On Penalties and Burdens

Burdens HipsterA burden is a burden, right?  A thirty-three-year-old man-child, living in his mother’s basement, with a Cheeto-stained, self-described “ironical” 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.  He’s 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 found out last January in Frost v. Commissioner.[1]  The burden of production is found in IRC § 7491(c), whereas proof—as well as in the pudding—is found in IRC § 7491(a).

On Penalties and Burdens and Individuals

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.[2]  To satisfy this burden the IRS must provide (or produce, if you want to get down to semantics) sufficient, credible evidence to show that it is appropriate to impose the penalty in the absence of available defenses.[3]  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?

Burdens Slow

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.[4]  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.[5]

Burdens AfootOnce the taxpayer produces credible evidence, the game is afoot, and the burden not only shifts to the IRS, but it 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 taxpayer then has a burden to prove that the evidence presented by the IRS as to its liability for penalties is incorrect.

Note that the variance doctrine has been applied to prevent a taxpayer from asserting IRC § 6751 for the first time in federal district court.  A taxpayer may not sue the United States for a tax refund until he first files a refund claim with the government in compliance with IRC § 7422(a).[6] The applicable regulations accompanying IRC § 7422(a) require the taxpayer to detail each ground upon which a refund is claimed.[7] Under the variance doctrine, any subsequent litigation of the government’s denial of a refund claim is limited to the grounds fairly contained within the refund claim.[8]  Federal courts have no jurisdiction to entertain taxpayer allegations that impermissibly vary or augment the grounds originally specified by the taxpayer in the administrative refund claim.  Therefore, IRC § 6751 must be raised in the taxpayer’s refund claim or the federal district court will have no jurisdiction to entertain the argument.

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.[9]  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 in Frost told us the story of Mr. Wheeler.

In Wheeler v. Commissioner,[10] 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 IRC § 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.[11]

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.[12] 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).[13]  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).[14]

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.[15]  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).[16]

Following the parable of Wheeler the Tax Court in Frost held that if a taxpayer challenges the IRS’s penalty determinations for failing to satisfy the procedural requirements of IRC § 6751, the IRS must come forward with credible evidence of meeting the procedural requirements (including prior written supervisory approval) as part of its initial burden of production under IRC § 7491(c).

As an aside, the Wheeler case (in which Mr. Wheeler appeared pro se) is a cautionary tale to all of the self‑important tax attorneys out there (present company included) as to why we’re not always needed for the government to completely drop the ball. 

Three times.

In the same case.

Burdens One Job

On Penalties and Burdens and Non-Individuals

Note, however, that the burden of production under IRC § 7491(c) applies only to individuals.  As discussed above, ordinarily, IRC § 7491(c) places the burden of production on the IRS with respect to liability for any individual for any penalty. However, when the petitioner is a corporation or an estate, it bears the initial burden of production to show that the IRS did not comply with IRC § 6751.[17]

Burdens Burden

When the burden lies on the IRS, the Tax Court has historically held that it must introduce evidence that it complied with IRC § 6751.[18]  However, when the burden lies on an estate or corporation or some other nonindividual, that nonindividual-taxpayer must show that the IRS did not comply with IRC § 6751. Interestingly, when an individual dies between the time he or she files the petition and when the case is tried, the IRS still bears the burden of production—because it was the individual’s original returns that the Tax Court examined, the individual items of income and loss that were adjusted, and the penalties asserted against the individual that were redetermined.[19]

In Plentywood Drugs, the Tax Court noted that this is a somewhat unusual burden—the burden of producing evidence that no evidence exists of the IRS’s compliance with its obligation to show compliance with IRC § 6751.  However, the Tax Court notes that it can be met, for example, by asking for the penalty‑approval form through a FOIA request or an informal discovery request and then showing that none exists, or if it does exist, it was untimely.  The petitioner could even have raised the issue in the list of assignment of errors in its petition.[20]

Burdens Jackson ThrillerAs an aside, in Estate of Jackson, although the penalties asserted were over $200 million, the estate failed to introduce any evidence that the IRS failed to comply with the procedural requirements of IRC § 6751.  In a brilliant rhetorical flourish Senior Judge Mark Holmes observed that although “Thriller is part of the record here.  So are demons, vampires, monsters, ghosts, and even the funk of 40,000 years.  But the record lacks any evidence that the IRS failed” to comply with IRC § 6751.[21]

Likewise, the Service does not bear the burden of production in partnership-level proceedings under the pre-2018 TEFRA audit regime.[22]  In addition to the fact that partnerships are not individuals, a partnership‑level proceeding determines the treatment of partnership items and the applicability of a penalty at the partnership level, but not the liability of any partner for either tax or penalties.[23]   If a partner’s liability is affected by a partnership-level determination, the partner’s liability, if any, is determined later at the partner level.  Even if the applicability of a penalty is determined at the partnership level, that penalty may not apply to any particular partner.[24]


[1] 154 T.C. No. 2 (Jan. 7, 2020).

[2] Tax Court Rule 142(a); Graev v. Commissioner, 149 T.C. 485, 493 (2017); Welch v. Helvering, 290 U.S. 111, 115 (1933).

[3] See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

[4] Higbee, 116 T.C. at 442 (citing H. Conf. Rept. 105-599, 240-241).

[5] Id. at 446.

[6] Ginsburg v. U.S., 2019 WL 1576017 (M.D. Fla. 2019) (quoting Charter Co. v. United States, 971 F.2d 1576, 1579 (11th Cir. 1992)).

[7] Id. (citing Treas. Reg. § 301.6402-2(b)(1)).

[8] Id.

[9] See Graev, 149 T.C. at 492-493; Clay v. Commissioner, 152 T.C. 223, 248 (2019).

[10] 127 T.C. 200 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008)

[11] Wheeler, 127 T.C. at 207.

[12] Id. at 207-08.

[13] Id. at 210.

[14] Id.

[15] Id. at 211-12.

[16] Id. at 212.

[17] NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006); Plentywood Drug, Inc. v. Commissioner, T.C. Memo. 2021‑45 (April 26, 2021); Estate of Jackson v. Commissioner, T.C. Memo. 2021-48 (May 3, 2021).

[18] See, e.g., Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 227 (2018); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

[19] Estate of Ramirez v. Commissioner, T.C. Memo. 2018-196.

[20] Wheeler, 127 T.C. at 206-07.

[21] Estate of Jackson, T.C. Memo. 2021-48, slip op. at 249.

[22] See, e.g., Dynamo Holdings, 150 T.C. at 233-35.

[23] Id.

[24] Id.

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