U.S. Tax Court Ruling Offers A Nice Summary Of A Key 'Cracking the Code-...' Point
A correspondent of mine's eye was caught by language in a recent "income" tax case with which the court acknowledges, in its own way, one of the key realities about the structure of the federal revenue law that is revealed in 'Cracking the Code- The Fascinating Truth About Taxation In America'. Ruling in a case titled 'Terry I. and Louise Major v. Commissioner of Internal Revenue', the court admits that if the petitioners had rebutted the "information returns" on which the Commissioner was-- necessarily-- relying in asserting that the Majors had received "income" and were therefore liable for an amount of tax, the court would have been obliged to find in the Major's favor.
Unfortunately for the Majors, they had not read
CtC, and thus were probably not even aware of the evidence with which they were contending. They had offered no response to that evidence, and the court-- quite reasonably, under the circumstances-- ruled against them. Nonetheless, in its effort to appear magisterial by pontificating on the subject, the court reveals that it fully understands this aspect of the structure of the law. Here is the relevant portion of the ruling:
"The Court finds that Forms 1099 demonstrate that Terry received income constituting sufficient evidence in this case. Likewise, Form 1099-B shows that Louise Major received income from "stocks, bonds, etc.", and Form 1099-INT reveals that Louise Major received income from interest. Consequently, respondent provided sufficient evidence linking petitioners to the income underlying the statutory notices of deficiency./8/
However, section 7491 may shift the burden to respondent in specified circumstances, for example, where the taxpayer produces "credible evidence". Sec. 7491(a)(1). The legislative history of section 7491 clarifies the meaning of "credible evidence":
Credible evidence is the quality of evidence which, after critical analysis, 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). A taxpayer has not produced credible evidence for these purposes if the taxpayer merely makes implausible factual assertions, frivolous claims, or tax protestor-type arguments. The introduction of evidence will not meet this standard if the court is not convinced that it is worthy of belief. If after evidence from both sides, the court believes that the evidence is equally balanced, the court shall find that the Secretary has not sustained his burden of proof. * * * [H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995.]"
Further, 26 USC 6201(d) provides for institutional obedience to the same principle. As explained in
CtC, page 183:
"Section 6201, the first part of which we looked at earlier, contains a useful subsection if IRS recalcitrance should force anyone into court:
(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 … the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.
(“Subpart B or C of part III of subchapter A of chapter 61”
refers to sections 6041 - 6050S, among which are those we
examined ‘Crafting A Trade Or Business Plan’ and ‘”W” Is For
Weapon’; and section 6051, which we examined in ‘Lies, Damned
Lies, And W-2’s’; as well as sections 6052- payment of wages in
the form of group-term life insurance, and 6053- Reporting of
The Eighth Circuit Court of Appeals explained this provision
concisely in Mason v. Barnhart, 406 F.3d 962 (8th Cir. 2005):
"Receipt of a Form 1099 does not conclusively establish that
the recipient has reportable income. If a recipient of a Form
1099 has a reasonable dispute with the amount reported on a Form
1099, the Code places the burden on the Secretary of the
Treasury to produce reasonable and probative information, in
addition to the Form 1099, before payments reported on a Form
1099 are attributed to the recipient. See I.R.C. § 6201(d)."
in mind that the "amount reported" means "the amount paid in the
course of the payer's "trade or business"" in the case of a 1099, or
"the amount of "wages" as defined at 3401(a) and/or 3121(a)
reported" in the case of a W-2. It is only those things that
are to be reported on these forms in the first place, so what must
be substantiated under 6201(d) is not the accuracy of the report in
regard to "the amount of dollars paid", but is the accuracy of the
report in regard to "the amount of dollars paid that meet the
statutory specifications for reporting with these forms".)
"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
To learn what constitutes the "credible evidence" to which Congress and the court refer; the legal meaning of "implausible factual assertions, frivolous claims, or tax-protestor type arguments"; why the Commissioner is obliged to rely on "information returns"; why, and how, the law must, and does, provide for their rebuttal and nullification; the legal meaning of the term "taxpayer" and why its use is in 6201(d) is irrelevant; and everything else important to most Americans concerning our tax structure, read 'Cracking the Code- The Fascinating Truth About Taxation In America'