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.

Does Failure to Assert Graev 6751(b) Issue in Claim for Refund Foreclose Asserting in Refund Suit? (9/13/19)

For some reasons, although I had this case in my database, I had not reported on it.  Ginsburg v. United States, 123 A.F.T.R.2d 2019-553 (M.D. Fla. 3/11/2019), here, on appeal to the Eleventh Circuit (No. 19-11836-J).  The Procedurally Taxing Blog has a good write up, so I won't re-do the ground covered there.  See Keith Fogg, Variance Doctrine Trumps IRS Failure to Obtain Administrative Approval of Penalty (Procedurally Taxing Blog 5/6/19).  I do, however, offer some musings.

The issue relates to the requirement that the IRS meet a production burden under § 7491(c) with respect to the written manager approval under § 6751(b).  The issue is sometimes referred to as the Graev issue because of the cases that first prominently raised the issue is a very public way in the first opinion in Graev v. Commissioner, 147 T.C. 460 (2016).  Although the issue was rejected in that opinion, it was later reversed in Graev . Commissioner, 149 T.C. 485 (2017) (reviewed opinion), based on Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017). There has been a lot of litigation about the Graev issue, usually in the Tax Court.  Sometimes, where the IRS can show the proper written approval but had not, consistent with prior Tax Court precedent, introduced the evidence at trial, the Tax Court will permit the IRS to open the record to introduce the approval, and that ends that.  Sometimes the Tax Court will not open the record and, because the IRS had the production burden it did not meet, that ends that as well.

The setting here for the issue is a refund claim.  We all know the general rule that the taxpayer must state the grounds for entitlement to a refund in the refund claim and failure to do so precludes the taxpayer from asserting the grounds in an ensuing refund suit.  Ginsburg did not include the Graev issue in his claim for refund.  The timing of the claim for refund with respect to the Graev issue timeline is not clear from the district court opinion, but I infer that the claim for refund was made and denied before the Chai decision which started the taxpayer wins on the Graev issue.  It might be helpful to look at the time line:

11/30/16	Graev v. Commissioner, 147 T.C. 460 (2016) (holding that the relevant § 6751(b) date is the assessment date not the assertion of the penalties in the notice of deficiency or some predicate act)
1/20/17	IRS denies Ginsburg claim for refund which did not raise the Graev issue.
3/20/17	Chai v. Commissioner, 851 F.3d 190 (2d Cir. 2017) (holding that the Tax Court was wrong in Graev and that the written approval must exist prior to the notice of deficiency or even some predicate action)
12/20/17	Graev . Commissioner, 149 T.C. 485 (2017) (Supplemental Opinion, reviewed, adopting Chai).