46 Fed. Cl. 110 | Fed. Cl. | 2000
ORDER'
Inextricably woven into the administration of the Federal tax laws is a fundamental promise that those laws will be enforced fairly and uniformly. Toward this end, the tax system includes a series of procedural protections for taxpayers associated with the assessment of taxes, penalties and interest. These procedures, however, constitute a double-edged sword for if the Internal Revenue Service (the “Service”) follows them and an assessment results, a set of judicially-created presumptions, grounded in the common law, arise to support the validity of the assessment. These presumptions apply prominently in tax refund suits, where they affect the fact-finding process by imposing evidentiary burdens on the taxpayer challenging the assessment. See, e.g., Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212 (1938). At issue in this refund suit is whether these presumptions — and the evidentiary burdens they impose — remain viable where the Service admits that it has lost the administrative file documenting the basis upon which a “responsible officer” tax penalty was assessed against the plaintiff.
I. Background
On June 8, 1992, defendant, acting through the Service, assessed against plaintiff, David F. Cook, a penalty pursuant to 26 U.S.C. § 6672(a),
On September 5, 1997, plaintiff paid $100.00 of the penalty and filed a claim for refund. Plaintiff filed suit on June 18, 1998, claiming that the Service had neither accepted nor rejected his claim within the statutorily-defined time period, thereby giving rise to jurisdiction under 26 U.S.C. § 6532(a)(1). In the complaint, plaintiff asserted that he was neither a “responsible person” nor “willful” in failing to pay over the employment taxes withheld by NMFI, primarily because any payments made from the trust fund were made at the direction of the bankruptcy court overseeing NMFI’s dissolution. Plaintiff demanded a refund of the $100.00 paid over to the Service, along with interest and attorney’s fees. Defendant answered and counterclaimed on November 18, 1998, demanding payment of the entire section 6672 penalty, plus unpaid interest and collection fees and costs.
On August 16, 1999, during formal discovery, plaintiff filed a Motion to Compel Production of Documents, seeking, inter alia, documents from the plaintiffs IRS administrative file.
II. Discussion
Ordinarily, the Government may establish a prima facie case as to a taxpayer’s liability for a penalty under section 6672(a) by presenting the assessment of liability against him as a responsible person for the willful failure to collect, account for, or pay over taxes withheld from employees. Michaud v. United States, 40 Fed.Cl. 1, 15 (1997); Teets v. United States, 29 Fed.Cl. 697, 702 (1993), aff'd, 39 F.3d 1196 (1994). See also Ruth v. United States, 823 F.2d 1091, 1092 (7th Cir.1987); United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir.1983), cert. denied, 465 U.S. 1079, 104 S.Ct. 1440, 79 L.Ed.2d 761 (1984). A certified copy of the taxpayer’s “Certificate of Assessments and Payments” is “routinely used to prove that a tax assessment has in fact been made.” Rocovich v. United States, 933 F.2d 991, 994 (Fed.Cir.1991). See also Teets, 29 Fed.Cl. at 702; Dougherty v. United States, 18 Cl.Ct. 335, 350 (1989), aff'd without op., 914 F.2d 271 (Fed.Cir.1990); Pototzky v. United States, 8 Cl.Ct. 308, 315 (1985). In the instant case, this court must determine, under the circumstances of this case, whether the assessment is entitled to a presumption of correctness and whether the plaintiff retains the burden of proof both as to the matters raised in his complaint and in the government’s counterclaim.
A. The Presumption of Correctness
In tax refund suits, factual issues are tried de novo in this court, with no weight given to subsidiary factual findings made by the Service in its internal administrative proceedings. International Paper Co. v. United States, 36 Fed.Cl. 313, 322 (1996); Sara Lee Corp. v. United States, 29 Fed.Cl. 330, 334 (1993). However, in a refund suit, the assessment made by the Service is presumed to be correct and this places an obligation on the taxpayer to come forward with evidence to rebut the presumption. United States v. Janis, 428 U.S. 433, 440-41, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976); Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct.
The presumption of correctness generally prohibits a court from looking behind the Commissioner’s determination, even though it may be based on hearsay or other evidence inadmissible at trial.
In the instant case, the loss of the administrative file gives rise to the possibility that the penalty assessment in question lacks foundation. As described in Janis and its progeny, however, an assessment is not “naked” simply because the administrative file supporting its entry is lost — what is critical, given the de novo nature of the proceedings before this court, is that admissible evidence exists to support the assessment. See Estate of Magnin v. Commissioner, 184 F.3d 1074, 1081 (9th Cir.1999); Karme v. Commissioner, 673 F.2d 1062, 1065 (9th Cir.1982). If such evidence exists, and is admitted by the court, it is irrelevant whether it is the same evidence that the Service relied upon in originally making its assessment. See Coleman v. United States, 704 F.2d 326, 329 (6th Cir.1983) (holding that assessment was naked, but noting that “secondhand” records or “any demonstrably reasonable methodology of estimation” may be used to establish presumption of correctness). Indeed, consistent with the “no-look” doctrine, courts have
In the instant case, then, the court must ultimately determine whether records supporting the assessment exist and are admissible. Notwithstanding the loss of the administrative file, the defendant asserts that such records do exist and has provided excerpts from them with its memorandum of law. While, at this stage of the proceedings, the court is unwilling to accept these records as the requisite support for the assessment,
In sum, the government’s admission that it has lost the entire administrative file here obliges this court to look behind the assessment. Using the procedure described in more detail below, the court will, at trial, review the government’s evidence supporting the assessment, before determining whether the assessment is truly “naked” or, conversely, is entitled to the normal presumption of correctness.
B. The Burden of Proof on the Taxpayer’s Complaint
Although sometimes referred to as “the opposite sides of a single coin,” Portillo, 932 F.2d at 1133, the presumption of correctness must be distinguished from the taxpayer’s burden of proof in the refimd suit. As a general principle, the taxpayer has the burden of proof in most tax controversies, but the demands of this burden differ depending on the forum in which the suit is filed.
Modern courts examining the rationale for imposing the burden of proof on the taxpayer often focus on several factors, typically “the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the Code.” United States v. Rexach, 482 F.2d 10, 16 (1st Cir.1973), cert. denied, 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330 (1973). See also Johnson, supra at 449-50. Other relatively recent decisions note that the taxpayer should bear the burden of proof simply because it is the plaintiff — as noted by the Ninth Circuit, “[i]n most litigation, from time immemorial, the burden of proof .... is on the plaintiff.” Rockwell, 512 F.2d at 887. Several early decisions, some predating the oft-cited “Helvering ” decisions on this subject, explain the rationale for this rule by focusing on the common-law heritage of the refund suit as involving a right of action for indebitatus assumpsit—essentially a lawsuit for money had and received. See United States v. Jefferson Elec. Mfg. Co., 291 U.S. 386, 402-03, 54 S.Ct. 443, 78 L.Ed. 859 (1934); Stone v. White, 301 U.S. 532, 535, 57 S.Ct. 851, 81 L.Ed. 1265 (1937). See also David v. Phinney, 350 F.2d 371, 376-77 (5th Cir.1965). Under the common law, the burden of proof in actions in assumpsit for money was placed on the person making a claim of funds held by another. The Supreme Court adopted this allocation of the burden of proof when, in 1881, it first held that the Court of Claims had jurisdiction over claims for tax refunds. See United States v. Real Estate Sav. Bank, 104 U.S. 728, 732-34, 17 Ct.Cl. 434, 26 L.Ed. 908 (1881).
The cases describing the genesis of the burden of proof rule are conspicuous in their failure to link theoretically the allocation of the burden directly to the presumption of correctness. Nonetheless, a significant body of case law describes the extent to which the loss of the presumption of correctness impacts the placement of the burden of proof. There is, for example, a long-standing split in the circuits as to whether rebutting
There are several reasons why it appears that even where a presumption of correctness does not arise, the burden of proof should remain on the taxpayer. First, pure logic suggests that if the burden does not shift when a taxpayer demonstrates that an assessment supported by records is “arbitrary and erroneous,” it also should not shift when an assessment is deemed “arbitrary and erroneous” because it is “naked.” The court cannot conceive why the reason the presumption is discounted as “arbitrary and erroneous” should matter when it comes to the allocation of the burden of proof. Second, the various rationales discussed above for imposing the burden of proof on the taxpayer only serve to reinforce this conclusion. Thus, under the common law rationale, the loss of the presumption of correctness does not alter the fundamental nature of a refund suit as an assumpsit action for money had and received, in which the burden is borne by the party seeking to recover funds. And, under the modern rationale for allocating the burden, even without the presumption, the taxpayer remains the party seeking to press a claim and best positioned to preserve and bring forward evidence bearing on the facts of that claim. Accordingly, imposing the burden of proof on the taxpayer, even where no presumption of correctness arises, is essentially consistent with the rationale for imposing this burden on the taxpayer in the ordinary case.
Plaintiff, however, suggests that Supreme Court’s decision in Janis dictates a different conclusion, namely, that'where the presumption of correctness does not arise, the burden of proof on the taxpayer’s claim is shifted to the government. In Janis, a wagering tax case, the Supreme Court was required to decide whether evidence obtained by State law enforcement officers in violation of the taxpayer’s rights under the Fourth Amendment could be introduced by the Government in a civil tax case. Without such evidence, the assessment would be “naked and without any foundation.” Quoting Helvering v. Taylor, 293 U.S. at 514, 55 S.Ct. 287 the Court stated that the “determination of tax due then may be one ‘without rational foundation and excessive,’ and not properly subject to the usual rule with respect to the burden of proof in tax cases.” Janis, 428 U.S. at 441, 96 S.Ct. 3021. The Court noted the existence of an intercircuit conflict “as to the effect upon the burden of proof in a tax case when there is positive evidence that an assessment is incorrect,” but observed that this “debate does not extend to the situation
The language in Janis, which some courts have observed is dicta,
It is conceivable that, in some case, the Service’s conduct could be so reprehensible that the integrity of the judicial process would demand that this court take appropriate remedial action. Such action might very well include shifting the burden of proof on the plaintiffs refund claim. But, there has been no showing that such is the case here. Accordingly, this court concludes that even if the assessment in question is shown to be naked, the burden of proof in the instant case as to the claims stated in the complaint will remain on the plaintiff.
C. The Burden of Proof on the Defendant’s Counterclaim
In its counterclaim, the government demands payment of the entire section 6672 penalty, plus unpaid interest and collection fees and costs. The pending motions raise two additional issues with respect to this counterclaim.
Plaintiff first argues that this counterclaim should be dismissed, due to what plaintiff portrays as an absolute absence of a factual predicate for the claim. He analogizes a counterclaim in a refund action to a setoff defense and points to Mahoney v. United States, 223 Ct.Cl. 713, 718, 1980 WL 4712 (1980), and Missouri Pacific Railroad Co. v. United States, 168 Ct.Cl. 86, 338 F.2d 668
A more serious question involves the burden of proof on the counterclaim. The general rule places the burden of proof on the government to prove its counterclaim. International Harvester Co. v. United States, 169 Ct.Cl. 821, 342 F.2d 432, 446-47 (1965). However, a long line of cases in this court (and its predecessor) has found that the presumption of correctness that ordinarily attaches to the Commissioner’s assessment allows the defendant to establish a prima facie case by offering into evidence a certified copy of the assessment. See Adams v. United States, 175 Ct.Cl. 288, 358 F.2d 986, 994 (1966); Michaud, 40 Fed.Cl. at 15; Whiteside, 26 Cl.Ct. at 567; Pototzky, 8 Cl.Ct. at 315. Once this prima facie case is made out, this court and others have held that the burden of proof shifts to the plaintiff. See, e.g., Pototzky, 8 Cl.Ct. at 315. See also Bolding v. United States, 215 Ct.Cl. 148, 565 F.2d 663, 672 (1977); Psaty v. United States, 442 F.2d at 1159-60; Lesser v. United States, 368 F.2d 306 (2d Cir.1966) (en banc).
In the instant case, however, it remains to be determined whether the Commissioner’s penalty assessment is “naked” or instead entitled to the ordinary presumption of correctness. Consistent with the rationale of the decisions discussed above, the burden of proof on the counterclaim in this case thus will shift to the plaintiff only if the defendant establishes that the assessment has an appropriate foundation. If, instead, the assessment is found to be naked, the burden of proof will remain where it ordinarily would be on a counterclaim, that is, on the defendant.
III. Conclusion
Based on the foregoing, the court concludes that the conduct of any trial proceedings in this case must be modified. Thus, in order to determine whether the presumption of correctness attaches to the assessment in question and to fix the burden of proof on the counterclaim, the defendant, rather than the
A final word on this matter is warranted. While understanding the Service’s immense recordkeeping obligations, this court believes that the Service has a particular responsibility to ensure that files needed for litigation are preserved and timely made available to the Justice Department and, upon proper discovery request, to plaintiffs. While in this seemingly isolated case, the law limits the ramifications of the Service’s failure to preserve its administrative records, broader relief might be appropriate were it determined that the problem in preserving records were pervasive and systematic.
Based on the foregoing, IT IS ORDERED:
1. Plaintiffs Motion to Compel Production of Documents, as supplemented, is GRANTED, IN PART and DENIED, IN PART. If it has not already done so, defendant shall produce all documents in its possession, which are not privileged, and regardless whether copies of such documents were originally contained in the administrative file for this case, responsive to the following requests made by Plaintiff in its First Set of Requests for Production of Documents from Defendant, the United States: paragraphs 1.02 (for relevant tax periods to be stipulated by the parties), 1.05, 1.06, 1.07 and 1.08. In addition, pursuant to 26 U.S.C. § 6103(e)(9), defendant (or, at the defendant’s option, the Service) shall disclose in writing to the plaintiff: (i) the name of any other person whom the Service has determined to be liable for a penalty under section 6672(a) for the same failure for which a penalty was assessed against the plaintiff; and (ii) with respect to these named individuals, whether the Service has attempted to collect such penalty from such other person, the general nature of such collection activities and the amount collected. The information described in this paragraph shall be provided by defendant to plaintiff no later than April 14, 2000. In all other regards, Plaintiffs Motion to Compel, as supplemented, is DENIED.
2. Plaintiffs Motion to Dismiss Defendant’s Counterclaim is DENIED.
3. Plaintiffs Motion for Rule 11 Sanctions is DENIED.
4. Any trial in this case shall proceed consistent with the procedures described above.
. Section 6672(a) (26 U.S.C.) provides, in pertinent part:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
. The IRS administrative file is a compilation of information used in variety of internal agency procedures, including the establishment of assessments, as well the processing of refund claims and refund suits. More than a thousand provisions of the Service’s Manual discuss the contents, uses and handling of this file. The provision that describes the use of the file in processing refund suits contains a checklist of the documents normally included in the administrative file, such as: tax returns, claims for refund, the revenue agents’ reports on any original examination of the tax year in question, as well as on the refund claim itself, any IRS Appeals Division Reports regarding the tax year, and a detailed transcript of the taxpayer’s account. IRM (35X17)42.
. In his response to the Motion to Compel, defendant’s counsel stated:
Counsel for defendant is not currently in possession of the IRS Administrative File and after an exhaustive search and communications with the various IRS and Department of Justice employees who may have had possession of the Administrative File, counsel for defendant believes the IRS Administrative File relating to plaintiff to be lost.
. Following the hearing, plaintiff filed two additional motions: a motion to dismiss the defendant's counterclaim and a motion for Rule 11 sanctions.
. The court recognizes that in a fully developed case, where both sides are able to make complete evidentiary presentations, the viability of the presumption of correctness and the placement of the burden of persuasion are likely to be insignificant. In such cases, resolving the issues presented by the pending motions would be outcome determinative only if the evidence were in equipoise — a highly unlikely event. See IRS Restructuring and Oversight Hearings Before the Senate Finance Comm., 105th Cong., 2nd Sess., 282, 285 (1998)(statement of Fred T. Goldberg, Jr.) ("As a practical matter, the chance that changing the burden of proof in litigated cases will make a difference is about like the odds of flipping a coin and having it land on its edge.”). However, the viability of the presumption and placement of the burden of proof can be determinative in undeveloped cases, where for example, no evidence is adduced by one or both parties on a critical element. See Steve R. Johnson, The Dangers of Symbolic Legislation: Perception and Realities of the New Burden-of-Proof Rules, 84 Iowa L.Rev. 413, 444-45 (1999) (hereinafter "Johnson”). As this court is in no position to evaluate whether the instant case will be fully developed or not, it is important to resolve the issues presented by the plaintiff’s motions.
. See also Seminole Thriftway Inc. v. United States, 42 Fed.Cl. 584, 587 (1998); Whiteside v. United States, 26 Cl.Ct. 564, 566 (1992).
. See also Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th Cir.1991); Danville Plywood Corp. v. United States, 16 Cl.Ct. 584, 593-94 (1989), aff'd, 899 F.2d 3 (Fed.Cir.1990); Christina Potter Moraski, Proving a Negative—When the Taxpayer Denies Receipt, 70 Cornell L.Rev. 141, 142 (1984) (hereinafter "Moraski").
. The Tax Court has indicated that the "underlying rationale” for this rule “is the fact that a trial before [this court] is a proceeding de novo; our determination as to a petitioner's tax liability must be based on the merits of the case and not any previous record developed at the administrative level.” Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 328, 1974 WL 2624 (1974).
. The other recognized exception to the "no-look” policy is where there is an allegation of unconstitutional conduct by Service employees. See Suarez v. Commissioner, 58 T.C. 792, 812-14, 1972 WL 2560 (1972). No such allegation has been made here.
. See also Llorente v. Commissioner, 74 T.C. 260, 264-65, 1980 WL 4552 (1980), rev'd in part, aff'd. in part, on other grounds, 649 F.2d 152 (2d Cir. 1981) (presumption not lost if IRS determination "is supported by evidence which can be properly introduced, even though respondent had evidence which cannot be utilized in the formulation of the deficiency”); Jackson v. Commissioner, 73 T.C. 394, 400, 1979 WL 3735 (1979); 14 John Mertens, The Law of Federal Income Taxation § 50.447 (1998) ("The inability to produce a record unintentionally lost, whether by the taxpayer, the Commissioner, or a third party, alters the type of evidence that may be offered to establish a fact.... Under such circumstances, secondary evidence is admissible to prove the contents of an unavailable original writing”); Paula M. Junghans & Joyce K. Becker, Federal Tax Litigation ¶ 18.03[1] (1992) (hereinafter “Junghans & Becker”).
. At this juncture in the proceedings, the court is ill-postured to render factual findings with respect to whether these materials provide an adequate foundation for the assessment in question. This is particularly true as the documents in question are not all self-authenticating.
. The plaintiff also seeks to invalidate the assessment, asserting that in losing his administrafive file, the Service violated various internal procedures requiring record retention and consequently cannot demonstrate that its internal procedures were followed in establishing the assessment in question. This assertion is misplaced, as it is well-recognized that such internal procedures "are directory not mandatory” and do not provide a basis for overturning an assessment. Estate of Jones v. Commissioner, 795 F.2d 566, 571 (6th Cir.1986). See also Virginia Educ. Fund v. Commissioner, 799 F.2d 903, 904 (4th Cir. 1986); Foxman v. Renison, 625 F.2d 429, 432 (2d Cir. 1980), cert. denied, 449 U.S. 993, 101 S.Ct. 530, 66 L.Ed.2d 290 (1980), reh. den., 449 U.S. 1119, 101 S.Ct. 932, 66 L.Ed.2d 848 (1981). Similarly misplaced is plaintiff's offhand assertion that the loss of the file somehow violates its due process rights — to the extent that the presumption of correctness is or is not modified in accordance with the long-standing legal principles described above, plaintiff clearly will receive all the process it is due. See Curley v. United States, 791 F.Supp. 52, 55 (E.D.N.Y.1992).
. It has been common to discuss two aspects of the burden of proof: the duty of bringing forward evidence (the burden of production) and the risk of nonpersuasion (the burden of persuasion). See Anastasato v. Commissioner, 794 F.2d
. Since the Service's administrative examination in this case commenced before July 22, 1998, the burden of proof provisions of the Internal Revenue Service Restructuring Act of 1998, 26 U.S.C. § 7491, are inapplicable. See Pub.L. No. 105-206, § 3001(c)(1), 112 Stat. 685, 726-27 (1998).
. The burden of proof rule actually may have its genesis as early as 1836, when the Supreme Court "recognized the existence of a right of action against a Collector of Customs for a refund of duties illegally assessed and paid under protest.” Flora v. United States, 362 U.S. 145, 185-86, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960) (Whittaker, J. dissenting)(citing Elliott v. Swartwout, 35 U.S. (10 Pet.) 137, 9 L.Ed. 373 (1836)). The Supreme Court indicated that this action was based on the common law action of money had and received. Flora, 362 U.S. at 186, 80 S.Ct. 630 (citing Elliott, 35 U.S. at 156-58)
. Cases holding that the burden does not shift include: Delaney v. Commissioner, 99 F.3d 20, 23 (1st Cir.1996); Sullivan v. United States, 618 F.2d 1001, 1008 (3d Cir.1980); Rockwell, 512 F.2d at 884; Rexach, 482 F.2d at 15-17; United Aniline Co. v. Commissioner, 316 F.2d 701, 704 n. 4 (1st Cir.1963) ("Presumption or no, the burden of proof never shifts”). Cases holding that the burden shifts include: Hardy v. Commissioner, 181 F.3d 1002, 1004-05 (9th Cir.1999); Keogh v. Commissioner, 713 F.2d 496, 501 (9th Cir.1983); Foster v. Commissioner, 391 F.2d 727, 735 (4th Cir.1968). In Janis, the Supreme Court noted, but did not resolve, this conflict. Janis, 428 U.S. at 441-42, 96 S.Ct. 3021. It should be noted that many of the cases that hold that burden shifts are unreported income cases involving illegal income, the principles of which may not be applicable to other types of cases.
. See, e.g., United States v. Walton, 909 F.2d 915, 919 n. 2 (6th Cir.1990), where the court stated: “The holding in Janis is dicta. The Court was opining as to the effect of refusing to admit evidence that the IRS planned to use to support its figures in a tax evasion case because of an allegedly unlawful seizure. The seizure ultimately was declared lawful."
. Two commentators have emphasized this, noting that "[t]he Court [in Taylor ] said nothing about who should have the burden of proof, in the sense of ultimate persuasion or the risk of nonpersuasion ...." John T. Piper & James M. Jerge, Shifting the Burden of Proof in Tax Court, 31 Tax Law. 303, 313 (1978). These commentators also observed that even those cases that talk of Taylor supporting a shift of the burden of proof, e.g., Gasper v. Commissioner, 225 F.2d 284, 288 (6th Cir.1955), refer only to the burden of production, and not the ultimate burden of persuasion, stating “[djespite some statements about the presumption of correctness "disappearing” and that the “burden of proof will shift,” it seems likely that the courts mean only a shifting of the burden of going forward.” Id.
. Plaintiff complains that the loss of the administrative file may prevent it from corroborating certain key aspects of its proof. The court will consider such issues as they may arise at trial, with an eye toward whether the loss of the records truly created prejudice. See, e.g., American Police & Fire Foundation, Inc. v. Commissioner, 81 T.C. 699, 1983 WL 14886 (1983).
. In Psaty, the Third Circuit explained its rationale for this rule, in part, as follows:
Under appellant’s theory, a taxpayer who makes a partial payment and sues for a refund could thereby shift the full burden of proof as to the balance of the claim to the Government. The difficulty with appellant’s contention is that it would impose a substantially greater burden upon a taxpayer who pays his taxes in full and sues for the refund than upon one who makes a partial payment. This is neither logical nor equitable.