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Kramer v. Commissioner (T.C. Memo. 2021-16)

On February 16, 2021, the Tax Court issued a Memorandum Opinion in the case of Kramer v. Commissioner (T.C. Memo. 2021-16). The primary issues presented in Kramer were whether the petitioners were in default and whether the IRS carried its various burdens of production and proof with respect to the deficiencies asserted.


The petitioners are not what you would call “cooperative” or “responsible” taxpayers.

Although they brought petition seeking a redetermination of adjustments into notices of deficiency (determining a deficiency, a failure to file penalty, and accuracy-related penalty, and fraud penalties), they neither cooperated in preparing the cases for trial nor did they appear for trial. The Tax Court is quick to note that in the IRS’s answer, the IRS affirmatively pleaded numerous allegations in support of its fraud penalty determinations. The IRS engaged in informal discovery, and when the petitioners failed to respond, the IRS engaged in formal discovery under Tax Court Rule 90.

Although the petitioners were warned that failure to respond to the individual requests for admission would be deemed admissions to each, the petitioner’s ignored the IRS’s discovery requests. Next the IRS sent the petitioner’s a stipulation of facts under Rule 91 and warned if the petitioners did not agree or respond, the IRS would file a motion under Tax Court Rule 91(f) to compel agreement to the stipulations of fact. Needless to say, the petitioner’s thumbed their nose at the Tax Court Rule 91(f) motion as well. Finally, the Tax Court warned (multiple freaking times) that if the petitioners did not show at trial, the failure to appear may result in the dismissal of the case in the entry of a decision against the petitioners. Even the IRS tried to get the petitioners to show up at trial, to no avail.

Default Judgment Under Rule 123

Tax Court Rule 123(a) provides that the Tax Court may hold a party in default and enter a decision against that party if he or she has failed to plead or otherwise proceed as provided by these Rules or as required by the Tax Court. Rule 123(b) allows the Tax Court broad discretion to dismiss a case for failure of a petitioner properly to prosecute or to comply with these Rules or any order of the Tax Court or for other cause which the Tax Court deems sufficient. In general, entry of default under Rule 123(a) is appropriate as to issues where the IRS bears the burden of proof, while dismissal under Rule 123(b) is appropriate where the taxpayer bears the burden of proof. See Smith v. Commissioner, 926 F.2d 1470, 1476 (6th Cir. 1991), aff’g 91 T.C. 1049 (1988); Putnam v. Commissioner, T.C. Memo. 2015-160, at *12-*13.

Presumption of Correctness not Apply Unless IRS Establishes Factual Predicate

Where, as here, a taxpayer disputes a deficiency determination that is based on unreported income, the presumption of correctness does not apply unless the IRS can establish at least a “minimal” factual predicate or evidentiary foundation connecting the taxpayer to an income-generating activity or to the receipt of funds. See United States v. Walton, 909 F.2d 915, 918-919 (6th Cir. 1990) (citing Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev’g 67 T.C. 672 (1977)); Richardson v. Commissioner, T.C. Memo. 2006-69, 2006 WL 931912, at *14, aff’d, 509 F.3d 736 (6th Cir. 2007). Once the IRS makes the required threshold showing, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the IRS’s determinations are arbitrary or erroneous. Walquist v. Commissioner, 152 T.C. 61, 67-68 (2019) (citing Helvering v. Taylor, 293 U.S. 507, 515 (1935)).

Stipulation in Default of Response Damns Petitioners

Because the petitioners are deemed to have stipulated the authenticity of copies of their joint Federal income tax returns for 2006, 2007, 2008, and 2010, those returns establish a sufficient factual predicate to connect petitioners to both the State and local tax refund income and the pension and annuity income that remain in dispute. Therefore, the IRS’s determinations with respect to those items are therefore entitled to the presumption of correctness, and the petitioners bear the burden to prove them arbitrary or erroneous.

IRS’s Burden of Production with Respect to Penalty

The Commissioner generally bears the burden of production with respect to a penalty where the taxpayer has contested it in a petition. See IRC § 7491(c); Funk v. Commissioner, 123 T.C. 213, 216-218 (2004); Swain v. Commissioner, 118 T.C. 358, 363-365 (2002). The IRS’s burden of production includes showing compliance with the supervisory approval requirement of IRC § 6751(b). See Graev v. Commissioner, 149 T.C. 485, 492-493 (2017), supplementing and overruling in part 147 T.C. 460 (2016); see also Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42.

The IRS also must offer sufficient evidence to indicate that it is appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). The IRS satisfies its burden of production, the taxpayer bears the burden of proving it is inappropriate to impose the penalty because of reasonable cause, substantial authority, or a similar provision. Id. at 446-447; see also IRC §§ 6651(a)(1), 6664(c); Wheeler v. Commissioner, 127 T.C. 200, 206 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).

Moral of the story number one, if you fail to heed the IRS’s entreaties and the Tax Court’s polite reminders, bad things happen.

Moral of the story number two, if you bring a petition in Tax Court, for the love of Pete, follow through with it, or the Tax Court will stick it to you like a tail on a dollar store donkey.

(T.C. Memo. 2021-16) Kramer v. Commissioner

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