Court Reverses District Court on Summary Judgment Holdings That (i) Taxpayer Owed Tax and Was Not Due a Refund and (ii) that, Even if Taxpayer Owed Tax, Taxpayer Did Not Owe Interest Because of Reasonable Cause (11/24/24)

In Rockwater, Inc. v. United States, ___ F.4th ___, 2024 U.S. App. LEXIS 29135 (11th Cir. 2024), CA11 here and GS here, the Court (i) reversed the district court’s summary judgment holding that the taxpayer’s peanut trailers were not “off-highway transportation vehicles” exempt from the federal excise tax on the first sale, (ii) reversed the district court’s holding on summary judgment that the taxpayer had reasonable cause not paying and thus was not subject to interest on the tax liability, and (iii) let stand the district court’s holding on summary judgment that, even if the taxpayer owed the tax, it had reasonable cause that exempted it from the penalty delinquency penalty. The Government did not appeal the latter penalty holding.

The Government appealed the liability holding ((i) above) but did not separately appeal the interest holding, on the basis that, interest on underpaid tax is mandatory and not subject to any reasonable cause exception; in other words, should the Government prevail on the tax due holding, it necessarily required it to have interest on the tax thus due.

The taxpayer’s liability for the tax offers no particularly interesting tax procedure issues. The case was a straight-forward refund suit. However, I did note one point in the majority opinion that seems to be a feint rather than necessary or even appropriate to explaining its holding.  The Court says at the beginning of its section explaining its holding: 

          In tax refund lawsuits, the IRS Commissioner's assessment has "the support of a presumption of correctness." Welch v. Helvering, 290 U.S. 111, 115 (1933). "[E]xemptions from taxation are to be construed narrowly." Mayo Found. for Med. Educ. & Rsch. v. United States, 562 U.S. 44, 59-60 (2011) (citation and quotation marks omitted).

The Court reaches its holding of liability for the tax based on straight-forward interpretation of the statute and regulation, with no seeming need for or benefit from any presumption of correctness or narrow construction for exemptions.

This is a similar phenomenon often appearing in Tax Court cases where, sometimes at significant length, the Tax Court thrashes around burden of proof principles sometimes without nuance but then holds that, in any event, that thrashing around was not really necessary because it finds all the dispositive facts by a preponderance of the evidence. (Thus, although not technically necessary, the thrashing around on burden of proof does signal to the Court of Appeals that the Tax Court judge thought about burden of proof, but at the risk that a Court of Appeals may not be particularly impressed if the thrashing around is not consistent with the Court of Appeals’ or some panel member’s thinking on burden of proof.)

Statistical Sampling for Large Dataset Issues in Tax Litigation (3/23/24)

In Kapur v. Commissioner, T.C. Memo. 2024-28, GS here,  the Court (Judge Pugh) set out the issue as follows (Slip Op. 2, two footnotes omitted):

    Before the Court is petitioners' Motion for Protective Order. The parties dispute whether discovery and trial should be limited to a sample of projects at this stage of litigation. We decline to order sampling for the reasons summarized below. n4
   n4 This appears to be a recurring issue. See, e.g., Phx. Design Grp., Inc. v. Commissioner, No. 4759-22 (T.C. Aug. 29, 2023) (order); Feller v. Commissioner, No. 11581-20 (T.C. Aug. 10, 2023) (order). Respondent referred us to these orders but of course they are not precedential.

The Court reviews (Slip Op. 5) sampling by agreement of the parties (whether encouraged by the Court or not). The Court then says (Slip. Op. 5-6, bold face supplied by JAT):

    Respondent also claims that we do not have discretion to order sampling at the request of petitioners if respondent objects. We disagree: We do have authority to limit discovery (including by ordering sampling) over the objection of a party. See Rule 70(c)(1). Nonetheless, we agree that exercising our discretion to limit the scope of discovery and trial in 6*6 accordance with petitioners' Motion for Protective Order is improper at this stage. The only issue in this case is whether petitioners are entitled to the research credits claimed for the years in issue. Evaluating compliance with section 41 necessarily involves consideration of the underlying business components. And petitioners agree that they have the burden of showing entitlement to the claimed research credits. See Feigh, 152 T.C. at 270. As we have said previously, "[a]bsent an agreement between the parties, project sampling improperly relieves the taxpayer of its burden of proving entitlement to the research credit claimed." Betz v. Commissioner, T.C. Memo. 2023-84, at *77 n.30 (citing Bayer, 850 F. Supp. 2d at 538, 545-46).

As I understand the Court said it can order sampling for discovery purposes but cannot order sampling over IRS objection for resolution of the merits on issues as to which the taxpayer bears the burden of persuasion.

It is not clear to me that the final conclusion is consistent with the Court’s earlier rejection of the IRS claim that Court does not have authority to order sampling when the IRS does not agree. Another way of reading the paragraph is that the Court will not order sampling based on the stage of pretrial development right now in Kapur.

This raises some issues for me, but let me start with my understanding of good sampling that permits reasonable inferences about the universe of data that is sampled. Those reasonable inferences can be stated in possibilities or margins of error for the inferences, which generally can be slimmed down by increasing the sample size.

FTPB 2020 Update 06 – Presumptions in Litigation (11/6/20)

In the discussion of Presumptions in the 2020 editions of the Federal Tax Procedure book (Practitioner Ed. pp. 576-577; Student Ed. pp. 399-400), I quote Rule 301. Presumptions in General Civil Actions and Proceedings.  I had not updated that discussion to include the revision of Rule 301 in 2011.  (Apologies to readers.)  As revised the Rule (here) reads:

Rule 301. Presumptions in Civil Cases Generally

In a civil case, unless a federal statute or these rules provide otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption. But this rule does not shift the burden of persuasion, which remains on the party who had it originally.

As stated in the Committee Notes on Rules-2011 Amendment, the Rule was amended in 2011 solely for readability and stylistic reasons but without change in substance from Federal Rule of Evidence 301 as enacted in 1976.  That means that the discussion in the 2020 editions is appropriate for present purposes.

I have also in the working draft for the 2021 editions of the Federal Tax Procedure book made other changes in the section dealing with Presumptions.  Those changes are not materially different from the discussion in the 2020 editions, so I do not offer them now.  However, those wanting most of that nuance can find it in John A. Townsend, Burden of Proof in Tax Cases: Valuation and Ranges—An Update, 73 Tax Lawyer 389, 403-407 (2020).  (The article can be viewed and downloaded at SSRN here.)

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.

Render Unto Caesar -- Another Intersection of Alleged Religion and Tax (10/9/12)

In Hovind v. Commissioner, T.C. Memo. 2012-281, here, the Tax Court decided decided that the taxpayer had "had unreported Schedule C income and expenses (collectively, net profit) attributable to Creation Science Evangelism (CSE) and Dinosaur Adventure Land (DAL) for each of the years at issue; " (ii) that the taxpayer whether petitioner is liable for additions to tax under section 6651(a)(1) for failing to timely file her income tax return for each of the years at issue; and (3) and that the taxpayer is liable for the fraud penalty under section 6663(a) for each of the years at issue.

The following is from the opinion and gives a good introduction (footnotes omitted):\

Mr. Hovind established CSE in 1989. CSE purported to be a nondenominational religious organization that advocated the message of creation science and opposed the theory of evolution. CSE promoted its message through live lectures by Mr. Hovind and Eric Hovind. Mr. Hovind frequently traveled, domestically and internationally, for speaking engagements, and petitioner occasionally accompanied Mr. Hovind on these trips.

The Ministry then somehow developed, with various revenue generating projects.  The Court then continued (some footnotes omitted):