Do Mixed Questions of Fact and Law Have Component Facts and Law for § 7491(a) Purposes? (9/11/25)

I address today what may seem to be a fairly mundane issue, but in some contexts might be important. Readers may already be familiar with § 7491(a), here, titled “Burden shifts where taxpayer produces credible evidence.” The “burden” referred to is the burden of proof and specifically the burden of persuasion. The burden of persuasion is not technically relevant until the end of trial when it determines which party loses in the event the trier of fact is in factual equipoise as to some key fact. From a practical perspective, it is important to keep in mind the conventional trial wisdom that triers of fact are rarely in equipoise, so that ultimately the assignment of the burden of persuasion is meaningless in most cases. Setting that aside and accepting the possibility that the burden of persuasion may be outcome-determinative in some cases, parties will often want to know before the beginning of trial which party has the burden of persuasion so that it can prove its case accordingly.

That is what happened in FBA St. Clair Property C, LLC v. Commissioner (T.C. Case 14406-23, here, at docket # 176 9/11/25), where the petitioner in a syndicated conservation easement case filed a motion in limine for the Court to hold that the conditions in § 7491(a) assigned the burden of persuasion to the IRS. The Court denied the motion, reasoning (Slip Op. 3-4):

          Section 7491(a) states that if a taxpayer produces credible evidence with respect to one or more factual issues relevant to the taxpayer’s tax liability, the burden of proof may shift to the Commissioner as to that issue or issues, as long as the taxpayer complies with certain additional requirements. Section 7491(a) only applies if the issue is factual and not “a mixed question of fact and law” which is “primarily a legal question.” Williams v. Commissioner, 120 F.App’x 289, 293 (10th Cir. 2005) (denying that § 7491(a) applies to the issue of whether a payment was a gift for purposes of § 102(a) or instead a bonus), aff’g T.C. Memo. 2003-97. Here, the issue is whether the transaction was a contribution or gift for purposes of Section 170(c), and we hold that this issue is a mixed question of fact and law, and so Section 7491(a) does not shift the burden to the Commissioner. 

Out-of-Time Deficiency Case Declaring NOD Invalid but with ASED Statute Still Open (4/17/24)

In my Federal Tax Procedure book, I note that there may be some procedural foot-fault in the IRS issuance of a notice of deficiency (“NOD”), such as failure to send to the last known address. If the NOD is invalid, any resulting assessment is invalid. I note that a traditional way to challenge the NOD for failure to send to the last known address is by filing an out-of-time petition for redetermination with the Tax Court. If the Tax Court then dismisses for lack of jurisdiction of an untimely petition it may base the decision on the invalidity of the NOD which invalidates the assessment requiring a valid NOD; that will invalidate the assessment. I caution that this gambit might be a pyrrhic victory if the IRS can still issue a new deficiency for which the statute of limitations is still open when the Tax Court dismisses.  (See the Federal Tax Procedure book 2023.2 Practitioner Edition pp. 515-516.)

Phillips v. Commissioner, T.C. Memo 2024-44, TA here & GS here, is such a case. In Phillips which the Court says is a deficiency case (see p. 1; for more explanation see my note # 1 below explaining how a CDP case morphed into a separate deficiency case), the petition for redetermination of the deficiency was out of time. The Court found the NOD and resulting assessment to have been invalid for failing the last known address requirement. In getting to the holding of invalidity, the Court offers good discussion of the application of the Regulations on last known address including the IRS access to USPS change of address information as a licensee, the IRS’s processes for insuring last known address, and the IRS’s failure to meet the Regulations’ requirements in this case. I will not further address the merits of the Tax Court’s last known address resolution.

I focus instead on the Phillips opinion’s closing shot (p. 15 n. 10):

Nothing in this Opinion should be construed as limiting respondent’s ability to issue petitioner a new notice of deficiency for 2014 that is properly mailed to petitioner’s last known address.

Supreme Court Opinion on Presumptions and Burden of Proof (6/21/21)

Readers will recall that I have written on burden of proof, including its components, the burden of persuasion and the burden of production.  I have posted blogs, but my principal offering burden of proof was in Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020), available on SSRN here.  Readers of this blog have surely been anxiously awaiting more on burden of proof.  The Supreme Court offered one today in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, ___ U.S. ___ (6/21/21), here.  Actually, I would not call it an update, but simply a rehashing of familiar burden of proof concepts in a specific setting in a class action securities fraud case.  The case is also perhaps notable because on the burden of proof issue, the majority opinion was written by Justice Barrett, and the dissent was written by Justice Gorsuch.

The case involved the burdens the parties bore in meeting the requirement that the class action plaintiffs show that the defendant’s false statements affected the market so that the plaintiffs’ reliance on the market price as a measure of value established damage.  The resolution turned on the plaintiffs’ invocation of a presumption in their favor and whether the presumption then shifted to the defendant a burden of production or a burden of persuasion.  The traditional role for a presumption, reflected in FRE 301, here, is to shift the burden of production—meaning a burden to produce some credible evidence without regard to whether that evidence persuades on the issue and without shifting the burden of persuasion.  In classic theory, the presumption does not shift the burden of persuasion, which, in Goldman, would have required that the plaintiffs bear the burden of persuasion on reliance.

The Court majority (Barrett, J.) held that, in this type of market reliance case, its precedents imposed the burden of persuasion on the defendant once the plaintiff met the requirements for creating the presumption.  In other words, the presumption in this case shifted the burden of persuasion, which is not the normal function of presumptions.

Once the majority found that its precedents imposed the burden of persuasion upon the presumption, the game was over.  Justice Gorsuch in dissent wanted to apply the general rule that the presumption only shifted the burden of production to Goldman and, once that limited production burden is met, the burden of persuasion remains with the plaintiffs.

That’s what the fight is all about.

Some interesting points from the opinions.

1. The shifting of the burden of persuasion (or, in a broader sense, the allocation of the burden of persuasion) only rarely would be outcome determinative.  (Majority Slip Op. 2 & 12-13).  This from pp. 12-13 is particularly good:

            Although the defendant bears the burden of persuasion, [*12] the allocation of the burden is unlikely to make much difference on the ground. In most securities-fraud class actions, as in this one, the plaintiffs and defendants submit competing expert evidence on price impact. The district court’s task is simply to assess all the evidence of price impact—direct and indirect—and determine whether it is more likely than not that the alleged misrepresentations had a price impact. The defendant’s burden of persuasion will have bite only when the court finds the evidence in equipoise—a situation that should rarely arise. Cf. Medina v. California, 505 U. S. 437, 449 (1992) (preponderance of the evidence burden matters “only in a narrow class of cases where the evidence is in equipoise”).

Publication in ABA Tax Lawyer Townsend Burden of Proof Article (6/8/20)

The ABA Tax Lawyer publication has published my article:  John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020).  I have posted the article as published to SSRN where it can be reviewed or downloaded in pdf format.  The suggested citation on SSRN is:  Townsend, John A., Burden of Proof in Tax Cases: Valuation and Ranges — An Update (2020). 73 Tax Lawyer 389, 2020. Available at SSRN: https://ssrn.com/abstract=3599481

I had posted an earlier blog entry of the posting of an earlier draft to SSRN.  See Townsend Article on Burden of Proof and Valuation in Tax Cases (Federal Tax Procedure Blog 12/9/19), here.  The final as published has substantial changes, so I recommend that the final published article be used rather than the earlier draft.

The SSRN Abstract is.

Abstract

In this Article, the author discusses the difficulty in many valuation cases of determining a definite valuation point by the required degree of persuasion (more likely than not in most civil cases). This point was made cogently in Cede & Co. v. Technicolor, Inc., a frequently cited opinion by the Delaware Court of Chancery, a forum for significant litigation involving corporate valuations:

[I]t is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. . . . [V]aluation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts’ opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.

Corporate valuations for estate tax are just one context of tax litigation, but there are many other contexts. A prominent example for some time now has been transfer pricing.

District Court Teaches Confusing Summary Judgment Lesson (2/19/20)

In United States v. Feldman, 2020 U.S. Dist. LEXIS 24162 (E.D. Mich 2/12/20), CL here (and docket entries here) in a collection suit, the Court denied the United States’ motion for summary judgment, starting the exegesis as follows (Slip Op. 1-2):

And the IRS says that every reasonable jury would agree with it and [*2]  so this Court should grant it summary judgment. But the Court believes that there is a genuine dispute over how much income Feldman received in 2001 and 2002, and thus a genuine dispute over whether the IRS has reasonably determined the amount of tax owed. Accordingly, as explained below, the Court will deny the IRS' motion for summary judgment.

The Court wanders around a bit in its discussion, and in the course of starting the wandering with the following comment (Slip Op.):

“Unfortunately, the parties in this case have put little effort into figuring out the proper summary-judgment burdens.”

So the Court sets about to instruct the parties.  Unfortunately, at least as I see it, the Court gets the analysis for the most significant issue wrong, in part because it does not understand the facts and the law of how stock transactions are reported in brokerage accounts.

I will try to summarize the key facts for purposes of this blog’s discussion. I note that I have not studied in detail the underlying submissions by the parties, but I spot checked a couple of the documents and incorporate them as background in this discussion.

I think the relevant facts are:

(i) Feldman did not file returns for 2001 and 2002;

(ii) the IRS assessed tax for those years based, according to the court, on a list of “seven payments from brokerage firms to Feldman;” The brokerage firms issued Forms 1099-B for stock transactions in Feldman’s account(s).  On Forms 1099-B a brokerage (or other financial) firm lists sales proceeds for stock (or other financial assets) sold in the client’s account(s).  Apparently, the list referred to was the IRS computer generated list of the amounts the brokerage firm reported as sales proceeds on the Forms 1099-B issued to Feldman for transactions in his account. Basically, the transactions would have been sales of stock (or other financial assets) where the sales proceeds were deposited into the taxpayer’s account with the brokerage firm.

(iii) the brokerage firm did not distribute to Feldman all of the proceeds it received and reported on Forms 1099-B.  Rather, because Feldman had written bad checks to the brokerage firm, the brokerage firm reduced any amounts ultimately paid to the taxpayer by the amount of its claim for bad check amounts.  There may have been some other offsets as well.  So, in sum, the amounts reported on the Forms 1099-B would have exceeded the amounts the brokerage firm actually distributed to the Feldman.

The relevant facts may be illustrated in a simple example: (i) brokerage firm sells stock from taxpayer’s account for $1,000 and receives that amount into the taxpayer’s account with the brokerage firm; (ii) brokerage firm collects from that $1,000 an amount of $200 for a bad check (or any other amount the taxpayer owes the brokerage firm); (iii) brokerage firm pays the taxpayer the net of $800.  In these facts, the Form 1099-B reports $1,000 proceeds (payments received by the brokerage firm on sale) and does not report the actual cash payment to the taxpayer of $800.  On his tax return, the taxpayer’s gain should be reported as follows: (i) amount realized $1,000 proceeds; (ii) less the taxpayer’s basis in the stock sold (the example does not quantify the basis and, in the years involved, basis was not a reporting item on Form 1099-B); and (iii) producing the taxable gain on the sale of the stock.

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.

Townsend Article on Burden of Proof and Valuation in Tax Cases (12/9/19)

Caveat:  The ABA Tax Lawyer publication has published my article:  John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389 (2020).  I have posted the article as published to SSRN where it can be reviewed or downloaded in pdf format.  The suggested citation on SSRN and the link for review or downloading is:  Townsend, John A., Burden of Proof in Tax Cases: Valuation and Ranges — An Update (2020). 73 Tax Lawyer 389, 2020. Available at SSRN: https://ssrn.com/abstract=3599481.  The final published article supersedes the draft and should be the one consulted going forward.

I have posted on SSRN a draft of an article, titled  Burden of Proof in Tax Cases: Valuation and Ranges - an Update, I have submitted to the ABA Tax Lawyer for publication.  The SSRN posting where the draft can be downloaded is here.

The SSRN Abstract is:

In this article, I update a previous article, John A. Townsend, Burden of Proof in Tax Cases: Valuations and Ranges, 2001 TNT 187-37 (2001). I discuss the difficulty in many valuation cases of determining a finite valuation point by the required degree of persuasion (more likely than not in most civil cases). This point was made cogently in a frequently cited opinion of by the Delaware Court of Chancery (which I quote in the next paragraph): 

It is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. Valuation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts' opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.

Sometimes where ranges are identified, arbitrary conventions (such as the midpoint as in the case of publicly traded stock) can be used to determine the issue in litigation. But where there is no such convention that should be applied, the burden of persuasion can resolve the case by identifying the range. The party bearing the burden of persuasion (or risk of nonpersuasion) then has persuaded only as to the end of the range that does not favor that party and the value, based on persuasion, is determined accordingly. 

The party bearing the burden of persuasion in tax cases is usually the taxpayer. In the article, I discuss interesting features of the burden and how, at least in the Tax Court, the burden of persuasion might shift to the Commissioner under Helvering v. Taylor, 293 U.S. 507 (1935), which I think is often misunderstood. 

Another benefit of identifying the range is that, if it is determined on appeal that the trier of fact misapplied the burden of persuasion but did identify the range, the court of appeals can resolve the case by picking the other end of the range (unless a successful attack is made on the choice of the ends of the range).

The purpose of the advance publication on SSRN is to advised the community of the article and solicit comments for those wishing to make them.  I find that comments will help me make final revisions that make the final publication better.  Thanks in advance.

The SSRN listing for all of my articles is here.

Another Confluence of Legal Interpretation and Fact Finding (1/19/19)

Earlier today I posted on a confluence of legal interpretation and fact finding:  Law Finding (The Chevron Framework) and Fact Finding in Trials (Federal Tax Crimes Blog 1/19/19), here.  I offer here another instance of that.

In my current working draft of my Federal Tax Procedure Book, I discuss the more likely than not standard for legal opinions as to tax benefits.  That more likely than not standard says, in effect, that the legal opinion or belief in the legal opinion must be greater than 50% in order to avoid some penalties. 

A similar more likely than not construct is often used to describe the level of belief that a fact finder (judge or jury) in a trial must have in order to find by a preponderance of the evidence that the party bearing the burden of persuasion (usually a plaintiff) has met the burden.

I have added the following as a footnote:

Fact burden of proof theory has a similar analysis.  As I discuss later in the book (starting on p. ___), the preponderance of the evidence as to a fact is often described as more likely than not, which is quantified in percentages as being greater than 50% in order to find the fact.  Conversely, if the trier is either 50-50 (called a state of equipoise) or less as to the fact, the fact cannot be found, meaning that the party bearing the burden of persuasion on the issue loses.  That same type of analysis applies to legal conclusions for tax opinions.  If the adviser is 50-50 (state of equipoise) or less on the legal issue, then the adviser cannot render a more likely than not opinion.  If the adviser is more than 50% on the legal issue, he can render a more likely than not opinion.  Of course, the difference between 49% and 51% opinions is razor thin and probably impossible to quantify with sufficient confidence to render a more likely than not legal opinion.  And the potential for error is compounded when subsequent legal conclusions depend upon the correctness of an earlier conclusion that itself may be uncertain.  Example: Legal issue 1 is barely more likely than not, say 51%; Legal issue 2, which depends on Legal issue 1 is at 51%.  Is the overall opinion that the tax benefits will be achieved at 51% or some lesser number (in this case around 26%).  How does the legal adviser render the opinion?  Heather Field, Tax Opinions & Probability Theory: Lessons From Donald Trump, 156 Tax Notes 61 (7/3/17).

Good Discussion of the Burden of Proof When the Trier of Fact Bases Decision on a Preponderance of the Evidence (12/17/15)

A case decided yesterday by the Fifth Circuit has a pretty good discussion on the effect of § 7491's shift of the burden of proof when the Tax Court may have improperly assigned the burden of proof under that section but had decided the case based on a preponderance of the evidence.  Brinkley v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 21838 (5th Cir. 2015), here.

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:

Thoughts on Estate of Elkins and Valuations (10/21/14)

I write today on the Fifth Circuit's opinion in Estate of Elkins v. Commissioner, ___ F.3d ___, 2014 U.S. App. LEXIS 17882 (5th Cir. 2014), here.  In that case, the Fifth Circuit reversed the Tax Court in a valuation case involving discounts for fractional interests in valuable art.  The Fifth Circuit opens with a summary of its reasoning, such as it is (footnote omitted):

In the Tax Court, the Commissioner steadfastly maintained that absolutely no fractional-ownership discount was allowable. This presumably accounts for his failure to adduce any affirmative evidence—either factual or expert opinion—as to the quantum of such discounts in the event they were found applicable by the court.
The Tax Court rejected the Commissioner's zero-discount position, but also rejected the quantums of the various fractional-ownership discounts adduced by the Estate through the reports, exhibits, and testimony of its three expert witnesses—the only substantive evidence of discount quantum presented to the court.1 Instead, the Tax Court concluded that a "nominal" fractional-ownership discount of 10 percent should apply across the board to Decedent's ratable share of the stipulated FMV of each of the works of art; this despite the absence of any record evidence whatsoever on which to base the quantum of its self-labeled nominal discount.
We agree in large part with the Tax Court's underlying analysis and discrete factual determinations, including its rejection of the Commissioner's zero-discount position (which holding we affirm). We disagree, however, with the ultimate step in the court's analysis that led it not only to reject the quantums of the Estate's proffered fractional-ownership discounts but also to adopt and apply one of its own without any supporting evidence. We therefore affirm in part, reverse in part, and render judgment in favor of Petitioners, holding that the taxable values of Decedent's fractional interests in the works of art are the net amounts reflected for each on Exhibit B of the Tax Court's opinion. This, in turn, produces an aggregate refund owed to the Estate of $14,359,508.21, plus statutory interest.

Just a few paragraphs down, the Fifth Circuit continues:

This entire appeal thus begins and ends with the question of the taxable value of Decedent's fractional interests in those 64 items of non-business, tangible, personal property that were jointly owned in varying percentages by Decedent and his three adult children at the instant of his death. And, the answer to that one question begins and ends with the proper administration of the ubiquitous willing buyer/willing seller test for fair market value: "Fair market value is defined as 'the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.'"

The context for the Fifth Circuit’s opinion is the Tax Court’s opinion below.   In Estate of Elkins v. Commissioner, 140 T.C. No. 5, 2013 U.S. Tax Ct. LEXIS 6 (T.C. 2013), here, the issue was the familiar one of the appropriate discounts for fractional interests.  The IRS generally disfavors fractional interests, due in no small part to taxpayers’ frequent – perhaps even common – use of aggressive discounts which will either prevail because they win the audit lottery or, if caught, will be recognized as improperly inflated and reduced accordingly.  (Most practitioners would say that it is entirely proper to assert aggressive discounts -- but not so aggressive that serious penalties would apply in the full expectation that, if contested, there will likely be some adjustment; that is the way the game is played.) Essentially, as I read the opinion, the Tax Court judge, Judge Halperin, found the estate's proffered too aggressive and found an alternative discount.  The estate, of course, had "experts" to testify as to the discounts.  The IRS essentially had no "experts" to testify that no discount or any discount less than testified by the estate's experts was appropriate.  So, on the record presented, Judge Halperin found that the proper discount was 10%, substantially below the discounts claimed by the estate.  He based that on the entire record before him.