The incredible taxpayer: the U.S. Tax Court and I.R.C. s. 7491.

• Author: Salley, Stephen G.

As part of the Internal Revenue Service Restructuring and Reform Act of 1998, Congress enacted new Internal Revenue Code [section] 7491(a). This "new" statute provides, in part, that if a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's liability, and has complied with certain substantiation and record-keeping requirements imposed by the Internal Revenue Code, then the burden of proof in any court proceeding with respect to such issue is on the Internal Revenue Service. (1) The new statute applies to court proceedings arising in connection with examinations beginning after July 22, 1998. (2) Given the time it takes for a tax audit to move from initial administrative examination to litigation, to date there have been few published opinions interpreting [section] 7491(a), a provision in the law for nearly four years. The U.S. Tax Court, in Griffin v. Comm'r, T.C. Memo 2002-6 (2002), and the U.S. Court of Appeals for the Eighth Circuit, in Griffin v. Comm'r, 315 F. 3d 1017 (8th Cir. 2003), have provided one of the first windows into how the statute may impact taxpayers, their counsel, and the IRS's own attitude toward tax litigation.

By enacting I.R.C. [section] 7491 into law, Congress attempted to address the perceived concern that individual and small business taxpayers are frequently at an unfair disadvantage when litigating with the IRS. (3) The disadvantage derives, in part, from the rules regarding the burden of proof in tax litigation. Historically, the statutory notice of deficiency has been presumed to be correct and the taxpayer is forced to assume the initial burden of coming forward not only with prima facie evidence to support a finding contrary to that of the notice of deficiency, but also must carry the ultimate burden of persuasion on the merits of the dispute. (4) This burden on taxpayers to disprove an assessment has left taxpayer representatives with a sense that they begin many factual cases climbing uphill, the presumption of correctness of the notice of deficiency becoming the handicap in a litigation race, with all ties going to the house, the Internal Revenue Service. (5)

Since the most frequent trier of fact and law in tax cases is the U.S. Tax Court, (6) the procedures and approaches implemented by that court with respect to the burden of proof are key in establishing the "hazards of litigation" assessments of the IRS and the taxpayer and, hence, not only for the trials themselves but the very process of tax dispute settlement. Because of this indirect "trickle down" influence over the totality of the tax process, the Tax Court's attitude toward evidence and persuasion color the entire atmosphere of tax audit and dispute.

In enacting I.R.C. [section] 7491, Congress sought to implement a litigation regime very different from that under the "presumption of correctness" for the Commissioner's findings, and requiring that facts asserted by a taxpayer be accepted as evidence shifting the burden of proof to disprove the assertion of the IRS, so long as the taxpayer meets minimum standards of credibility. (7) If this express Congressional intent is thoughtfully implemented by reviewing courts, [section] 7491 may effect a quiet revolution, rebalancing the playing field between the IRS and the taxpayer in the hundreds of factual tax disputes in which subjective intent, behavior, business purpose, valuation, or other issues subject to testimony by a taxpayer on his or her own benefit is treated presumptively as real evidence rather than merely special pleading.

Historically, the Tax Court, like all courts and triers of fact, has been able to disregard testimony of a taxpayer, utilizing the rubric that it need not accept mere "self-serving" or implausible evidence, (8) Not surprisingly, when the Tax Court labels evidence as "self-serving" it is usually signaling that such evidence is about to be disregarded, virtually as an exercise of judicial notice or clairvoyance, leaving the commissioner armed with a now unrebutted presumption of correctness. Inside the tangle of cases dealing with "self-serving" testimony reside a motley of often unanalyzed law and attitudes which, if [section] 7491(a) is to be respected, will require the Tax Court (and indeed all courts with tax jurisdiction) to revisit and analyze with greater precision. Simply stated, the courts will need to...