An earlier version of this post originally appeared on the Forbes PT site on January 26, 2015.
It is not unusual at this time of year for taxpayers to get an information return reflecting some payments that are long forgotten. With the memory jogged, the taxpayer may place the Form 1099 in a file and use it later when it comes time to file the return.
Sometimes there is a disconnect between a 1099 and what a taxpayer thinks actually happened. We wrote about that earlier this month when we looked at a disabled vet who sued Bank of America after receiving a 1099 for the cancellation of a credit card account he claimed to have never opened. Other problems may arise too. Sometimes, a taxpayer may claim to have never received the 1099. That happened in Ebert v Commissioner, a Tax Court case from earlier this month where the taxpayer admitted in 2009 to having owned over 1100 shares of Burlington Northern Santa Fe Corp (BNSF) stock. The registered agent of BNSF had a record of issuing 1099 DIV for four quarterly dividend payments to Ebert at his correct address. Mr. Ebert was convinced that in 2009 he had only received one of the $470 quarterly payments, and he claimed to have never received the 1099 DIV showing payment of the other three quarterly dividends. On his 2009 tax return, Ebert filed his return reflecting the receipt of only $470 of the BNSF dividends.
Not surprisingly, the mismatch generated a deficiency notice stating that Ebert owed the tax on the other three quarterly dividend payments. Ebert petitioned the Tax Court. This case involves whether a taxpayer’s testimony alone may overcome documentary evidence that suggested the taxpayer received the dividends.
read more...Prior to trial, IRS counsel helpfully requested and received from the paying agent a copy of the properly addressed 1099 DIV showing a record of four payments being made to Ebert. Prior to trial, counsel presented the 1099 DIV to Ebert. Ebert attempted to call the paying agent; as is often the case, there was a new paying agent, and to complicate matters Berkshire Hathaway acquired BNSF in 2010 and Ebert did not get any useful information regarding the mystery dividends. The case went to trial, where Ebert testified that he did not receive any of the other three quarterly dividend payments, nor did he receive the Form 1099 DIV.
The Law
Taxpayers generally have the burden of proving an IRS determination is incorrect. Section 7491(a) provides for a shifting of the burden of proof if the taxpayer has cooperated with the IRS and “introduces credible evidence with respect to any factual issue relevant to ascertaining the liability.” Under Section 6201(d), there is also a shift in the burden of production if a taxpayer asserts a reasonable dispute with respect to any third-party item reported on an information return and the taxpayer has cooperated with the IRS. In that situation, the IRS has the burden of producing reasonable and probative information in addition to the information return.
Some brief background on burden of proof: the Wex legal dictionary refers to burden of proof as relating to “the threshold that a party seeking to prove a fact in court must reach in order to have that fact legally established; that has two distinct components, the burden of production and the burden of persuasion. TheWex legal dictionary refers to burden of production as a “party’s obligation to come forward with sufficient evidence to support a particular proposition of fact”; burden of persuasion is the “obligation of a party to introduce evidence that persuades the factfinder, to a requisite degree of belief, that a particular proposition of fact is true.”
In civil tax cases, the burden of persuasion is the “preponderance of evidence” standard. What exactly does preponderance of evidence mean? Well, again practitioners’ views may vary on its practical import, but it generally means (and I borrow from the Wex legal dictionary again) that the evidence in the record is “just enough . . . to make it more likely than not that the fact the claimant seeks to prove is true.”
There has been some vigorous debate in this blog about how useful burden shifting is for taxpayers. The general view among most practitioners is that the shift does not do much in actual disputes; as comments to one of our prior posts reflect, however, that is not shared by all. It would seem, however that it might make a difference in a case like Ebert when a taxpayer has to prove the negative. The IRS in those cases generally is only going to have a copy of the 1099 and a taxpayer will only have his or her own testimony unless IRS does some digging.
In Ebert, however, the Tax Court punted on whether 7491(a) and 6201(d) applied, finding that Ebert’s testimony was credible and enough to carry the day even if the taxpayer’s burden was the normal “preponderance of evidence” standard.
I was somewhat surprised that the Tax Court found in favor of Ebert, especially with no shift in burden; there are countless cases where the Tax Court discounts a taxpayer’s own testimony as self-serving. In addition, the payor and its agent were major corporations and there was no dispute regarding receipt of at least one of the quarterly dividend payments. There was also no reported change of residences in 2009, and the evidence suggested that the 1099 DIV was mailed to the taxpayer’s correct address.
Yet, cases are not tried on paper, and the opportunity to tell it to the judge may make a difference no matter which party has the burden of proof or production. Like Ebert, a credible taxpayer who has made efforts on his own to get information relating to the payment (Ebert credibly testified that he had “unsuccessful attempts” to contact the paying agent prior to trial) may be enough to carry the day, especially if the amount in question is relatively small. As the court explained, Ebert
has devoted a substantial amount of time to contest the relatively small amount of tax liability at issue here, and he testified consistently, clearly, and with considerable conviction in explaining the negative–that he did not receive the disputed dividend payments. He has persuaded us that he did not receive the disputed dividend payments in 2009.
Conclusion
The case demonstrates a few important points. One, a taxpayer who has been a good taxpayer over a long period of time, whose story is consistent – particularly on a small amount of money where contesting the liability may be costing the taxpayer more than the amount at issue – and where the IRS relies on a piece of paper to disprove the taxpayer – can win a fact based determination. Another important point is cooperation. Here, the taxpayer cooperated at the examination level which allowed section 6201(d) to come into play and the taxpayer tried to find the information from the issuing corporation only to be frustrated in the attempt. It can never hurt to have 6201(d) in your corner when you are fighting a battle concerning the correctness of a Form 1099. Courts have a long history (see Portillo v Commissioner) of skepticism of the correctness of these forms and expect the IRS to go to some lengths including a possible source of funds analysis or cash expenditure analysis to support a naked allegation in Form 1099 where the taxpayer disagrees. Finally, opinions do not have an ability to easily express the impression a fact witness makes on them. Where your client makes an excellent fact witness, your case has a significant opportunity for success if the decision turns on the interpretation of the facts. The IRS will almost always have significant trouble finding witnesses to overcome good fact testimony.
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The Tax Court correctly decided Ebert. Let’s hope this New Year’s case sets a new standard for how it decides unreported income cases.
My experience is that whenever Chief Counsel attempts to verify an information return, it seeks the underlying payment records, e.g., cancelled checks. I therefore suspect that Chief Counsel sought those payment records, but received only a letter and an information return copy. Rather than concede the unreported income issue absent payment verification, however, Chief Counsel instead tried to bluff two pro se taxpayers.
Uncharacteristically, the Tax Court was persuaded by a pro se taxpayer’s unreported income explanation. That tells me the issue was so clear-cut that a fair Chief Counsel should have already been persuaded by the Eberts’ explanation. But the Ebert Chief Counsel decided to bluff, thereby both unreasonably and vexatiously multiplying the proceedings.
A win for the Eberts was not justice enough. The Tax Court should have also, sua sponte, ordered Chief Counsel to show cause why he should not receive a 26 U.S.C. sec. 6673(a)(2)(B) excessive costs sanction. I would have enjoyed reading any objection–if Chief Counsel had been bold enough to file one.
Once again, a 30-second search of the missingmoney.com website would find that Mr. Lawrence B. Ebert of Bridgewater NJ has nearly 40 items of unclaimed property being held for him by the New Jersey state treasurer. No doubt the BNSF checks are among them. His failure to follow up every three months when the expected funds did not arrive does not excuse his failure to report them as income in the year they were available to him.
A knowledge of unclaimed property law, often administered by the state revenue department, is much more useful than expertise in many of the topics taught in law schools. Big and small companies are subject to state audit to make sure property is turned over as required. When states do not find the owners, the money helps fund state budgets.
Had IRS counsel not been ignorant of how to search for Mr. Ebert’s dividends, this case could have been settled quickly and to the satisfaction of all parties. Had Judge Colvin not been ignorant of how things work in the real world, this case would not have been decided incorrectly.
For numerous reasons, I decline to join with Bob Kamman (rhymes with salmon) in a major leap to a quick conclusion about the Ebert outcome.
First, Bob says he performed only a “30-second” website search. I take him at his word.
Second, in no Tax Court document do I see evidence that “Lawrence Ebert” is the same “Lawrence B. Ebert” who Bob references. Yet “Lawrence Ebert” is a common name…even in New Jersey.
Third, I can find no connection between the Bridgewater, NJ, address that Bob’s referenced site provides and the other Tax Court petitioner, Rebecca Ebert.
Fourth, that Bridgewater, NJ, address does indeed connect to Lawrence B. Ebert…a New Jersey patent attorney. Unlike the average citizen, any attorney (a patent attorney too) is bound to have at least a passing familiarity with the legal concept of escheat…and thereby enough sense to check his state’s unclaimed property website.
Fifth, as a patent attorney, Lawrence B. Ebert may have provided his address to various property holding entities merely as his clients’ address of record, not because of his personal relationship with those entities.
Sixth, wouldn’t someone with “nearly 40 items of unclaimed property” have a few more tax problems than just one generated by $1,410 in unreported income for only one tax year? Mr. and Mrs. Ebert have filed but one Tax Court petition.
Seventh, the Tax Court’s “Lawrence Ebert” vigorously disputed that he had not received the three BNSF dividend checks. If that petitioner was Bob’s “Lawrence B. Ebert,” then would he not have been exercised enough at trial to blurt out something such as, “You know, this isn’t the first time a company has claimed to pay me when I know that it didn’t!” (See, above, “nearly 40 items of unclaimed property”).
Eighth, Bob’s attack on Mr. Ebert’s due diligence is unwarranted because it ignores the Tax Court’s finding that:
“Petitioner husband has made numerous unsuccessful attempts in recent years to contact Computershare and Wells Fargo regarding various matters relating to his BNSF stockholdings, including payment of the disputed dividends.” Ebert at 2.
Ninth, the Tax Court did not mention that Mr. Ebert was an attorney. That fact, if it was one, would seem to have merited at least an honorable mention. The Tax Court could have used such a fact to bolster its “numerous unsuccessful attempts” finding and to clarify its surprisingly taxpayer-friendly conclusion. (“In one such attempt, Petitioner husband, an attorney, sent a letter that threatened a lawsuit if he did not receive his dividend payments within 30 days.”)
I ask that Bob point us to actual evidence that connects his “Lawrence B. Ebert” to the Tax Court’s “Lawrence Ebert and Rebecca Ebert.” Until he does, for all the reasons I list here, I must give his comment an emphatic “thumbs down.”
I posted a lengthy response to Jason T’s comments this morning, but they can be expunged and replaced with the following:
I contacted Lawrence Ebert, the distinguished patent attorney of Bridgewater, New Jersey, and he confirmed that he is the petitioner in this case.
A thumbs-up to Bob Kamman for his follow through. Attorney Ebert should give thanks that Bob was not his Chief Counsel opponent.
Kamman’s comments reflect a certainty naïveté about how New Jersey unclaimed property operates.
I tried to get an itemization; not happening. Also, try to get a response from ComputerShare or Wells Fargo.
The phone number on the document of Chief Counsel from ComputerShare was “not in service” and the signatory
of the document could not be located.
As a headsup for Mr. Kamman, I received today (2 Sept. 2015) a phone call from NJ Property that they do NOT hold dividend checks from Burlington Northern for the year 2009. I am waiting to hear from ComputerShare, and the (fictional?) Mr. Baptiste, whose letter was used in my case.
Five years later, I still have no luck with NJ Unclaimed Property. Bank of America reported that NJ “unloaded” (meaning drained) $15k from a debit card. Many emails and certified letters to them later, they have not responded (verified by an OPRA request). Did not answer my state assemblyman either. Something odd here.