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.

Notes on Dawson Available Documents and Tax Court Style Guide (5/9/24)

The purpose of this blog entry is to inform readers (some of whom may already know some of the items) of certain matters relating to Tax Court practice.

 MATTERS RELATED TO THE DAWSON SYSTEM:

1. Documents available Online in the DAWSON System. First, there is no permanent link for opinions. Those wanting opinions or orders have to do so in the following alternative manners:

a. the “Today’s Opinions” or “Today’s Orders” pages, here and here, respectively which are available only on day of publication);

b. through the Docket Entries for the specific Case, here.

c. through the Opinion Search here or Order Search here. In addition to specific opinion searches, the Opinion Search offers significant database search possibilities by types of opinions (T.C., Memorandum, Summary, and Bench), by Tax Court Judge, and by dates (this latter permitting a search for cases that are no longer on the Today’s Opinions discussed in paragraph 1.a.)

I am not sure precisely why there are no permanent links provided for opinions, although I understand it relates to the design of the DAWSON system.

As to search by Judge with no other limiting parameters, the pages display only “first 100 matches;” in theory, this might limit the usefulness for certain types of studies. But within those parameters, certain analyses may be made. For example, having too much time on my hand, I wanted to see how productive the Active Judges were in terms of their T.C. and Memorandum Opinions. I started with a  prolific generator of opinions, Judge Lauber who, although a Senior Judge since January 1, 2020, produced 100 T.C. and Memorandum Opinions from 7/26/21 (the earliest date that the search reached the maximum 100 opinions for Judge Lauber) to present (5/9/24). I then used the tool to determine the number of opinions rendered by the presently active Judges during the same period. Here are the results:

Those are the raw data; I draw no conclusions from these data because I am sure there is a lot of nuance behind them.

The Treasury Green Book Proposals for Tax Legislation on Procedure (including the NTA Blog Regarding the § 6751 Proposal) (5/7/24)

The National Taxpayer Advocate, currently Erin M. Collins, offers a blog that often contains information useful for tax procedure enthusiasts. The recent blogs are here. The most recent is Treasury FY 2025 Green Book Proposes to Essentially Eliminate Written Supervisory Approval for Penalties (NTA Blog 5/2/24), here.
 
The NTA laments that Treasury wishes to do away with § 6751(b)’s written supervisory approval requirement.  Section 6751(b) is a poorly drafted statute causing considerable confusion and requiring considerable administrative and judicial resources. From my perspective, the commotion around § 6751(b) has served little purpose other than rewarding tax abusers by avoiding penalties because of an IRS procedural foot-fault that really did not affect those taxpayers negatively. Nevertheless, being the NTA, the NTA must advocate for the taxpayers and finds some value in the written supervisor approval requirement. For Treasury’s view on the subject, readers might want to read the section of the Green Book General Explanations starting on p. 175, here.
 
The Green Book catalogs Treasury’s proposals to Congress for changes in statutory law. The Treasury General Explanations of the Green Book are here. The Table of Contents for the General Explanations is here. The General Explanations make the proposals in a format discussing present law, reason for change, and the proposals for change.

I thought I would mention without detail some of the other Green Book proposals that might be of interest to tax procedure enthusiasts. These proposals are under headings titled Improve Tax Administration and Improve Tax Compliance (see Table of Contents pp. iii & iv which provide links for the items in the Table of Contents). All of the proposals are important, but the ones I thought worth mentioning are:
 
1. The modification of § 6751(b)’s written supervisor approval requirement discussed above, starting at p. 175 here. (JAT Note: One matter perhaps relevant here is that Treasury has Proposed Regulations that attempt to make some sense and order from the 6751(b)’s written supervisor approval requirement. See Musings on Proposed § 6751(b) Regulations and the Potential Demise of Chevron Deference (Federal Tax Procedure Blog 1/8/24; 1/15/24), here.)
 
2. Revision of § 6103 to clarify that Tax Return Information Disclosed on the Public Record in Judicial Proceedings or in Publicly Filed Notice of Federal Tax Lien Is Not Tax Return Information Prohibited From Disclosure (General Explanations starting at p. 187, here.)
 
3. Allow Admission in Innocent Spouse Cases of Relevant Evidence at Trial (Rather than Limited to Administrative Record) (General Explanations starting at p. 190, here.)

Excellent Article on Practical Effects the Administrative Law World Awaits Supreme Court Opinion(s) on Chevron (5/5/24)

The flood of Chevron comments seems to have slowed down while the Supreme Court is considering Chevron for what further havoc it will wreak in pursuit of its conservative agenda. Readers will certainly know that Chevron is a favorite bogeyman (real or feigned) in the conservative community.

I write to point readers to an article that I found very good about what might happen with the much-anticipated opinion. The article is James Downing, Energy Lawyers Debate the Impact of Losing the Chevron Deference (RTO Insider 4/29/24), here. The article reports on a discussion among “energy lawyers” which are perhaps not as nerdy as tax lawyers because of energy’s long-standing reputation of being major risk-takers. One of my favorite memories from moving to Houston in 1977 was an ad from a local entrepreneur, Eddie Chiles, proclaiming “If you don't have an oil well, get one,” see Wikipedia entry here. Tax lawyers are not identified with any particular risk-taking community and have long been thought as so nerdy as to be risk-averse (that reputation was challenged as tax lawyers forayed into bullshit tax shelters in relatively recent memory).

At any rate, the article reports interesting comments from the lawyers serving in energy regulator roles. I quote excerpts from the article:

          Chevron makes sense as a legal doctrine and provides judges with an easy way of affirming an agency’s decision-making when there is ambiguity in the law, FERC General Counsel Matthew Christiansen said at the EBA’s Annual Meeting. But underlying those decisions is some basic common sense being applied by the judges.

          “Because I think that Chevron is largely deployed as a way of providing a compelling path to affirm an agency action, I’m not convinced that the loss of Chevron in many cases, if that is indeed what happens, is going to lead to wildly different outcomes,” Christiansen said. “I’m sure it’s going to lead to different outcomes on the margins. But at the end of the day, I’m a big believer in agencies’ ability to still put forth compelling justifications.”

          Chevron has provided a lot of value over the decades, but the politics have reversed completely since it was first decided, DOE General Counsel Samuel Walsh noted. The late Justice Antonin Scalia, a textualist, was a big fan of the doctrine, and Justice Clarence Thomas authored the Brand X decision in 2005 that extended deference to the Federal Communications Commission and kept internet service providers from being regulated as common carriers.

          “Some of the most important Chevron cases were cases where agencies were using the flexibility afforded by deference to regulate in a more light-handed way, or maybe not at all,” Walsh said.

          The biggest area where DOE might be affected by the change in precedent would be on its ability to set efficiency standards for electric appliances, he said.

          “But to my knowledge, we’ve only been upheld at Chevron Step 2 once,” Walsh said; Step 1 is deciding whether the law’s intent is clear from the text. “We’ve done hundreds of rules over the last four decades, and I think we’ve only benefited from it in a clear and explicit way once.”

          DOE has benefited from the law more in its other functions such as litigation around nuclear waste storage in the 1990s and in litigation against the federal power marketing administrations it oversees. The law that governs sales from federal dams specifically calls “municipalities” preferred customers, so in the early 1990s, some “clever” city governments asked the Western Area Power Administration to sell them cheap electricity, Walsh said. WAPA argued that the term “municipalities” meant municipal utilities, and Chevron helped it carry the day in court.

*  * * *

DC Circuit Holds IRS Has Assessment Authority for § 6038(b) Penalty, Reversing Tax Court (5/3/24; 11/19/24)

In Farhy v. Commissioner, 100 F.4th 223 (D.C. Cir. 5/3/24), CADC here**, TN here, and GS here, the Court of Appeals (Judge Pillard author) held that the IRS has assessment authority for the § 6038(b) penalty. In so holding, the Court rejected the Tax Court holding that the IRS did not have assessment authority. Judge Pillard’s opinion is well-reasoned and presented. Although it is not a short opinion, I highly recommend reading the whole thing.

I will say that the opinion talks in terms of Congress’ intent. Thus, for example, summarizing the reasoning (Slip op. 13-14, emphasis supplied by JAT):

We need not embrace either party’s tax code-wide default rule to resolve this case. We accordingly do not pass on those broader theories beyond explaining why Farhy’s does not preclude assessment of section 6038(b) penalties. Instead, we conclude that a narrower set of inferences suffices to show that Congress intended to render those penalties assessable. Read in light of its text, structure, and function, section 6038 itself is best interpreted to render assessable the fixed-dollar monetary [*14] penalties subsection (b) authorizes. As a result, the Commissioner’s authority to assess all “assessable penalties” encompasses the authority to assess penalties imposed under section 6038(b).

My analysis is that there was no congressional intent on assessment authority issue. But given the schema, one can fairly infer that, had Congress had an intent on the assessment authority issue, it would have been to confer assessment authority on the IRS. That is simply filling in the gaps as a matter of statutory interpretation.

For my thoughts on the issue (noting particularly my skepticism on the Tax Court’s now reversed decision, see my prior blog posts (chronological order)):

• Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Delinquencies (Federal Tax Procedure Blog 4/3/23; 4/23/23), here.
• Regulations Interpreting Pre-1996 Code Provisions; Fixing Farhy (Federal Tax Procedure Blog 5/11/23; 5/12/23), here.

Added 5/3/35 9:00 pm:

JAT Comments:

7th Circuit Affirms Tax Court Determinations on Mixed Questions for Clear Error (5/2/24)

In Moore v. Commissioner, ___ F.4th ___ (7th Cir. 4/30/24), CA7 here and GS here, in a brief opinion, the Court affirmed the Tax Court’s holding/finding that the taxpayer had failed to prove key factual elements for the §41 tax credit for “qualified” research expenses. The Court holds (Slip op. 2-3): 

           The Tax Court found it impossible to answer the “was it qualified?” and “how much?” questions. The Moores call this a legal error, but it was a finding of fact under the approach used to differentiate fact from law in U.S. Bank, N.A. v. Village at Lakeridge, LLC, 583 U.S. 387, 395–96 (2018). (That is to say, the finding is case-specific rather than based on resolving a dispute about what a legal rule provides.) As a factual finding, it is reviewed for clear error, and we do not see any error at all, let alone a clear one.

The case is unexceptional but I thought readers might want more on the Supreme Court case cited, U.S. Bank, N.A. v. Village at Lakeridge, LLC, 583 U.S. 387, 138 S.Ct. 960 (2018) (SC here, SC U.S. Report Preliminary Print here, and GS here ), the Court determined the scope of review (de novo or clear error) for bankruptcy court determinations of nonstatutory insiders (i.e., person not in the “includes” (non-exclusive) specific definition in the statute). "Insider" is a legal definition that applies to specific facts. Was the bankruptcy court’s determination of insider status reviewable under the clear-error standard (for factual determinations) or the de novo standard (for legal conclusions)?

I provide here the Court’s Syllabus because I think is a pretty good summary:

          Held: The Ninth Circuit was right to review the Bankruptcy Court's determination for clear error (rather than de novo). At the heart of this case is a so-called “mixed question” of law and fact—whether the Bankruptcy Court's fndings of fact satisfy the legal test chosen for conferring nonstatutory insider status. U. S. Bank contends that the Bankruptcy Court's resolution of this mixed question must be reviewed de novo, while Lakeridge (joined by the Federal Government) argues for a clear-error standard.

Getting the Latest Case Citations – Supreme Court and Tax Court T.C. Opinions (4/29/24)

In today’s Professor Steve Vladek substack offering, commenting on some Supreme Court Justices’ quixotic quest to write a rule for the ages (here), Vladek offered down-page this additional discussion:  SCOTUS Trivia: Earlier Access to Official Citations (One First 4/29/24):

I tweeted about this when it first appeared last year, but the Court’s new “Reporter of Decisions,” Rebecca Womeldorf, has already implemented one significant reform that will be of interest to anyone who prefers citing as many Supreme Court decisions as possible to their official source (the U.S. Reports).

In the old days, it would take 3-4 years from when a Supreme Court decision would come down to when the Court would release the “preliminary part” for the corresponding volume of the U.S. Reports. Thus, any citation to recent Supreme Court decisions was necessarily forced to rely upon unofficial sources—West’s Supreme Court Reporter; Lexis’s Lawyers’ Edition; or others. This didn’t usually matter all that much; those reporters tend to be pretty darn accurate. But there’s a reason why official sources are preferred.

Well, the Supreme Court’s website is now providing official citations to decisions of the Court within weeks of those decisions coming down (and, it appears, is also working backwards to provide citations to rulings from the last few terms, as well). So as opposed to a lag of 3-4 years, now there’s a lag of only 3-4 weeks. A quick glance at the Court’s website shows that there are official citations for every decision through FBI v. Fikre, from March 19 (601 U.S. 234 (2024), for those who are scoring at home).

Again, this may matter to only three of you. But to the three of you who, like me, take special satisfaction from citing recent cases properly, this is good trivia. 

D.C. Circuit Affirms Tax Court's Holdings on Written Supervisor Approval, Qualified Amended Return, and Statute of Limitations on UBS JDS (4/25/24)

In Lamprecht v. Commissioner, ___ F.4th ___ (D.C. Cir. 4/23/24), D.C. Cir. here and GS here, the Court affirmed the Tax Court in Lamprecht v. Commissioner, T.C. Memo. 2022-91, here. See Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (Federal Tax Procedure Blog 9/1/22), here. In so doing, the Court (Judge Walker) steps through the arguments and the resolution in a crisp straightforward opinion.

The background discussed in the opinion is that the IRS issued a John Doe Summons to UBS in 2008 (which essentially set off the IRS and DOJ foreign account initiative). UBS did not immediately reply with full and complete response. As a result, the civil statute of limitations for persons within the scope of the summons (U.S. person account holders) was suspended and did not pick up until the summons was resolved. Suspension of Statute of Limitations From the UBS John Doe Summons (Federal Tax Crimes Blog 1/26/14), here.

The opinion holds in the Court’s outline format:

I. The IRS Complied with 26 U.S.C. § 6751(b)(1)

A. It Doesn’t Matter When (or Whether) a Supervised
Tax Examiner Signs the Approval Required by
§ 6751(b)(1)’

B. The IRS May Use a Form 5345-D to Comply with
§ 6751(b)(1)

C. The Tax Court’s Refusal to Exclude the Forms 5345-D
from Evidence Was Not an Abuse of Discretion

II. The Lamprechts’ Corrected Returns Did Not Protect
Them from Penalties [QAR Issue]

A. The [UBS] Summons Was Legal

B. The Summons Relates to a Benefit Claimed on the
Lamprechts’ Original Tax Returns

III. The Penalty Assessments Were Not Too Late

A. The [UBS] Summons Was Not Resolved in August 2009

B. The [UBS] Summons Was Legal (Again)

 JAT Notes:

Seventh Circuit Rejects Strict Irreparable Injury Requirement for § 7402(a) Injunctive Relief for Government (4/25/24)

In United States v. Olson, ___ F.4th ___ (7th Cir. 4/11/24), CA7 here and GS here, the Court discussed the “irreparable injury” requirement for equitable injunctive relief for the Government under § 7402(a). The opinion is short and crisply states the analysis, so I will just copy and paste the core discussion:

          The United States filed this suit seeking both a money judgment and an injunction compelling the Olsons to deposit withholding taxes into a bank using an approved payroll service. See 26 U.S.C. §§6302, 6157; 26 C.F.R. §§31.6302-1, 31.6302(c)-3. The proposed injunction also would require the Olsons to pay their taxes ahead of private creditors, permit the IRS to inspect their books. and records, and notify the IRS if they start another business.

          The district court ordered the Olsons to pay more than $300,000. But the court denied the motion for an injunction, relying on language in United States v. Benson, 561 F.3d 718, 724 (7th Cir. 2009). See 2023 U.S. Dist. LEXIS 8472 (N.D. Ind. Jan. 17, 2023). The United States sought reconsideration, observing that this portion of Benson interpreted 26 U.S.C. §7408(b), which deals with tax shelters, while the request in this case rests on 26 U.S.C. §7402(a), which reads:

          The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.

          Under this statute an injunction may issue if “necessary or appropriate for the enforcement of the internal revenue laws.”

          The district court understood §7402(a) to call for consideration of the traditional factors, under which a plaintiff seeking a permanent injunction “must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). Cf. Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008) (similar factors for preliminary injunction). As the district judge saw matters, the United States has not established irreparable harm because it will not become insolvent if the Olsons do not pay their taxes. 2023 U.S. Dist. LEXIS 40549 *7 (N.D. Ind. Mar. 9, 2023). The court added that the United States does not face irreparable injury, because it can get future money judgments against the Olsons if they persist in not paying taxes.

          By the district court's lights, no court ever would order relief under §7402(a), because the national government's solvency does not depend on tax payments from any one person or business, even the largest. Yet judges should not interpret statutes in a way that makes them ineffectual. Nor should a court be sanguine that the IRS can collect from the Olsons just because it has a money judgment. They have not paid in the past and assert inability to pay in the future. The sort of relief the United States seeks in this case creates a mechanism for payment: the use of a payroll service that will turn over with-holding taxes (at least) whether or not the Olsons cooperate. Ability to audit the Olsons' books without the need for subpoena-enforcement proceedings also will assist in tax assessment and collection.

          Application of the traditional factors is straightforward. (1) The United States suffers irreparable harm in the sense that it is unlikely to collect future taxes unless some intermediary such as a payroll processor superintends how the business's income is distributed. (2) Money damages are inadequate because the Olsons assert both inability and unwillingness to pay. (3) The balance of hardships favors relief (the Olsons' belief that they are entitled to prefer other uses of money amounts to little more than disagreement with the tax laws). And (4) the public interest calls for ensuring that the Olsons have the same costs (taxes as well as wages) as their competitors. The district court's contrary decision on these factors is an abuse of discretion.

Court Affirms FBAR Willful Penalty Despite Apparently Accepting NonFiler's Claim of Innocent Ignorance in the Face of Damning Facts (4/24/24; 4/25/24)

In United States v. Vettel, ___ F. Supp. 3d ___ (D. Neb. 4/11/24), CL here and GS here [to come], the Court held, after bench trial, that David Vettel was liable for the willful FBAR penalty. The Court reasoned that, although the Court apparently accepted Vettel’s testimony that he did not know of any tax liability related to the offshore accounts or of the FBAR filing requirement, he had enough objective indications that he was reckless and, therefore, willful for purposes of the FBAR penalty.

I say that the Court “apparently accepted Vettel’s testimony,” Given that reckless conduct alone would suffice for liability, the Court did not have to accept his testimony of ignorance. Indeed, that is the way the Government couched its post-trial brief. See brief here.

The Government’s recitation (brief pp. 13-34) of the objective indications of at least recklessness are damning indeed and certainly permit an inference that Vettel knew of at least his tax reporting obligation and likely also FBAR reporting obligation and intended to evade them. Thus, the brief says (p. 18) “Vettel admits that it is ‘not logical’ to believe that foreign income he earned is not taxable anywhere.” Further, the brief says (p. 18) in preparing his 2012 return, Vettel’s accountant asked questions about foreign income, causing Vettel to disclose a Turkish account but not the Swiss BSI account, resulting in an incomplete FBAR being filed. Also, David Vettel hid the BSI account from his wife, Crystal. (Opinion pp. 8-9.) There are many more facts at least objectively showing Vettel was willful under the FBAR standard and certainly capable of casting doubt on Vettel's claims of innocent ignorance.

I note that David Vettel, with his wife Crystal Vettel, had a Tax Court case, Docket Number 16988-19 (Dawson here). That case was resolved by stipulated decision on 11/12/20, although Dawson does not have a link to any document (even the stipulated decision that I thought should have a link).