revealed that the terrible hair on the top of his head was just a bad toupee. He had been bald all along.
About Carlton Smith
For a tax professional to use this forum to attack an individual who just died in an accident is already reprehensible. But to attack Jim Traficant for his attempt to rein in IRS abuses is nonsensical.
Despite Carl Smith’s baseless charges, the burden of proof issue has long been a sticking point in IRS-taxpayer relations. In fact, section 7491 was not the first attack on the sanctity of the “presumption of correctness” of either a deficiency determination or an assessment.
For some time, Tax Court Rule 142(a)(1) has allowed the Tax Court to sua sponte shift the burden of proof to the Commissioner. And, two years before the time Carl Smith falsely tells us that Congressman Traficant’s rage at his Tax Court loss was the impetus behind section 7491, Congress enacted I.R.C. section 6201(d). That section placed the burden of production (a part of the burden of proof) on the IRS in any case where it relies on information returns to assert an unreported income receipt.
Furthermore, Carl Smith gave us only half the story on Congressman Traficant’s 1997 bill, H.R. 367. That bill did propose a new Code subsection 7524(b) that placed the burden of proof on all issues in judicial proceedings on the Secretary. What Carl omitted was that Traficant’s proposed Code subsection 7524(a) would have placed that same burden of proof on all issues in administrative proceedings ON THE TAXPAYER. Apparently, Congressman Traficant’s purported personal rage at the IRS was not an all-consuming one.
We can certainly thank Congressman Traficant for I.R.C. sections 7491(b) and (c). Are not taxpayers better off knowing the IRS can no longer rest on its presumption of correctness when it uses Bureau of Labor Statistics to dummy up unreported income claims? And are taxpayers not better off knowing the IRS bears the burden of producing evidence to support each of the myriad penalties, tax additions, and additional amounts that it asserts against them?
I daresay that section 7491(a) is a good law. Despite Carl Smith’s intimations, Congressman Traficant was obviously unable to single-handedly pass a burden-of-proof law. So he did what all good negotiators do: he asked for the moon and settled for the stars.
The problem with 7491(a) lies not in its existence, but in its application–the Tax Court has effectively read it out of the law. Carl Smith is wrong: section 7491(a) does not “almost always require[ ] a taxpayer to prove his or her case the same way as in the old days.” To the contrary, section 7491(a) requires only that the taxpayer introduce “credible evidence” with respect to ANY factual issue. And that credible evidence requirement disregards the presumption of correctness. Even if the IRS then produces evidence of equal weight, it will fail to carry its burden of proof. That is the correct result.
Regrettably, the Tax Court has turned 7491(a) upside down. It habitually claims 7491(a) is irrelevant because it applies only in the event of an evidentiary tie. That is not true: it applies as soon as the taxpayer introduces credible evidence on any factual issue.
Besides Congressman David Pryor and Senator William Roth, I can’t think of any Member of Congress who has fought more for taxpayer rights than Congressman James Traficant. Notwithstanding Carl Smith’s post-mortem attacks on him, Congressman Traficant should rest in peace with all our thanks.
Obviously, I disagree with much of what Jason T. says. But on two things, I do agree with him.
First, 7491(c), which imposes the burden of production on the IRS in the case of penalties has been shown to have substantial teeth in altering the outcomes of Tax Court penalty rulings since the Tax Court first addressed the provision in the Higbee case. However, I am not sure the extent to which Congressman Traficant had any input into creating that subsection. Congress made other changes in IRS penalty administration in adopting 6751, such as requiring managerial approval in writing of assertion of many penalties. I suspect members other than Traficant had concerns about excessive application of IRS penalties, as well.
Second, I agree with Jason T. in his unhappiness with the Tax Court’s decision (approved by the appellate courts) to strip 7491(a) of what little effect it might have by saying that the court need only issue burden of proof rulings in cases of evidentiary ties.
Parenthetically, I also don’t approve of the Tax Court’s practice of saying that it can ignore the burden of proof rules in 7491(a) if the taxpayer doesn’t mention the section in his pleadings or briefs. I find no provision in 7491(a)’s language that allows the court to ignore it unless mentioned by the taxpayer, and I think Congress rightly assumed that 7491(a) would be applied in all cases, as the burden of proof in fraud cases under 7454(a) is imposed by the Tax Court on the IRS, regardless of whether the taxpayer mentions 7454(a) in his or her papers.
Keith Fogg’s post is both accurate and entertaining. The burden of proof is meaningless, and should be. The Tax Court has so held more than two hundred times. For the best explanation of why, see Blodgett v. Commissioner, 394 F.3d 1030, 1035, 95 AFTR2d 2005-448 (2005).
My only quibble with Keith’s post is the last sentence of the third-to-last paragraph, where he says that the IRS usually has no evidence. Not true. The IRS usually has some evidence, and the taxpayer has some, and the court decides the case based on whose evidence is the strongest. That is exactly how cases are supposed to be decided. (I don’t think Keith meant to say what he said; might have been a typo.)
Blodgett says that the party with the strongest evidence will win, regardless of the placement of the burden of proof. That is the simplest way to say that the burden of proof does not matter. That is exactly how cases should be decided.
To say that the IRS must prove its case and carry the burden and the taxpayer can sit back and do nothing and still win is ridiculous. The taxpayer lived the facts and is required to maintain records. To say otherwise would destroy the tax system. Which is exactly what Traficant wanted.
Phil Jones
Portland, OR
My quibble with Phil Jones is his view that “the court decides the case based on whose evidence is the strongest.” No way. The courts first accord a deficiency notice or an assessment a “presumption of correctness.” That presumption, which alone can win the IRS a case, is not evidence.
Phil says that for the taxpayer to sit back and do nothing, and still win, would “destroy the tax system.” But the tax system is at its zenith when the IRS can sit back and do nothing (other than issue an NOD or assess a tax) and still win? Indeed, the taxpayer “lived the facts and is required to maintain records.” So why should any presumption of correctness go to the IRS?
Under Phil’s logic, we should change our criminal justice system to mirror our federal tax system. After all, the criminal defendant knows very well whether or not he committed a crime. Like his civil tax counterpart, he too “lived the facts.” Why, then, should we give him a presumption of innocence? Why should we trouble the government with the burden of proof (beyond a reasonable doubt standard, no less)? Why not accord an indictment or information with a “presumption of correctness?” Isn’t it absurd that someone who knows he committed a crime can “sit back and do nothing, and still win?”
The Fifth Amendment I read says due process of law applies equally to a deprivation of life, liberty, AND property. And that includes in tax collection.
Congress enacted 7491(a) as a remedial measure. A remedial measure deserves a liberal construction. But the courts have given 7491(a) the strictest possible construction. And that constructions thwarts the will of the people’s elected representatives. That thwarting, my colleagues, is far more apt to destroy the tax system.
That’s not how the presumption of correctness works. Yes, the Commissioner starts with the presumption of correctness, but it disappears the minute the taxpayer offers any small amount of contrary evidence. Stewart v. Commissioner, T.C. Memo 1990-264. It is difficult to sympathize with a taxpayer who has failed to keep records and cannot offer any evidence of any kind. The taxpayer is legally obligated to keep records, and cannot rely on the lack of records to be excused from paying his taxes.
No one seriously argues that the criminal burden of proof rules should apply in civil tax cases, or vice versa. Nor can anyone seriously argue that the due process rules applicable in criminal cases should apply in civil tax cases, or vice versa. Traffic courts and small claims courts and Tax Court cases and criminal courts can all deprive a person of property, but entirely different rules apply to each of those, and they should.
The Tax Court has applied the burden of proof rules properly in more than two hundred cases by holding that the weight of the evidence prevails regardless of who bears the burden, and six circuits in ten opinions have agreed when those cases were appealed. Polack v. Commissioner, 366 F.3d 608, 93 AFTR2d 2004-2094 (8th Cir. 2004), affirming T.C. Memo 2002-145; FRGC Investment v. Commissioner, 89 Fed. Appx. 656, 93 AFTR2d 2004-1434 (9th Cir. 2004; unpublished opinion), affirming T.C. Memo 2002-276; Williams v. Commissioner, 120 Fed. Appx. 289, 95 AFTR2d 2005-764, 2005-1 USTC ¶50,163 (10th Cir. 2005; unpublished opinion); Geiger v. Commissioner, 279 Fed. Appx. 834, 101 AFTR2d 2008-2388, 2008-1 USTC ¶50,358, 2008 WL 2191789 (11th Cir. 2008; unpublished opinion), affirming T.C. Memo 2006-271; Keating v. Commissioner, 544 F.3d 900, 2008 WL 4552954 (8th Cir. 2008); Jorgensen v. Commissioner, 431 Fed. App. 544, 107 AFTR2d 2011-2069, 2011 WL 1666930 (9th Cir. 2011; unpublished opinion), affirming T.C. Memo 2009-66; Whitehouse Hotel Limited Partnership v. Commissioner, 615 F.3d 321, 106 AFTR2d 2010-5759, 2010-2 USTC ¶50,564 (5th Cir. 8/10/10 Docket No. 09-60085); McLauchlan v. Commissioner, ___ Fed. App. ___ (5th Cir. 2014; unpublished opinion, Docket No. 12-60657); Esgar Corp. v. Commissioner, ___ F.3d ___ (10th Cir. 3/6/14), affirming T.C. Memo 2012-35; Scheidelman v. Commissioner, ___ F.3d ___ (2nd Cir. 2014; Docket No. 13-2650). Are all of those Tax Court judges and circuit court judges really that far wrong? Should the party who offered the preponderance of the evidence have lost? No. The party with the preponderance of the evidence should always win, regardless of which party bore the burden of proof. That is a truism. That’s why the burden of proof does not matter.
The proof is in the pudding. Can anyone offer a citation to a case where the burden of proof caused a deserving taxpayer to lose a case that the taxpayer should justly have won? I have never seen such a case. I doubt it exists.
The lack of legal authority to support the opponents of the current burden of proof statute and the resulting case law would indicate that their arguments are not legal arguments, but instead are political arguments, and Mr. Traficant expressed them in a political arena.
And as for Mr. Traficant, he received his due process in the original post. He was condemned by his own words.
Phil Jones
Portland, OR
I’m not sure which law Phil Jones is reading. A condition precedent to the application of 7491(a) is that the taxpayer maintain all required records. Also, the taxpayer’s credible evidence must attach to each disputed income, estate or gift tax item–not merely to the entire deficiency.
The people’s representatives enacted 7491(a) to remedy an existing unfair balance between the tax collector and the taxpayer as litigants. The judiciary should therefore apply that law as Congress intended it. The courts, however, treat 7491(a) as if it had never been enacted. And Phil Jones and Co. treat it as if it is superfluous (…”the burden of proof does not matter”).
Indeed, the proof of the pudding is in the eating. If one reviewed only the Tax Court’s “more than two hundred cases” in which it sloughed off 7491(a), he would find numerous taxpayers who would have prevailed had that law been properly applied. To me, that is more than enough.
So where does Phil Jones draw the burden of production-persuasion-proof line? I agree with Carl Smith that the 7491(c) burden of production statute on penalties is good law. I also believe the 7491(b) burden of proof statute on statistical income reconstruction is good law. Likewise, I think the 6201(d) burden of production statute on information return based income reconstruction is good law. Would Phil also want these laws repealed on the ground that they tend to “destroy the tax system?”
Yes, sadly, all of those judges are really that far wrong. That is because they come from the “taxes are the lifeblood of government,” “the Fifth Amendment does not apply to taxation,” and “the government is always presumptively correct” schools. But those old schools let out a long time ago. Instead, the trend has been toward IRS “reform and restructuring,” “fair and meaningful hearings,” and “taxpayers’ bills of rights.” In a Republic, those are the correct schools of thought.
I don’t quibble with §7491(b) and (c), although they don’t really change prior law by much, if any. See Journal of Taxation, March, 1999, Vol. 90 No. 3, p. 133.
But can anyone provide a cite to an actual case where it is evident that the taxpayer lost but would have prevailed had the burden of proof been shifted under §7491(a)?
Phil Jones
Portland, OR
Phil Jones challenges anyone to “provide a cite to an actual case where it is evident that the taxpayer lost but would have prevailed had the burden of proof been shifted under §7491(a).” His challenging is a daunting one–but not in the way he believes.
Initially, I’m not sure who among us has the time or inclination to produce Phil’s answer. That would first require a search through the at least 200+ cases where the taxpayer lost on a burden of proof challenge. Finding those cases would not be the harder part; that would be reading through them to find who “would have prevailed” had the court properly applied 7491(a). Ah, but Phil does not carry the point merely because of our inability or unwillingness to undertake a near-Herculean research feat.
Instead, I present a few of my favorite 7491(a) burden of proof cases and a brief reason why I like each:
1. Griffin v. CIR, 315 F.3d 1017 (8th Cir. 2003)(observing that “[i]t is not sufficient to summarily conclude that the outcome is the same regardless of who bears the burden of proof; if that were the case, § 7491(a) would have no meaning” and remanding to the Tax Court for further proceedings).
Phil maintains that the 8th Circuit’s Blodgett case renders Griffin “no longer good law.” Philip N. Jones, The Burden of Proof 10 Years after the Shift, 121 Tax Notes 287, 299 (October 20, 2008). I don’t see how. The Blodgett court chose one path created by a two-way intra-circuit split. Another 8th Circuit panel facing the burden of proof issue could, as Blodgett chose not to do, follow Griffin. And at least three courts have cited Griffin since Phil wrote his article.
2. Thompson v. United States, 523 F. Supp. 2d 1291 (N.D. Ala. 2007)(concluding that United States’ position with respect to 7491(a) burden of proof issue “not substantially justified” and deliberately issuing opinion on settled costs motion to explain why).
Although Phil’s article discussed a Thompson case at length, unsurprisingly perhaps, it was not this Thompson case.
3. Rigas v. United States, Civ. No. H-09-3770 (S.D. Tex. May 2, 2011)(shifting the burden of proof to the United States in a tax refund suit because taxpayers met each 7491(a) requirement).
Undeterred, the U.S. met its burden of proof and the court awarded it summary judgment.
4. Shellito v. CIR, No. 10-9002 (10th Cir. Aug. 24, 2011)(vacating Tax Court decision for Commissioner, remanding case, and urging Tax Court (which had again ignored the burden of proof issue) to “reconsider assigning the burden of proof in this case in accordance with I.R.C. § 7491(a).”
Knowing it could not carry the burden of proof, the IRS folded its tent. In 2012, the Tax Court entered a stipulated decision for the taxpayer.
The above cases indicate how the courts SHOULD apply 7491(a). If they did so, we might have “a whole new ballgame.”
Batter up, Phil!
Jason:
I will take up your challenge, although I cannot think of any baseball analogies. I am familiar with three of your cases, but the fourth (Rigas) is new to me. But first I will comment that all those cases I mentioned are not too hard to read. In all or nearly all, the court tells us which side has the preponderance of the evidence. We don’t need to figure it out. It is clearly stated. And that side won.
But back to your challenge:
1. Griffin – Yes, Griffin does say what you say it says. But Griffin is no longer good law because it was reversed by Blodgett. And Blodgett relied on Polack v. Commissioner, 366 F.3d 608, 93 AFTR2d 2004-2094 (8th Cir. 2004). So two panels of the 8th circuit have held that the burden of proof does not matter. And one held the opposite. And the two post-date the one. So I don’t think anyone can say that Griffin is still good law in the 8th Circuit or anywhere else. But Griffin does say exactly what you say it says. No doubt about it. And yes, some courts have even cited it. I guess they don’t know how to Shepardize.
2. Thompson – Yes, the IRS lost a costs motion. And yes, the court criticized the IRS position on the burden. But none of the Thompson opinions suggest that the outcome on the merits would have changed had the burden been placed differently. We are looking for a case where the burden of proof made a difference in the results on the merits, in the tax due. Correct?
3. Rigas – It actually proves my point, not yours. The burden was actually shifted to the IRS, and the IRS still won, because they had the preponderance of the evidence. If the taxpayer had had the burden, the IRS would still have won. Thus the burden made no difference. Another example of a case like this is McCord v. Commissioner, 120 T.C. 358 (2003), reviewed by the court, reversed on other grounds, 461 F.3d 614, 2006 WL 2411543, 98 AFTR2d 2006-6147 (5th Cir. 2006). In McCord, both the Tax Court and the appeals court accepted the stipulated burden of proof on the IRS. And the taxpayer won because the taxpayer had the preponderance of the evidence. And the taxpayer would have won even if the taxpayer had been stuck with the burden.
4. Shellito – I wrote an article on Shellito: “Tenth Circuit Employs Unusual Logic in Criticizing IRS and Reversing the Tax Court,” Journal of Taxation, September 2011, Vol. 115 No. 3. A very interesting and odd opinion, and fun to write about, for a procedure nerd like me. But I can find no evidence that the burden affected the outcome. On remand, the parties settled. But I can’t tell whether one party prevailed over the other, or they split the difference. If you have evidence one way or the other, please speak up. But it appears that the result was not a ruling on the merits by a court. It was a settlement. And we don’t know the terms of the settlement, or at least I don’t know.
Actually, last but not least, I think there might be two cases that might possibly fit the criteria, and I was wondering if you might find one or both. They are very odd/unusual, and neither were appealed, but they might possibly fit my criteria. Here they are:
Forste v. Commissioner, T.C. Memo 2003-103. In that case, the evidence may have been balanced or close to balanced, in which case the burden does make a difference. I have never seen another case like that, where the evidence might have been in equipoise. Extremely rare, but it might actually fit the criteria, much as I hate to admit it. But it tends to prove my point, that the burden matters only in an evidentiary tie, which the courts have said many dozens of times. This might be the only tie I have ever heard of.
Dunlap v. Commissioner, T.C. Memo 2012-126, at note 26. On one of the issues involving one of the taxpayers, neither side offered any evidence whatsoever. A very rare situation. Had the burden of proof been on the taxpayer with respect to that issue, the Service would have prevailed because the presumption of correctness would have trumped the lack of evidence. Although an issue on which neither side introduces any evidence is exceedingly rare, this is such an example, and the burden of proof actually changed the outcome. I have never seen another case like it. Perhaps it should be categorized as an evidentiary tie. Which would make two of them. Who knew?
Please read those two cases, and let me know if you agree that the burden made a difference. If so, then I would say that the box score on the question of whether the burden of proof makes a difference is about 245 to 2, at least according to my research. Your mileage may vary.
I will give you the last word, and then we can wrap up this discussion. It has been most interesting, and I have enjoyed it. Thank you for your part in it. (And drop me an email sometime, so I might find out who you are; you can click on my name above.)
Best regards, and I think we might agree on only one thing: May Mr. Trafficant rest in peace,
Phil Jones
Portland, OR
Thank you for both your patience and return volley, Phil. I read your last post and the cases you suggest that I read on the burden of proof issue. Here is what I hope is my forehand smash (is a tennis analogy better?):
1. The long-followed general rule is an appellate panel’s opinion may be overruled only by an en banc court. Blodgett thus did not even purport to “overrule” Griffin. Instead, faced with a choice between its following Griffin and its following another panel, Blodgett followed the other panel. Another 8th Circuit panel is free to follow Griffin, which other courts have favorably cited. As you say, Griffin says what it says; to me, it makes perfect sense.
2. In Thompson, the outcome indeed would have been different if the IRS had gotten its way. The IRS tried mightily to avoid bearing the burden of proof. It argued (naturally) that 7491(a) did not apply. It also claimed that the 11th Circuit’s pattern jury instruction misstated the law by placing the burden of proof on the IRS in a hobby v. business issue. As the IRS saw it, on that issue section 183(d) imposed the burden of proof on the taxpayers. The district court, though, said the taxpayers could have shifted the burden of proof under 7491(a) even if they failed to satisfy the 183(d) requirements of showing a profit in multiple years. Fortunately, the Court got it correct: the 7491(a) burden on the taxpayer “is not particularly onerous.” The Thompsons presented their “credible evidence” and thereby won the judgment–and their costs for the IRS’s unreasonable burden of proof position.
3. As for Rigas, you are right because it does support your position. My short list of cases, however, represented only what I described as my favorite 7491(a) burden of proof cases. I like Rigas because a court actually had no problem in correctly applying 7491(a). That makes Rigas a rarity.
4. On Shellito, I will read your article about it. But first I will clarify what I said about that case. By holding the IRS to the burden of proof, the 10th Circuit turned the notice of deficiency into a paper tiger. On remand, the Tax Court entered a decision stating that the taxpayers owe nothing. That is no “settlement.” It is, though, the correct outcome under 7491(a).
Now, to address your two cited Tax Court cases:
A. Forste was a diamond in the rough: the Tax Court not only applied 7491(a), it shifted the burden of proof! As I (re)read Forste, he was indeed fortunate to have had 7491(a) as support. If 7491(a) didn’t exist, Forste would have lost. Forste could have, as he did, pointed to the “tort or tort type personal injury” language in his settlement documents. But with him bearing the burden of proof, that would not have been enough. His only other option would have been to call the second contracting party’s attorney as a witness (which is what the IRS did do). But that witness couldn’t recall that Forste’s settlement, out of the many he had seen, was deliberately drafted to make certain payments “tort or tort type personal injury” ones, and thus nontaxable. As the Tax Court indicated, that same testimony would have worked against Forste had he borne the burden of proof. Thanks to 7491, however, the IRS bore the burden of proof. And because that same witness’s “I can’t recall” testimony didn’t prove anything for the IRS, Forste prevailed. Add Forste to my short list.
B. Regarding Dunlap, its note 26 does read as you say: but there the presumption of correctness never attached. Dunlap involved multiple taxpayers in a consolidated case involving cash charitable contributions to the same entity. The notices of deficiency, though, challenged the cash contributions of only one taxpayer. The IRS challenged the other taxpayers’ cash contributions only in its answer. Therefore, because that was a “new matter” as to those taxpayers, the IRS bore the burden of proof under Tax Court Rule 142(a)(1). The Tax Court did find that the one taxpayer met the 7491(a) requirements and shifted the burden of proof. The Court’s footnote 26 indirectly references a fact behind that burden shift, but notes the other taxpayers didn’t need to meet the same burden. The footnote as to those other taxpayers, though, refers only to Tax Court Rule 142(a)(1), not to section 7491(a).
To wrap things up on this thread, I think that when it comes to 7491(a) the courts put the cart before the horse. On the factual issues, the courts first look for what they admit is a rare event: an evidentiary tie. When the rare evidentiary tie does not occur, they conclude the burden of proof is irrelevant. That is wrong. Provided that the taxpayer has satisfied the other 7491(a) requirements, the courts should first determine whether the taxpayer introduced credible evidence. If he has not, then the taxpayer retains the burden of proof. But if he does, voila!, the burden of proof then shifts to the IRS. If the IRS can do no better than to produce the rare evidentiary tie, then the taxpayer prevails. I don’t know why that is such a difficult concept for the courts to grasp, let alone to employ.
Thank you, Phil, for a most stimulating discussion! All the best and, yes, let us leave Mr. Traficant to rest in peace.
My mistake. My prior post got posted as “Anonymous.” My error.
Phil Jones