Eighth Circuit reverses Tax Court on burden of proof. .

• Author: Lerman, Jerry L.

In Griffn, 8th Cir., 1/14/03, vact'g and remd'g TC Memo 2002-6, the Eighth Circuit ruled that the taxpayer introduced credible evidence sufficient to shift the burden of proof to the Service under Sec. 7491(a). Sec. 7491 was enacted in 1998 as a key provision of the Internal Revenue Service Restructuring and Reform Act of 1998. Griffin is the first circuit court case in which the taxpayer prevailed under Sec. 7491(a).

Background

A taxpayer generally bears the burden of proof under Tax Court Rule 142(a). However, Sec. 7491(a)(1) specifies that if, in any court proceeding, a taxpayer introduces credible evidence as to any factual issue relevant to determining his or her income, estate or gift tax liability, the Service shall bear the burden of proof on that issue. According to Sec. 7491(a)(2), the taxpayer must satisfy recordkeeping and substantiation requirements and cooperate with the Service on reasonable requests for witnesses, information, documents, meetings and interviews.

Sec. 7491(a) does not apply to corporations, partnerships and masts whose net worth exceeds $7 million, nor if any other statute specifies a specific burden of proof. Congress enacted Sec. 7491(a) to create a "better balance" between individual and small business taxpayers and the Service when these taxpayers litigate with the Service; see 1998-3 CB 994.

Sec. 7491 does not define "credible evidence." The Conference Committee Report states that credible evidence is evidence "which the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to presumption of IRS correctness)"; see 1998-3 CB 994-95. This would be evidence sufficient to rule in the taxpayer's favor in the absence of contrary evidence.

Facts

Robert and Julia Griffin owned 100% of the stock of Griffin California Enterprises, Inc., an S corporation; Griffin California owned 60% of two partnerships. One of the partnerships owned a shopping mall, and the other a dance hall. Robert Griffin personally guaranted loans to construct these properties, even though the Griffins had no direct ownership interest in the partnerships or the properties.

In 1995-1996, Robert Griffin paid delinquent real property taxes on the properties. The taxpayers deducted these payments on Part I of their Schedules E, claiming the taxes were on property they owned, which was incorrect. The Service determined that the payments were effectively capital contributions to...