Presumption of Correctness and Burden of Proof (Persuasion) (1/21/20; 12/28/22)

As revised 12/28/22.

As revised on 12/28/22, the blog below is too long and has some diversions.  I try to be helpful to readers by the following very short summary.

Summary:

Too often courts refer to a "presumption of correctness" that applies to IRS determinations.  The presumption of correctness must be distinguished from a presumption of regularity often said to attach to Government action.  The presumption of regularity applies (if at all) to presume procedural regularity.  For example, if the IRS issues a notice of deficiency, it may be presumed that the IRS undertook the procedural steps required to issue the notice of deficiency.  As to the correctness of the deficiency determined in the notice, however, the presumption of regularity does not apply.  That is the context in which the presumption of correctness is often deployed. 

Often, the reference to presumption of correctness is in conjunction with a statement that the taxpayer bears the burden of proof (meaning burden of persuasion) to prove that the determination is incorrect. The presumption of correctness is meaningless gloss.  In classic procedure theory, a presumption merely shifts a burden of production from the party with the burden of persuasion onto the other party.  In tax cases, however, the taxpayer has the burden of persuasion and, for that reason, necessarily has the burden of production. All a presumption of correctness could do is to shift to the taxpayer a burden of production already imposed on the taxpayer by the burden of persuasion. Hence, the invocation of the presumption of correctness to shift the burden of production to the taxpayer is like (as one court said) covering with a handkerchief something already covered by a blanket.

That’s the proposition presented in the rest of the blog.  My recommendation is that courts (including the Tax Court), tax litigators, and scholars just quit talking about the presumption of correctness in tax context as if it means something. It does not mean anything and, for that reason, at least poses the possibility of being misleading. And, talking about the presumption of correctness shows that they really don’t understand what they are claiming.

END OF SUMMARY

This blog is a bit of a diversion, perhaps rant, about the loose use of the presumption of correctness much bandied about in tax judicial opinions.  What set me off this morning (the date of the original blog) was the Tax Court opinion in Onyeani v. Commissioner, T.C. Memo. 2020-15, here.  In Onyeani, Onyeani petitioned for redetermination after a notice of deficiency was issued for 2015.  Nothing unusual there.  Procedurally, though it was not a typical case because it had been preceded by a termination assessment under § 6851(a).  Those termination assessments happen.  But what happens way more often is the nit I pick today relating to burden of proof (persuasion) and presumption of correctness.

In Onyeani, Judge Lauber says (p. 19):

The Commissioner’s determinations in a notice of deficiency are generally presumed correct. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). 

In the next sentence, Judge Lauber calls this the presumption of correctness, a common wording.

So what’s my beef?  At the very minimum, Rule 142, here, says nothing about presumptions--of correctness or otherwise.  The relevant part of Rule 142 is:

RULE 142. BURDEN OF PROOF
(a) General: (1) The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court; and except that, in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer, it shall be upon the respondent. As to affirmative defenses, see Rule 39. 

Welch v. Helvering, 290 U.S. 111, 115 (1933), here does say something about presumptions of correctness (emphasis supplied):

“[The Commissioner’s] ruling [NOD] has the support of a presumption of correctness, and the petitioner has the burden of proving it to be wrong. “

Note that Supreme Court did not say in Welch that the IRS determination has the presumption of correctness because the taxpayer had the burden of persuasion or that the taxpayer had the burden of persuasion because the IRS determination was presumed correct.  Rather, the Supreme Court used the conjunctive that would not necessarily indicate that the two are the same; it did not say, for example, that the taxpayer bears the burden of proof (persuasion) because the IRS determination is presumed correct. Courts have read Welch as saying because, but those courts are wrong.  As I note below, the assignment of the burden of proof (persuasion) is free-standing for policy reasons as recognized in testimony to Congress before Welch and the assignment of the burden of persuasion carries with it the assignment of the burden of production which is the only function of a presumption.

To avoid further confusion, I need to distinguish between the burden of persuasion and the burden of production.  I do this in the context of a jury trial where the difference between the two are better developed (although they apply in bench trials such as in the Tax Court as well).  The burden of persuasion determines which party wins after all the evidence is in loses if the trier of fact (the jury) is in equipoise as to any crucial fact.  It comes into play at the end of the trial (although allocation of the burden of persuasion will influence how the parties present the evidence during trial.)  The burden of production is a concept to require, at any key point in trial (before the end of trial), which party loses by directed verdict from the judge without submission to the jury if that party does not introduce further evidence.  For further reading on these burdens, see John A. Townsend, Federal Tax Procedure (2022 Practitioner Ed.) pp. 596-597 (2019), which may be downloaded here.  I also refer readers to a parallel discussion in, John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389, 405-406 (2020), SSRN here.So, what is the relationship between the presumption of correctness and burden of proof, as implied by Judge Lauber in Onyeani and the Supreme Court in Welch v. Helvering, but not Rule 142 (which deals only with burden of proof (persuasion))?

Under classical trial procedure theory, the presumption has a limited function.  That classical understanding is now in Federal Rules of Evidence (FRE) Rule 301, here:

Rule 301.  Presumptions in General Civil Actions and Proceedings.
In all civil actions and proceedings not otherwise provided for by Act of Congress or by these rules, a presumption imposes on the party against whom it is directed the burden of going forward with evidence to rebut or meet the presumption, but does not shift to such party the burden of proof in the sense of the risk of nonpersuasion, which remains throughout the trial upon the party on whom it was originally cast.

The burden of going forward is the burden of production.  Rule 301 and classical theory has nothing to do with the assignment of the burden of persuasion.  (OK, courts and scholars flirt sometimes with a notion that some presumptions might shift the burden of persuasion from the party having the burden of persuasion to the party otherwise not having the burden of persuasion, but let’s set that aside; those wanting some introduction to the theories involved with presumptions might read  the notes attached to the Rule 301 link above, which offer sort of a "legislative" history of the consideration of the Rule.)

Under this classical operation, the presumption of correctness shifting the burden of production to the opposing party can only have meaning if the party raising the presumption has the burden of persuasion.  One cannot persuade without producing which is all the burden of production requires.  As one early famous case noted, assigning a burden of production to a party having the burden of persuasion covers with a handkerchief something already covered by a blanket.  Chicago Stock Yards Co. v. Commissioner, 129 F.2d 937, 948 (1st Cir. 1942) (also noting that there is no practical effect of raising a presumption against a party having the burden of persuasion).

Now, as noted, Rule 142 assigns the burden of persuasion to the taxpayer.  So what’s the deal with also larding on the presumption of correctness which, at least under classical theory, a burden of production already assigned by Rule 142's assignment of the burden of persuasion?  Nothing, at least under classical theory.  Yet the two are linked in probably thousands of cases.  I make no attempt to survey and reconcile all those cases, because to do so would require more time than I have to spend and, in any event, would be a futile task.  Cf. Welch v. Helvering, 290 U.S. 111, 115 (1933).

I guess that, if in theory, one needed to find some justification for raising the specter of a presumption of correctness at the start of a Tax Court proceeding despite the assignment of the burden of persuasion to the taxpayer, perhaps it could be in the notion (evident in the appellate and Supreme Court opinions in Helvering v. Taylor) that some basis for entering the Tax Court decision (equivalent to a district court judgment) determining a tax liability the taxpayer must pay to the IRS and permitting that to happen if the taxpayer does nothing or fails to meet the taxpayer’s burden of persuasion.  I suppose.  Instead, I suggest that the repeated references to the presumption of correctness while seemingly adding something to the burden of persuasion analysis really does nothing.

Finally, there is a link in the history of the earliest Tax Court rule assigning the burden of proof (persuasion) to the taxpayer.  I cut and paste this from a footnote in my article (p. 412 n. 70, emphasis supplied):

   n70 Congress was aware that the BTA imposed the burden of proof on the taxpayer, a rule that is now incorporated in the rules of procedure before the Tax Court. U.S. TAX COURT, RULES OF PRACTICE & PROCEDURE Rule 142(a) (as amended through Jan. 15, 2020) (stating that “[t]he burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court”). During the hearings leading to the 1926 Tax Act, a former member of the BTA testified to the House Ways and Means Committee that, if the burden of proof were to be placed on the Service instead of the taxpayer, Congress “might as well repeal the income tax law and pass the hat, because you will practically be saying to the taxpayer, ‘How much do you want to contribute toward the support of the Government?’ and in that case they would have to decide for themselves.” Revenue Revision, 1925: Hearings Before the Committee on Ways and Means, 69th Cong. 907 (1925) (statement of James S. Y. Ivins). Other reasons expressed for placing the burden of proof on the taxpayer were that the taxpayer was the moving party (id. at 907–08), that the actions of the government are “prima facie presumed correct” (id. at 908), and that the evidence is peculiarly within the possession of the taxpayer (id. at 908, 930 (statement of Charles D. Hamel)). See also Leo P. Martinez, Tax Collection and Populist Rhetoric: Shifting the Burden of Proof in Tax Cases, 39 HASTINGS L.J. 239, 259 n.89 (1988) (noting that “[h]earings conducted prior to the Revenue Act of 1928 suggested that no one had seriously questioned the allocation of the burden of proof to the taxpayer”).

Notice that the presumption of correctness, while mentioned, did not play the pivotal role in assigning the burden of persuasion to the taxpayer.  To repeat, the burden of persuasion carries with it a burden of production which is the only function of a presumption.

So, whatever function the presumption of correctness has is already "baked" into the assignment of the burden of persuasion.  Therefore, the presumption of correctness adds nothing except fluff, but might give to those who don't know some impression that IRS determinations require something more than the burden of persuasion.  For example, in a jury trial in a tax case, the jury will be instructed that the taxpayer bears the burden of persuasion as to fact issues.  Instructing the jury as to the presumption of correctness would be inappropriate, in my judgment because juries may give the "presumption" more importance than it has.  I have never requested such an instruction in a jury trial.

While in the Department of Justice Tax Division Appellate Section in the early 1970s, I prepared a memorandum on burden of proof that was circulated to to guide Tax Division attorneys in asserting positions before the courts so that, hopefully, over time the discussions might be more consistent and precise. The Assistant Attorney General approved circulation of the memorandum.  I have since lost that memorandum, but as I recall, for the reasons noted above, I recommended that DOJ Tax attorneys not invoke the presumption of correctness.  (I  think that many DOJ Tax attorneys were not convinced by my reasoning and research, did not read the memorandum, or forgot about the contents of the memorandum and continued to pump the presumption of correctness as before; for myself, I have tried many civil jury trials after I wrote that memorandum (most of the time while in DOJ Tax Civil Trial Sections); as I recommended in the memorandum, I never asked for an instruction that the IRS's actions were presumed correct or carried a presumption of correctness; I did always ask for instruction on the appropriate burden of persuasion.)

Finally, as to one of the dangers in using the presumption of correctness is the conflation of the presumption with the burden of persuasion, which might permit one to assume that a taxpayer might prevail simply by meeting a burden of production.  In United States v. Rexach, 482 F.2d 10, 16 (1st Cir. 1973), here, cert. denied 414 U.S. 1039 (1973):

Whatever uncertainty may once have existed because of our use of the general phrase "burden of proof" was dispelled by our opinion in United Aniline Co. v. C. I. R., 316 F.2d 701 (1st Cir. 1963). We there explicitly rejected the suggestion of the Fourth Circuit in Stout v. C. I. R., 273 F.2d 345, 350 (4th Cir. 1959), that the Commissioner's assessment merely shifts to the taxpayer the burden of going forward with evidence, and disapproved the use of the term "presumption" because of the danger, illustrated in Clark v. C. I. R., 266 F.2d 698 (9th Cir. 1959), of misleading courts into believing that if the taxpayer introduced evidence from which it "could" be found that the assessment was erroneous, the burden of proof was placed on the Commissioner. We unambiguously stated that whether or not reference was made to a presumption, it must be made clear that "the taxpayer never loses the burden of proving the Commissioner's determination erroneous." 316 F.2d at 704; see also n. 4, "Presumption or no, the burden of proof never shifts."

See also Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1, 109-110 (2004) (noting that the committee reports for the 1998 revision to § 7491 seem to conflate the presumption with the burden of persuasion.

JAT Additional Side Comments:

1. Some spurious notions of the presumption of correctness creep into the discussion.  For example, the generally astute observer, Professor Bryan Camp stated (Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1, 16 (2004) (emphasis supplied)):  

Once the tax is assessed a rebuttable presumption arises based, in part, on the probability of its correctness. The presumption is also based upon considerations of public policy. First, as to the accuracy of the amount assessed, the presumption furthers the policy of requiring the taxpayer to meet certain bookkeeping obligations placed upon him by the Code. It also recognizes that the taxpayer has more readily available to him the correct facts and figures.

With due respect, the presumption has nothing to do with the probability that the IRS determined the correct amount of tax.  As noted above, it is the assignment of the burden of proof (persuasion) that does the work of requiring the taxpayer to prove the IRS wrong, rather than the notion that the IRS is presumed to get it right.

2.  Judge Lauber also notes (Slip Op. 2-3):

Acknowledging considerable mystery about the underlying transactions, we decide this case primarily on the basis of burdens of proof. Respondent has established that petitioner received unreported income, and we sustain his deficiency determination except to the extent that petitioner substantiated deductions or off [*3] sets therefrom.

So this is the rare case where the assignment of the burden of persuasion (at least where it is the preponderance of the evidence burden of persuasion) is outcome determinative.  On this issue, here is a footnote from my article (p. 400 n. 38):

   n38 Schaffer ex rel. Schaffer v. Weast, 546 U.S. 49, 58 (2009) (“In truth, however, very few cases will be in evidentiary equipoise.”); id. at 68 (Breyer, J., dissenting) (“And judges rarely hesitate to weigh evidence, even highly technical evidence, and to decide a matter on the merits, even when the case is a close one. Thus, cases in which an administrative law judge (ALJ) finds the evidence in precise equipoise should be few and far between.”); 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 . . . .”); Polack v. Commissioner, 366 F.3d 608, 613 (8th Cir. 2003) (citing Cigaran); Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2004) (citing Cigaran and Polack); Knudsen v. Commissioner, 131 T.C. 185, 188 (2008) (citing Cigaran, Polack, and Blodgett); Estate of Bongard v. Commissioner, 124 T.C. 95, 111 (2005) (declining to decide who bears the burden of proof (persuasion) because the case was decided based on the preponderance of the evidence). Professor Neil Buchanan notes that, although it is conceptually conceivable that there might be a 50-50 case in which the outcome is determined by the assignment of the burden of persuasion: In the real world, however, it is never that close (in tax cases, or in any other civil case, as my CivPro-teaching colleagues can attest). In fact, a study in 2008 (ten years after [the Internal Revenue Service Restructuring and Reform Act of 1998]) showed that shifting the burden of proof under the 50%-plus-a-tiny-amount standard simply makes no difference in tax cases. The outcome is the same, no matter who formally bears the burden of proof. Neil H. Buchanan, The Burden of Proof and Tax Law: Deja Vu Silliness, DORF ON LAW BLOG (June 14, 2013, 9:32 AM), http://www.dorfonlaw.org/2013/06/the-burden-of-proof-and-taxlaw-deja-vu.html [https://perma.cc/EH7G-C7JH].

3.  Side note: I cited the Supreme Court 1933 case of Welch v. Helvering. Helvering was Guy Tresilliam Helvering, Wikipedia here, the Commissioner of Internal Revenue. Many early cases thus refer to the Commissioner by the name of the Commissioner (Helvering in Welch v. Helvering and for many landmark cases early in the age of the modern income tax) or by Commissioner (as is the common practice now).  For an earlier iconic tax case where the Commissioner is referred to both ways (emphasis supplied), see Taylor v. Commissioner, 70 F.2d 619, 620-621 (2d Cir. 1934) (L. Hand, J.), aff’d Helvering v. Taylor, 293 U.S. 507 (1935).   I point out that the 2d Circuit decision was by Learned Hand, not because relevant to the present issue but to urge people who may not be familiar to Judge Learned Hand to become familiar.  See Wikipedia, here (noting inter alia that “Hand has been quoted more often by legal scholars and by the Supreme Court of the United States than any other lower-court judge.” 

4. I cited Chicago Stock Yards Co. v. Commissioner, 129 F.2d 937, 948 (1st Cir. 1942) above for the necessary proposition that assigning a burden of production (the sole function of a presumption) to a taxpayer bearing the burden of persuasion is meaningless. As a side note, the attorney for the taxpayer in Chicago Stock Yards was Joseph N. Welch, of Hale & Dorr, who came to national fame in the Army-McCarthy hearings at which Welch did a masterful job on Senator McCarthy. If that means nothing to you, I strongly recommend googling (or, should I have said Googling?) and suspect that you will get more out of this recommendation than anything else in this blog. If you would like to listen to NPR's 50th anniversary report with liberal excerpts from the tapes, you can at http://www.npr.org/templates/story/story.php?storyId=1951414.