On Burden of Production and Related Concepts and an Appellate War Story on Scope of Review (5/12/24)

In a recent revision to my working draft of the Federal Tax Procedure Book (with the 2024 version due in early August 2024), I added to the discussion of the Burden of Production. (The 2023.2 version of the Practitioner edition, here, has the Burden of Production discussion starting on p. 617.) As I note there, the burden of production concept is usually discussed in a jury trial setting where the party bearing the burden of persuasion will lose on motion for directed verdict without getting to the jury if there is not enough evidence on a key fact to be submitted to the jury. That is a production burden or, as some call it, the risk of nonproduction. This burden is addressed to the function of the judge rather than the jury.

In a recent article, I noted that “The burden of production could also come into play on a motion for summary judgment, motion for j.n.o.v., or even on appeal when the trial judge or appellate judges determine that the evidence was of such quality that a reasonable juror could not make a determination.” John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389, 402 n. 42 & 404 n. 49 (2020). I decided to add that thought to the Burden of Production discussion in the working draft of the Federal Tax Procedure Book so that it will appear in the 2024 edition.

As I now have it in the working draft, the added paragraph is (footnote omitted):

          The burden of production is discussed above in its traditional jury-trial setting where it would be invoked in a motion for directed verdict. There is an analog in motions for summary judgment, motion for judgment notwithstanding verdict (j.n.o.v.), and appeals. In each of those settings, a proponent may succeed if the record has unrebutted persuasive evidence that a reasonable jury could not find for the opponent. In other words, the opponent on a motion for summary judgment has a burden of production (or risk of nonproduction) equivalent to show evidence that a reasonable jury could find for the opponent.

I thought I would elaborate in this blog by reference to a recent tax opinion. In Meyer, Borgman & Johnson, Inc. v. Commissioner, 100 F.4th 986 (8th Cir. 5/6/24), CA8 here and GS here, the Court affirmed the Tax Court’s grant of summary judgment holding that the taxpayer did not qualify for § 41’s credit for qualified research expenses” because the expenses were “funded” by another party (rather than at taxpayer risk) within the meaning of § 41(d)(4)(H). I will not go further into the law; the opinion is very short, so I encourage those interested to read it.

Obviously, in granting summary judgment, the Tax Court had to make findings of fact and conclusions of law. Under my analysis above, the taxpayer bearing the burden of persuasion and thus the burden of production on summary judgment had to show that there were sufficient facts under the law to warrant the Court denying the summary judgment. In other words, in the face of an otherwise appropriate IRS motion for summary judgment, the taxpayer had to ensure that the facts on the motion for summary judgment were of sufficient quality to make the issue a triable issue. In the jury analog, the facts would have to be sufficient to get the issue to the jury if the facts were as presented in the motion for summary judgment.

I focus on the Court’s statement in Meyer, Borgman & Johnson, Inc. of the standard of review on appeal, because it seems to be less than precise about what it was doing in the context of reviewing the grant of a motion for summary judgment. I quote the relevant portion of the opinion (Slip Op. 2, cleaned up to strip out case citations and quotes to get to the reasoning and bold-face supplied by JAT):

On summary judgment, the Tax Court ruled that MBJ’s research was “funded” within the meaning of 26 U.S.C. § 41(d)(4)(H), meaning that MBJ did not qualify for the credits. This court reviews de novo a grant of summary judgment. Summary Judgment pursuant to Tax Court Rule 121 is derived from Rule 56 of the Federal Rules of Civil Procedure and is interpreted consistently with interpretations of Rule 56. Contract interpretation and the propriety of summary judgment are legal issues we review de novo.

This court reviews de novo the Tax Court’s legal conclusions; findings of fact are upheld unless clearly erroneous. An income tax deduction is a matter of legislative grace and* the burden of clearly showing the right to the claimed deduction is on the taxpayer.

So, the Court acknowledges that, on grant of a motion for summary judgment, there are both legal conclusions and fact conclusions, with the former being reviewed de novo and the latter being reviewed for clear error. I view that as showing the analogy to the burden of production (or risk of nonproduction). On the motion for summary judgment, the party opposing the motion must make sure that the summary judgment record includes evidence that would at least show that the fact issue involved was a triable issue. In that sense, that party has a burden of production on the motion for summary judgment if the movant has adduced sufficient evidence that will carry the day in the absence of some contrary evidence. In this sense, it functions like a burden of production in a jury trial that, if not met, will require a directed verdict (or a j.n.o.v.).

On Contract Interpretation as Legal Issue and JAT War Story on American Realty Trust v. United States, 498 F.2d 1194 (5th Cir. 1974)

I quoted from Meyer, Borgman & Johnson, Inc. above. Included in the larger quote was this: “Contract interpretation and the propriety of summary judgment are legal issues we review de novo.” I focus on the contract interpretation part of the quote with a war story from my time at the DOJ Tax Appellate Section. I was assigned to write a memorandum either recommending or not recommending whether the Government appeal in a case that eventually became American Realty Trust v. United States, 498 F.2d 1194 (5th Cir. 1974), here.  The issue in the case was whether the taxpayer was entitled to depreciation deductions for a building. That issue turned on whether, for tax purposes (in substance rather than form), the taxpayer was the owner of the building or a secured lender. The transaction was in the form of a sale to the taxpayer and leaseback with a repurchase option that would economically be exercised, meaning that the taxpayer was an interim only in appearance rather than substance. (A major player on the “seller’s” side was Harry Helmsley, a prominent real estate entrepreneur and husband of Leona Helmsley, the famous "queen of mean" convicted of tax evasion. See Article on Prominent Tax Evaders Prompted by Anniversary of Helmsley's 1989 Conviction for Tax Evasion (Federal Tax Crimes Blog 9/4/16), here.) The form of the documentation was couched in purchase and sale lingo seeming facially to transfer ownership of the building to the taxpayer. However, when the operative terms of the documents were parsed carefully, the transaction had the characteristics (shall we say “substance”) of a secured lending arrangement which, if so characterized for tax purposes, would mean that the taxpayer would not qualify to claim the substantial depreciation it claimed on the return.

At trial, the Government's trial attorney, who was very aggressive and bragged about her wins in jury trials, insisted in the district court that the issue was a fact issue for which she was entitled to demand a jury (which she did do so in the answer to the complaint). In a pretrial hearing, the trial judge questioned whether the issue was a legal issue saying that it was merely a contract interpretation issue to determine its legal substance; the question was whether it should be tried as a bench trial to the judge or a jury trial. The trial attorney resisted strongly, asserting to the judge that if the trial judge did not have a jury trial, she would take him to the Fourth Circuit and it would come back for the jury trial. So, the judge had a jury trial at her insistence. She (the Government) lost to the jury which determined that the documents created a sale transaction with ownership transferred to American Realty Trust. The trial attorney recommended no appeal because, in her mind, it was a fact issue determined by a jury, for which reversal on appeal is quite difficult. See Justice Thomas and Tax -- The Plot Sickens (Federal Tax Procedure Blog 10/29/23; 10/31/23), here (on difficulty of reversing jury verdict in a case where the issue was really factual).

I decided to recommend that the Solicitor General authorize an appeal. In such a case, until the SG decided not to authorize the appeal, the trial attorney is supposed to do everything required to preserve the appeal, including filing a protective appeal that could be reversed if the SG decided not to authorize the appeal. She filed the protective appeal but did not timely order the transcript, creating a substantial delay. (The delay was subject to a motion to dismiss the appeal on the basis that there would be prejudicial delay in a fact case where the transcript is not available; the argument is addressed in the Government’s reply brief, here (pp. 1-8 and Appendix at pp. 21-31); however that issue is not technically relevant, although it played a part in the Fourth Circuit’s resolution of the case without receiving the transcript; the Court decided the appeal without the transcript.)

The Solicitor General authorized appeal. I kept a copy of my briefs; the appellate opening brief is here and the appellate reply brief is here; I did not keep a copy of the taxpayer brief. In the briefs, we argued that the issue was one of law interpreting contracts (the sale-leaseback documents) that the Court of Appeals could review de novo (the same argument that the 8^th circuit in Meyer, Borgman & Johnson, Inc. stated). In relevant part on the characterization of the issue as legal or factual and scope of review, the Summary of Argument in our opening brief says (p. 14):

          Preliminarily, we submit that the issue presented is one of law, because the rights, obligations and economic interests of the parties are essentially undisputed. The parties entered into detailed written agreements reflecting the arrangement, and no one seeks here to alter the substantive provisions of the agreements. The issue, then, is solely one of legal characterization--i.e., do those substantive provisions comport with the label the parties attached to them ("sale"), or are they in substance provisions more akin to a secured lending device?

I would normally have handled the oral argument in the case, but by the time of argument, I had transferred to a trial section. Hence my reviewer, Jonathan Cohen, handled the oral argument. As recounted in the opinion (p. 1197-1198, some footnotes omitted and bold-face supplied by JAT):

In this Court, the government again raises the contention, developed at trial, that the ART-Helmsley transaction was "in substance a secured loan transaction in which the taxpayer loaned money to the nominal `seller' [Helmsley]." The second step in the government's argument is, of course, that ART was not entitled to claim depreciation on the Palm Beach Towers, inasmuch as ART was not the "true" owner of the property.

 In oral argument before this Court, government counsel suggested that the proper characterization of the "substance" of the transaction was essentially a factual matter. This suggestion is entirely consonant with the manner in which the government litigated the case in the district court. For example, in its trial brief, the government proposed that the "sole dispute" between the parties could be resolved by tendering the following factual question to the jury:

"Has plaintiff, American Realty Trust, proven by a preponderance of the evidence that the Palm Beach Towers transaction was a bona fide sale and leaseback, and not a financing arrangement?"

 The issue was put to the jury in practically the form proposed by the government n11 and a verdict favorable to ART was returned. 

   n11 The request for a jury trial was made by the government. [The Court then quotes the jury charge, noting that the Government did not object at trial or on appeal.]

So viewed, it would seem that our primary function on this appeal is to determine whether there was sufficient evidence to support the jury's verdict. We emphasize that appellate review of a jury verdict presents no occasion for the reviewing court to sift and weigh competing factual assertions, to draw its own inferences from contradictory evidence, or to choose between the more persuasive of two plausible but contradictory inferences. It is the jury which "weighs the contradictory evidence and inferences" and draws "the ultimate conclusion as to the facts." Nor would the district court have been correct in granting the government's motions for directed verdict or for a judgment non obstante veredicto, unless the proofs at trial that this was not a bona fide sale and lease-back had been "so clear that reasonable men could reach no other [conclusion]."

Applying these standards, we are disinclined to disturb the jury's verdict. There was extensive testimony to the effect that the Helmsley-ART deal was not merely a tax avoidance device, that commercial considerations underlay it, and that the parties intended that the ownership of the Palm Beach property would pass to ART. In short, there was evidence that the transaction "was a good faith purchase and lease-back" and not a mere "financial arrangement." Given the presence in the record of such evidence, we cannot say the jury's verdict was clearly erroneous. Neither can we say that the record so overwhelmingly supported the government's position that a directed verdict or a judgment n. o. v. should have issued.

Of course, the Court’s claim that “government counsel suggested that the proper characterization of the ‘substance’ of the transaction was essentially a factual matter may or may not be correct; I was not there and do not know what Jonathan Cohen said. However, if Jonathan Cohen said that it was not argument the Government made in the briefs, and I think he went beyond his brief to “suggest” to the Court it was a fact issue. The brief clearly argued that it was a legal issue. What a mess!

The Court then in the balance of the opinion (pp. 1198-1199) to bat down the legal argument, but in getting there the Court had essentially cast the die.

The upshot of all that is that the next significant case with the issue of ownership in complex transactions where tax ownership was in dispute was Frank Lyon Co. v. United States, 435 U.S. 561 (1978), here. Frank Lyon, in my mind one of the most disastrous opinions from the Supreme Court (used and abused by bullshit tax promoters in promoting bullshit tax shelters (pardon the redundancy)). Although I did not handle Frank Lyon, I did make a personal trip to the Appellate Section to urge the person drafting the appeal recommendation from the district court to recommend appeal. Maybe I had some influence in the appeal recommendation; maybe not. But the Government won in the Eighth Circuit in a very well-reasoned opinion that, had the Supreme Court not accepted certiorari or decided the same way, we would have avoided some of the bullshit arguments for bullshit tax shelters. See Frank Lyon Co. v. United States, 536 F.2d 746 (8^th Cir. 1976), here.

I do have another story, although not technically my war story, about why the Supreme Court accepted certiorari in Frank Lyon in a case that it should not have accepted cert or should have Dismissed as Improvidently Granted ("DIG") the case. But I won't repeat that story here.