Home | News | Site Map | Search | Contact


Observations in regard to a diverse selection of tax-related legal topics


Why The Filer Is The "Petitioner" In Tax Court

A LOT OF FOLK HAVE BEEN TROUBLED OVER THE YEARS by what seems an improper role-reversal (and much more importantly, an improper shift in the burden of proof) in "Tax Court" proceedings. In Tax Court, the person targeted by a "Notice of Deficiency" is the one cast in the role of plaintiff, and bearing a burden of proof, with the IRS "determination" enjoying a presumption of correctness.

To many folks, this seems to be an example of the twisted character of law concerning the tax. But the perception is only due to a misunderstanding of "deficiencies" and the role of Tax Court.

The reason the filer is the "petitioner" (that is, the plaintiff) in a Tax Court proceeding even though it seems to him that he is not the one initiating the action is because "deficiency" proceedings actually only concern the applicability of exemptions, deductions, credits and the particular rate of tax claimed by the filer on his return in the first place-- all matters of variable applicability the propriety of which is within the expertise and authority of the IRS to determine. So actually, the filer HAS initiated the action-- he did so when he filed his return claiming those exemptions, deductions, credits and rate.

A Notice of Deficiency is merely an IRS determination concerning a filer's exemption, deduction, credit and rate claims. A Petition to Tax Court is simply a filer's request for a redetermination, if he disagrees with the IRS's conclusions and believes he can show why they are wrong.

The law defining "deficiency" does NOT provide for consideration of the correctness of the amount of "income" reported on a return, or assertions that all "income" was not reported. IRS assertions that the amount of "income" reported on a return were too low would necessarily put the agency in the plaintiff's role in the action, since under these circumstances it would be the one making the initiating (that is, positive) claims.

IN LARGE PART, CONFUSION HAS ARISEN ON THIS ISSUE because of the unfortunate practice of "non-filing" by some seriously misled folks. Non-filing creates a situation in which the IRS appears to be the initiator of the contest while still being spared the burdens of proof, because of an evolved doctrine concerning non-filing in the face of "information return" allegations.

Under this doctrine, if someone hasn't filed a return, he is deemed to have agreed with the assertions by payers (such as on W-2s and 1099s) of which he has been put on notice, and thus to have effectively answered those allegations with a declared amount of "income" equal to the payer allegations, no exemptions or deductions claimed, and the application of a tax rate of "0". The IRS responds with a Notice of Deficiency proposing the application of a single exemption, the standard deduction and what should be the correct rate of no tax to that presumptively-agreed-to amount of "income".

Because no original return appears in the record, and yet an "examination report" is offered listing amounts of "income", and a deficiency is proposed asserting an amount of tax due, it appears in such a case that the IRS has initiated everything and should be in the plaintiff's role bearing the burdens of proof in every respect. But it is really the non-filer's silent acquiescence to the "information return" allegations that is the starting point for the action.


The Measure Of "Reasonable" And "Credible"


(d) Required reasonable verification of information returns

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.

26 USC 7491(a) says the same (also with the requirement for its application that the Secretary 's reasonable requests have been cooperated with):

Sec. 7491. - Burden of proof

(a) Burden shifts where taxpayer produces credible evidence

(1) General rule

If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.

The measure of "reasonable" in 6201(d)'s "reasonable dispute" specification, and "credible" in the similar language of 7491(a) isn't how the dispute or evidence strikes a judge's fancy prior to an evidentiary hearing. "Reasonable" in that context means "constructed and presented in a way specified by protocols"-- that is, on the designated forms and without self-contradiction or other invalidating flaws.

A dispute or evidence presented in this reasonable and credible way then must be tested in a proper adversarial proceeding. In such a proceeding the government, pursuant to the specifications of 6201(d) and 7491(a), bears the burden of proof-- and a burden specifically requiring evidence outside of the "information return" being disputed, as explicitly said at the very end of 6201(d): "the Secretary shall have the burden of producing reasonable and probative information ... in addition to such information return." Only after such a proceeding can a judge then make a finding as to the disputed facts.

"Defendants are correct that the 1099s, on their own, do not create tax liability. Form 1099 is an informational return, filed by a third party to the relationship between the IRS and the taxpayer, which reports income as that third party believes it to be. The Internal Revenue Code makes it clear that a Form 1099 is not the final word on what a taxpayer's taxable income is. As provided in 26 U.S.C. § 6201(d):

"In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item reported on an information return ... by a third party ... the [IRS] shall bear have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return."

The Tax Court has held that a Form 1099 is insufficient, on its own, to establish a taxpayer's taxable income. See Estate of Gryder v. Commissioner, T.C. Memo. 1993-141, 1993 WL 97427, 65 T.C.M. (CCH) 2298, T.C.M. (RIA) 93,141 (1993), citing Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.1991). See also Portillo v. Commissioner, 988 F.2d 27, 29 (5th Cir. 1993) (a Form 1099 is "insufficient to form a rational foundation for the tax assessment against the [taxpayers in this case]."). Thus, while a Form 1099 can serve as the basis for the inception of an IRS investigation, it cannot and does not, on its own, create tax liability or establish how much income the taxpayer actually received."

Daines v. Alcatel, S.A., 105 F.Supp.2d 1153, 1155 E.D. Washington, 2000

"That which is not in fact the taxpayer's income cannot be made such by calling it income."

Hoeper v. Tax Comm'n of Wis., 284 US 206, 215 (1931)

"Credible evidence [under 7491(a)] is the quality of 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 the judicial presumption of IRS correctness)."

H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995 (emphasis added)

Also see Mason v. Barnhart, 406 F.3d 962 (8th Cir., 2005); Rendall v. CIR, 535 F.3d 1221 (10th Circ., 2008) and cases cited; and Perez v. CIR, T.C. Summary Opinion 2009-94.

NOTE: Don't be misled by the appearance of the word "deficiency" in 6201(d)-- although the rule would apply in a tax court proceeding like in any other court proceeding, 6201 is not the section concerned with "deficiencies" as custom-defined in tax law and relevant to Tax Court proceedings, such as is discussed in the preceding article above. What is meant by "deficiency" as used here is not an indicator that the Secretary is authorized to assert "information return" allegations in statutorily-specified "deficiency proceedings" of the sort conducted in Tax Court, other than as discussed above concerning cases of non-filing.

NOTE II: Some material related to this topic can be found here.


Regarding Consent

AXIOMATICALLY, "CONSENT" CAN NEITHER BE COMPELLED nor required, and by definition, it is always the right of a party from whom it is needed or desired to withhold consent. By the same token, consent is irrelevant to what is mandatory, and to "withhold consent" from what is mandatory is legally meaningless. It imposes no harm on any party and has no effect for which remediation is needed or even possible; further, if consent cannot be withheld, then it IS not being withheld, regardless of what expressions are made.


All Pay Is Not "Wages"

PERIODICALLY, A LITIGANT OR CLAIMANT will run into some idiotic government-serving argument, assertion or assumption that all amounts paid by a boss to a worker for labor qualify as "wages" as the term is meant in tax law. This, of course, is because what DOES qualify as tax-context "wages" is a measure of taxable activities and of corresponding liability, and the revenue-hungry state would like everyone to treat every payment for labor as that kind of taxable-activity measurement.

But of course, "wage"-qualified payments are only a subset of all payments for labor. Happily, the law makes this plain even without needing to go to the fact that were it otherwise, and did the tax laws attempt to treat all pay for labor as a measure of tax liability (meaning, treat all work for which anyone is paid as a taxable activity), the tax would be a capitation, and could only be applied by apportionment.

For instance, the definition of "wages" in the tax law itself (at 26 U.S.C. 3401(a)) distinguishes that subset from the larger class of all pay for labor. The definition of "wages" is remuneration to an "employee" as defined at 3401(c). That definition incorporates as one of the exemplars of the subset of all workers "an...employee...of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing."

By listing as objects of the term being defined a particular subset of employees from out of the overall class of all employees, commonly-defined, the law is making clear that the term being defined does NOT encompass the overall class of which the listed and distinguished subset was already a part and which there would be no reason to mention if the overall and all-inclusive class was being described. Rather, the law is saying "The term "employee" being defined here consists of this subset of employees distinguished from out of the overall class 'employee', plus other workers for pay who share the characteristics which distinguish those explicitly listed as exemplars."

The statutory language at 26 U.S.C. 3402(p)(3)(B) helpfully illustrates and emphasizes this point. Here the law explicitly addresses (and thus admits the existence of) pay for labor which is not "wages" (red text added and some portions bolded for clarification):

(3) Authority for other voluntary withholding

The Secretary is authorized by regulations to provide for withholding—

(B) from any other [non-"wages"] type of payment with respect to which the Secretary finds that withholding would be appropriate under the provisions of this chapter, if the employer and employee, or the person making and the person receiving such other type of payment, agree to such withholding. Such agreement shall be in such form and manner as the Secretary may by regulations prescribe. For purposes of this chapter (and so much of subtitle F as relates to this chapter), remuneration or other payments with respect to which such agreement is made shall be treated as if they were wages paid by an employer to an employee to the extent that such remuneration is paid or other payments are made during the period for which the agreement is in effect.