This is cumulative to what I state in the text book, but is probably a good reminder for students and new practitioners. I incorporate the entire discussion on that subject:
A. The Allocation of the Burden of Proof
"The allocation of the burden of proof [under I.R.C. § 7491] is a legal issue reviewed de novo." Whitehouse Hotel Ltd. P'ship v. Comm'r, 615 F.3d 321, 332 (5th Cir. 2010) (quoting Marathon Fin. Ins., Inc., RRG v. Ford Motor Co., 591 F.3d 458, 464 (5th Cir. 2009)).
As a general rule, the Commissioner's determination of a tax deficiency is presumed correct, and the taxpayer has the burden of proving the determination to be erroneous. See Tax Ct. R. 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, I.R.C. §§ 6201(d) and 7491(a) set forth exceptions to this rule. Under § 6201(d), "if a taxpayer asserts a reasonable dispute with respect to any item of income . . . and the taxpayer has fully cooperated with the Secretary . . ., the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency." Similarly, under § 7491(a), if "a taxpayer [(1)] introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax," n7 (2) complies with certain substantiation requirements, (3) "maintain[s] all records required under this title," and (4) "cooperate[s] with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews," then "the Secretary shall have the burden of proof with respect to such issue." Nevertheless, this Court has held that the operation of this burden-shifting scheme is irrelevant when both parties have met their burdens of production and the preponderance of the evidence supports one party. See Whitehouse Hotel, 615 F.3d at 332; Knudsen v. Comm'r, 131 T.C. 185, 189 (2008) ("[A]n allocation of the burden of proof is relevant only when there is equal evidence on both sides.").
n7 Although this Court has yet to speak on what constitutes "credible evidence," the Eighth and Tenth Circuits have defined the term to mean "the quality of evidence, which after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted. . . ." Blodgett v. Comm'r, 394 F.3d 1030, 1035 (8th Cir. 2005) (quoting Griffin v. Comm'r, 315 F.3d 1017, 1021 (8th Cir. 2003)); accord Rendall v. Comm'r, 535 F.3d 1221, 1225 (10th Cir. 2008) (citing Blodgett, 394 F.3d at 1035).
Here, the tax court initially found that Brinkley "did not introduce credible evidence regarding the tax character of the income in issue that merited a shifting of th[e] burden [of proof] to [the Commissioner]" under §§ 6201(d) and 7491(a). But the court ultimately declined to hold Brinkley to his burden, concluding instead that "[t]he preponderance of the evidence, without regard to burden of proof, is that [under letter agreement II] petitioner received the value of his stock and compensation for service previously rendered or to be rendered in the future." Accordingly, the resolution of this issue turns on the tax court's finding that the preponderance of the evidence supports the Commissioner's position that the $3.1 million payout in letter agreement II amounted to compensation for both his stock and his services to Zave and/or Google -- and therefore was properly characterized as ordinary income.
We agree with the tax court's finding that the preponderance of the evidence favors the Commissioner's deficiency determination, so any error in the court's allocation of the burden of proof is harmless. See Whitehouse Hotel, 615 F.3d at 332; Blodgett v. Comm'r, 394 F.3d 1030, 1039 (8th Cir. 2005).Addendum 12/18/15 9:00am:
I thought I would add some further discussion from my Federal Tax Procedure book:
f. The Limits of Burden of Proof.
Cases are replete with burden of proof discussions as if burden of proof played a role in case outcomes. Of course, in criminal cases, burden of proof beyond a reasonable doubt is critical and a constitutional requirement. But in most civil cases the assignment of the ultimate burden of proof -- the burden of persuasion -- merely determines who wins and who loses if the trier of fact is in equipoise -- i.e., is unable to find that the fact more likely than not existed or didn’t exist. If the trier believes that the evidence establishes that the fact more likely than not existed, then it doesn't matter which of the parties had the burden of proof or any component of it. Similarly, if the trier believes that the evidence establishes that the fact more likely than not did not exist, then it also doesn’t matter which of the parties had the burden of proof or any component of it. It is only where the trier is unable to make the affirmative finding that the case is affected by which party bore the burden of proof (or any component).n1928 Most trial observers feel that it is rare that a trier – whether judge or jury – is in this state of equipoise so that the assignment of the burdens of proof may not ultimately be that important an issue, but it is important in framing and trying a case, of course.n1929 In fact, in judge tried cases, it is common for the trial judge to discuss in the opinion the burden of proof (i.e., the burden of persuasion) to a greater or lesser extent, but then to say that, after all, the discussion is irrelevant because he is not in a state of equipoise as to any issue. n1930 n1928 An interesting case illustrates the phenomenon where the trier is in equipoise so that the resolution turns upon the assignment of the burden of proof, meaning in this case the burden of persuasion. In Forste v. Commissioner, T.C. Memo 2003-103, the issue was whether the taxpayer could exclude $45,615 from income under a prior version of § 104. The court first determined that then recently enacted § 7491 which I discuss in more detail below applied to assign the burden of proof to the IRS as to $25,130. The Court held that the IRS had failed to meet that burden and thus, without an affirmative finding, held that that portion was excluded under § 104. As to the balance of the payment, the Court held that the taxpayer bore the burden of proof and held for the IRS because the taxpayer had not met his burden of proof. In other words, as to both components, the Court was in equipoise so that the assignment of the burden of proof controlled the result. For an application of this type of analysis in a criminal sentencing, see United States v. Safiedine, 2013 U.S. Dist. LEXIS 179364 (ED MI 2013) (where the preponderance of the evidence standard applied to tax loss and restitution issues; as to tax loss, the taxpayer bore the burden of persuasion on unclaimed deductions and as to restitution, the Government bore the burden of persuasion; since the court was in equipoise on unclaimed deductions, the tax loss was computed without the unclaimed deductions but as to restitution, the amount was determined with the unclaimed deductions).
n1929 Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998) (“The shifting of an evidentiary burden of preponderance is of practical consequence only in the rare event of an evidentiary tie . . . .”); see also Polack v. Commissioner, 366 F.3d 608, 613 (8th Cir. 2003) (citing the Cigaran case); Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2004); and Knudsen v. Commissioner, 131 T.C. 185, 188 (2008); Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005) (declining to decide who has the burden of proof (persuasion) because the Tax Court decides the case on the preponderance of the evidence).
n1930 In doing so, the judges often cite the cases cited in the preceding footnote to this text or cases with the applicable circuit’s variation of this theme. Estate of Jorgensen v. Commissioner, 2011 U.S. App. LEXIS 9203 (9th Cir. 2011) (“When, as here, the tax court decides the case based on the preponderance of the evidence and without regard to presumptions of correctness, § 7491's burden-shifting is simply not relevant”); see also Scheidelman v. Commissioner, 755 F.3d 148 (2d Cir. 2014) (burden of proof shift under § 7491 is immaterial because the position sustained is “more persuasive, regardless of the burden of proof”) . Moreover, if a trial judge does not expressly say that he is not in equipoise, a court of appeals may effectively so determine by saying that the allocation of the burden of persuasion did not affect the decision. See e.g., Whitehouse Hotel Ltd. Partnership v. Commissioner, 615 F.3d 321, 332-333 (5th Cir. 2010) (“there is no indication that the tax court's decision turned on the allocation of the burden”).