Opinion
180-19
04-03-2024
SHARON L. DAVISON & ALLEN R. DAVISON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth A. Copeland Judge
Before the Court is Petitioners' Motion to Shift the Burden of Proof (Motion), filed August 14, 2023. Respondent filed his Response to Petitioners' Motion on September 25, 2023. In the Motion, Petitioners, Sharon and Allen Davison, represent that they have "complied with the requirements of IRC Section 7491 to shift the burden of proof" and also move that the Court "apply the more stringent 'clear and convincing evidence' standard of proof upon the Respondent."
Background
The following background is drawn from the parties' pleadings and Motion papers. It is stated solely for the purpose of ruling on the Davisons' Motion and not as findings of fact. The Davisons resided in Kansas when they timely filed their Petition.
Respondent issued a notice of deficiency determining income tax deficiencies and accuracy-related penalties (under section 6662) for the Davisons' 2013 and 2014 tax years. The deficiency determinations stemmed from the following: disallowance of net operating loss (NOL) carryforwards; disallowance of a loss reported on Form 4797, Sales of Business Property; various determinations of unreported income; and various computational adjustments. In their Petition, the Davisons contest (among other things) all elements of Respondent's deficiency determinations, and they assert that Mrs. Davison is entitled to relief from joint and several liability under section 6015. After the Petition was filed, Respondent considered and denied Mrs. Davison's claim for innocent spouse relief.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
The record in this case to date does not contain any documentation or other evidence relating to the Davisons' claimed NOL carryforwards, the Davisons' claimed loss reported on Form 4797, or the items of unreported income alleged by Respondent. Regarding Mrs. Davison's claim for innocent spouse relief, on October 1, 2020, the Davisons filed a Response to the Court's Order to Show Cause, which included the following factual claims:
● Sharon Davison relied upon her husband to handle tax matters including tax planning and compliance.
● Her husband, Allen Davison, had expertise, education, training, and experience in dealing with federal tax law. . . . He handled all tax matters relating to this spouse, Sharon Davison.
● Sharon Davison was a homemaker and mother of four children. Her focus was on household and motherly duties. She has no training or education in the tax law. She solely relied on her husband to properly handle tax matters.
I. Burden of Proof
Generally, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of showing the determinations are in error. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). When a case involves unreported income, the U.S. Court of Appeals for the Tenth Circuit, to which this case is appealable absent a stipulation to the contrary, has held that the Commissioner's determination of unreported income is entitled to a presumption of correctness once some substantive evidence is introduced demonstrating that the taxpayer received unreported income. United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the Commissioner introduces some substantive evidence linking the taxpayer to the income, the presumption of correctness applies and the burden is on the taxpayer to produce substantial evidence overcoming it. Id.
W e follow a Cour t of Appe als de cision t hat is sq uare ly o n poi nt wh e n ap pea l from our decision lies to that Court of Appeals alone. Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Section 7491(a) provides in relevant part as follows:
(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.
(2) Limitations.-Paragraph (1) shall apply with respect to an issue only if-
(A) the taxpayer has complied with the requirements under this title [i.e., the Internal Revenue Code] to substantiate any item; [and]
(B) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews . . .. . . .
(3) Coordination.- Paragraph (1) shall not apply to any issue if any other provision of this title provides for a specific burden of proof with respect to such issue.
For purposes of section 7491(a), we have held that "credible evidence" is evidence that, after critical analysis, a court would find constituted a sufficient basis for a decision on the issue in favor of the taxpayer if no contrary evidence were submitted. Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. 105, 114 (2009).
The Davisons have not yet introduced before the Court any evidence (credible or otherwise) relevant to their claimed NOL carryforwards or their claimed loss reported on Form 4797. In fact, the Davisons have not specified any particular "factual issue[s]" (emphasis added), see I.R.C. § 7491(a)(1), that they allege are relevant to these two legal issues. (The current record does not even contain the Form 4797 at issue.) Regarding Mrs. Davison's claim for innocent spouse relief, the factual claims included in the Davisons' Response to the Court's Order to Show Cause do not constitute "credible evidence" for purposes of section 7491(a) because they are simply assertions neither backed by documentary evidence nor contained in a sworn affidavit. See Higbee v. Commissioner, 116 T.C. 438, 445 (2001) (holding that the taxpayer's "self-serving testimony at trial" did not by itself constitute credible evidence for purposes of section 7491(a)). Therefore, we will deny the Davisons' Motion without prejudice as to the burden of proof on the factual issues relevant to these three legal issues. We will revisit the burden of proof on such factual issues if and when the Davisons present further relevant evidence (whether before or during trial).
We note that the Davisons previously brought a collection due process case in this Court that involved some of the same underlying issues as in this case. See Tax Court docket No. 13711-18L. If there are relevant documents in the record of that previous case, we advise the Davisons to either (1) propose to Respondent that they be included in a stipulation of facts for this case or (2) file those documents as proposed trial exhibits once this case is set for trial.
Respondent has not yet introduced any "substantive evidence" linking the Davisons to the items of unreported income alleged in the notice of deficiency. See McMullin, 948 F.2d at 1192. For instance, the record contains none of the third-party information returns, such as Form 1099-DIV, Dividends and Distributions, referenced in the notice of deficiency. Therefore, the burden of proof does not (yet) fall on the Davisons with respect to the alleged unreported income. See McMullin, 948 F.2d at 1192. (However, Respondent will have an opportunity to introduce such "substantive evidence" before and during trial.) Therefore, we will deny the Davisons' Motion without prejudice insofar as it requests that the burden of proof on the unreported income determinations be shifted to Respondent. The Davisons may renew their Motion on this point if and when Respondent introduces substantive evidence linking the Davisons to the alleged items of unreported income.
II. Standard of Proof
The Davisons also have moved the Court to apply a "clear and convincing" standard of evidence to Respondent's burdens of proof. Since we hold that Respondent does not currently have the burden of proof on any issue, we will deny the Motion without prejudice as to Respondent's standard of proof. However, we caution the Davisons about renewing their Motion on this point. The standard of proof in civil cases is presumptively a preponderance-of-the-evidence standard. See Herman & MacLean v. Huddleston, 459 U.S. 375, 390 (1983). The only circumstance for which a clear-and-convincing standard is provided by law in Tax Court cases is when the Commissioner alleges fraud with intent to evade tax, see Rule 142(b), which is not at issue in this case. We note that the Davisons' Motion provides no legal authority for their assertion that a clear-and-convincing standard should apply to any factual issue involved in their case.
Regarding the unreported income determinations, the most we can say is that Respondent currently has the burden of production (to come forward with the evidence), rather than the burden of proof.
To reflect the foregoing, it is
ORDERED that Petitioners' Motion to Shift the Burden of Proof, filed August 14, 2023, is denied without prejudice.