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Frost v. Commissioner (154 T.C. No. 2)

On January 7, 2020, the Tax Court issued its opinion in Frost v. Commissioner, 154 T.C. No. 2. The issue presented in Frost was whether the IRS satisfied the burden of production under IRC § 7491(c) in offering evidence of compliance with the requirement of IRC § 6751(b)(1) that the agent initially determining accuracy-related penalties obtained timely written supervisory approval to assert IRC § 6662(a) accuracy-related penalties against the petitioner.

Parsing the Semantics: Burden of Proof and Burden of Production

A burden is a burden, right? When you’re thirty-three, living in your mother’s basement in the ‘burbs, with a Cheeto-stained, ironical (your word, not mine) hipster mustache, then yes. That’s a burden, no matter how you slice it. No need to prove it or to produce evidence to support it. You’re a bum and a burden. Shave the flavor saver, and get a damn job, hippie.

Proof and production, though. Six of one, half a dozen of another?

Not when it comes to Tax Court proceedings, or so we find out in Frost. Production, as well as in Ms. Comer’s second grade feature of Guys and Dolls, is found in IRC § 7491(c), whereas proof, as well as in the pudding, is found in IRC § 7491(a).

In any Tax Court proceeding, under IRC § 7491(c), the IRS bears the burden of production with respect to the liability of an individual for any penalty. Tax Court Rule 142(a); Graev v. Comm’r of Internal Revenue, 149 T.C. 485, 493 (2017); Welch v. Helvering, 290 U.S. 111, 115 (1933). To satisfy this burden the IRS must provide sufficient, credible evidence to show that it is appropriate to impose the penalty in the absence of available defenses. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The burden of production as to any other factual issue relevant to ascertaining the liability of a taxpayer (for income, estate, and gift taxes), on the other hand, rests on the taxpayer to produce sufficient, credible evidence pursuant to IRC § 7491(a).

What exactly is sufficient, credible evidence, and isn’t that the same thing as proof? Slow your roll, Skippy. Apparently, Congress didn’t think so. “Credible” refers to the quality of evidence that the Tax Court would find sufficient to base a decision if no other evidence were provided. Higbee, 116 T.C. at 442 (citing H. Conf. Rept. 105-599, 240-241). Implausible assertions, frivolous claims, and tax-protester-type arguments are not credible, which is likely why Uncle Bill’s argument that didn’t have to pay income tax because he lived in the 25,000 square foot autonomous principality of Freedomton (located about six miles south of Biddeford, Maine) never panned out. The same standard that applies to the taxpayer in IRC § 7491(a) applies to the IRS in IRC § 7491(c), except that Congress also noted that “reasonable cause” and “substantial authority” were not required under IRS’s the burden of production. Id. at 446.

Once the taxpayer produces credible evidence, the game is afoot, and the burden not only shifts to the IRS, but it puts on its big-boy pants and graduates to a burden of proof pursuant to IRC § 7491(a), by which the IRS must disprove the evidence that the taxpayer has presented. Similarly, if the IRS produces credible evidence under IRC § 7491(c), the burden goes Lou Ferrigno to the Hulk in a shirt-splitting second, and the taxpayer then has a burden to prove that the evidence presented by the IRS as to its liability for penalties is incorrect.

Procedural Requirements of IRC § 6751(b)(1) an Element of IRS Burden of Production

An element of the IRS’s burden under IRC § 7491(c) is that the IRS must produce evidence that it complied with the procedural requirements of IRC § 6751(b)(1). See Graev v. Commissioner, 149 T.C. at 492-493 . IRC § 6751(b)(1) requires the initial determination of certain penalties to be personally approved (in writing) by the immediate supervisor of the individual making such determination. Graev, 149 T.C. at 492-493; Clay v. Commissioner, 152 T.C. 223, 248 (2019).

Issue of First Impression – When Burden Shifts Back to Taxpayer to Disprove IRS’s Compliance with IRC § 6751(b)(1)

Although the Tax Court has held that the IRS’s initial burden of production under IRC §7491(c) includes producing evidence that he complied with IRC § 6751(b)(1), to date the Tax Court had not addressed when the burden shifts to the taxpayer to show otherwise. To tell that story, the Tax Court told us the story of Mr. Wheeler, a cautionary tale of why appearing pro se rarely is worth the money it saves in attorney’s fees.

The Wheeler Analogy – IRS Bears Burden of Production with Respect to IRC § 6651(a)(1), IRC § 6651(a)(2), and IRC § 6654 Penalties

In Wheeler v. Commissioner, 127 T.C. 200 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008), the Tax Court expanded its analysis of IRC § 7491(c) with respect to the additions to tax under IRC § 6651(a)(1) (failure to file a timely tax return), IRC § 6651(a)(2) (failure to pay the amount of tax shown on a return), and IRC § 6654 (underpayment of estimated taxes). In Wheeler, the taxpayer claimed (well, “assigned error to the determinations,” if you want to get formal) that the IRS’s assertion of penalties under IRC §§ 6651(a)(1), (2), and 6654 was erroneous. Thus, with respect to the failure to file, pay, or pay estimated taxes, the Tax Court found that the burden of production was on the IRS to produce sufficient evidence to overcome its burden of production as to each determination. Wheeler, 127 T.C. at 207.

With respect to failure to file penalty of IRC § 6651(a)(1), the IRS had to introduce evidence showing that the taxpayer did not file his return (or a request for extension of time) by the original due date of the return. Wheeler, 127 T.C. at 207-208. With respect to the failure to pay penalty of IRC § 6651(a)(2), the IRS had to introduce evidence that either the taxpayer filed a return or that the IRS filed a substitute for return pursuant to IRC § 6020(b) (authority of IRS to file substitute for return). Wheeler, 127 T.C. at 210. In Wheeler, the IRS failed to produce sufficient evidence that a substitute for return had been filed, and the Tax Court, therefore, found that the IRS failed to satisfy its initial burden of production under IRC § 7491(c). Wheeler, 127 T.C. at 210.

Finally, with respect to failure to pay estimated tax payments IRC § 6654, the IRS had to produce evidence of a required annual payment payable in installments under IRC § 6654 and that such installments were unpaid. Wheeler, 127 T.C. at 211-212. Although the IRS actually deigned to produce evidence at this juncture, and showed that the taxpayer in Wheeler was liable to pay estimated taxes for the year in issue, the IRS, stymied once again, failed to introduce evidence of a return for the previous year or the amount of tax shown on that previous year’s, thereby failing satisfy the IRS’s burden of showing that the taxpayer had a required annual estimated tax payment obligation (as required under IRC § 6654). Wheeler, 127 T.C. at 212. Mr. Wheeler, also pro se, is a cautionary tale to self-important tax attorneys, a tale of why we’re not always needed for the government to completely drop the ball. Three times. In the same case.

Takeaway – IRS Must Show Penalty Approval under IRC § 6751(b)(1) to Satisfy Burden of IRC § 7491(c).

Following the parables of Higbee and Wheeler the Tax Court held that if a taxpayer challenges the IRS’s penalty determinations for lack of supervisory approval, the IRS must come forward with credible evidence of prior written penalty approval (pursuant to IRC § 6751(b)(1)) as part of its initial burden of production under IRC § 7491(c).

But Wait, What About the Burden of Proof Regarding IRC § 6751(b)(1)?

Well, apparently, Judge Pugh wasn’t feeling quite up to addressing it, which, should come as little surprise since she went to Duke for undergraduate “studies.” To her credit, she saw the error of her ways and went on to Stanford and then UVA for law school, graduating Order of the Coif. Further to Judge Pugh’s credit, not a single Tax Court judge had seen fit before her to weigh in regarding whether the IRS bears the burden of proof in addition to the burden of production with respect to IRC § 6571(b)(1). Thus, the Tax Court once again punted on the issue in Frost, which I suppose makes perfect sense if you’ve ever watched a Duke football game. All they do is punt.

(154 T.C. No. 2) Frost v. Commissioner

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