II. Explanation of the Bill
(Sec. 3001 of the Bill and new Sec. 7491 of the Code)
Under present law, a rebuttable presumption exists that the Commissioner's determination
of tax liability is correct. "This presumption in favor of the Commissioner is a procedural device
that requires the plaintiff to go forward with prima facie evidence to support a finding contrary to
the Commissioner's determination. Once this procedural burden is satisfied, the taxpayer must still
carry the ultimate burden of proof or persuasion on the merits. Thus, the plaintiff not only has the
burden of proof of establishing that the Commissioner's determination was incorrect, but also of
establishing the merit of its claims by a preponderance of the evidence".
The general rebuttable presumption that the Commissioner's determination of tax liability is
correct is a fundamental element of the structure of the Internal Revenue Code. Although this
presumption is judicially based, rather than legislatively based, there is considerable evidence that
the presumption has been repeatedly considered and approved by the Congress. This is the case
because the Internal Revenue Code contains a number of civil provisions that explicitly place the
burden of proof on the Commissioner in specifically designated circumstances. The Congress
would have enacted these provisions only if it recognized and approved of the general rule of
presumptive correctness of the Commissioner's determination. A list of these civil provisions
(1) Fraud.--Any proceeding involving the issue of whether the taxpayer has been guilty of
fraud with intent to evade tax (Secs. 7454(a) and 7422(e)).
(2) Required reasonable verification of information returns.--In any court proceeding, if a
taxpayer asserts a reasonable dispute with respect to any item of income reported on an information
returned filed with the Secretary by a third party and the taxpayer has fully cooperated with the
Secretary (including providing, within a reasonable period of time, access to and inspection of all
witnesses, information, and documents within the control of the taxpayer as reasonably requested
by the Secretary), the Secretary has the burden of producing reasonable and probative information
concerning such deficiency in addition to such information return (Sec. 6201(d)).
(3) Foundation managers.--Any proceeding involving the issue of whether a foundation
manager has knowingly participated in prohibited transactions (Sec. 7454(b)).
(4) Transferee liability.--Any proceeding in the Tax Court to show that a petitioner is liable
as a transferee of property of a taxpayer (Sec. 6902(a)).
(5) Review of jeopardy levy or assessment procedures.--Any proceeding to review the
reasonableness of a jeopardy levy or jeopardy assessment (Sec. 7429(g)(1)).
(6) Property transferred in connection with performance of services.--In the case of
property subject to a restriction that by its terms will never lapse and that allows the transferee to
sell only at a price determined under a formula, the price is deemed to be fair market value unless
established to the contrary by the Secretary (Sec. 83(d)(1)).
(7) Illegal bribes, kickbacks, and other payments.--As to whether a payment constitutes an
illegal bribe, illegal kickback, or other illegal payment (Sec. 162(c)(1) and (2)).
(8) Golden parachute payments.--As to whether a payment is a parachute payment on
account of a violation of any generally enforced securities laws or regulations (Sec.
(9) Unreasonable accumulation of earnings and profits.--In any Tax Court proceeding as
to whether earnings and profits have been permitted to accumulate beyond the reasonable needs of
the business, provided that the Commissioner has not fulfilled specified procedural requirements
(10) Expatriation.--As to whether it is reasonable to believe that an individual's loss of
citizenship would result in a substantial reduction in the individual's income taxes or transfer taxes
(Secs. 877(e), 2107(e), 2501(a)(4)).
(11) Public inspection of written determinations.--In any proceeding seeking additional
disclosure of information (Sec. 6110(f)(4)(A)).
(12) Penalties for promoting abusive tax shelters, aiding and abetting the understatement of
tax liability, and filing a frivolous income return.--As to whether the person is liable for the penalty
(13) Income tax return preparers' penalty.--As to whether a preparer has willfully
attempted to understate tax liability (Sec. 7427).
(14) Status as employees.--As to whether individuals are employees for purposes of
employment taxes (pursuant to the safe harbor provisions of section 530 of the Revenue Act of
Reasons for Change
The Committee is concerned that individual and small business taxpayers frequently are at a
disadvantage when forced to litigate with the Internal Revenue Service. The Committee believes
that the present burden of proof rules contribute to that disadvantage. The Committee believes that,
all other things being equal, facts asserted by individual and small business taxpayers who
cooperate with the IRS and satisfy relevant recordkeeping and substantiation requirements should
be accepted. The Committee believes that shifting the burden of proof to the Secretary in such
circumstances will create a better balance between the IRS and such taxpayers, without
encouraging tax avoidance.
The Committee believes that it is inappropriate for the IRS to rely solely on statistical
information on unrelated taxpayers to reconstruct unreported income of an individual taxpayer.
The Committee also believes that, in a court proceeding, the IRS should not be able to rest on its
presumption of correctness if it does not provide any evidence whatsoever relating to penalties.
Explanation of Provision
The provision provides that the Secretary shall have the burden of proof in any court
proceeding with respect to a factual issue if the taxpayer introduces credible evidence with respect
to the factual issue relevant to ascertaining the taxpayer's income tax liability. Four conditions
apply. First, the taxpayer must comply with the requirements of the Internal Revenue Code and
the regulations issued thereunder to substantiate any item (as under present law). Second, the
taxpayer must maintain records required by the Code and regulations (as under present law).
Third, the taxpayer must cooperate with reasonable requests by the Secretary for meetings,
interviews, witnesses, information, and documents (including providing, within a reasonable
period of time, access to and inspection of witnesses, information, and documents within the
control of the taxpayer, as reasonably requested by the Secretary). Cooperation also includes
providing reasonable assistance to the Secretary in obtaining access to and inspection of witnesses,
information, or documents not within the control of the taxpayer (including any witnesses,
information, or documents located in foreign countries). A necessary element of cooperating
with the Secretary is that the taxpayer must exhaust his or her administrative remedies (including
any appeal rights provided by the IRS). The taxpayer is not required to agree to extend the statute
of limitations to be considered to have cooperated with the Secretary. Cooperating also means that
the taxpayer must establish the applicability of any privilege. Fourth, taxpayers other than
individuals must meet the net worth limitations that apply for awarding attorney's fees
(accordingly, no net worth limitation would be applicable to individuals). Corporations, trusts,
and partnerships whose net worth exceeds $7 million are not eligible for the benefits of the
provision. The taxpayer has the burden of proving that it meets each of these conditions, because
they are necessary prerequisites to establishing that the burden of proof is on the Secretary.
The burden will shift to the Secretary under this provision only if the taxpayer first
introduces credible evidence with respect to a factual issue relevant to ascertaining the taxpayer's
income tax liability. Credible evidence is the quality of evidence which, after critical analysis, the
court would find sufficient upon which to base a decision on the issue if no contrary evidence were
submitted (without regard to the judicial presumption of IRS correctness). A taxpayer has not
produced credible evidence for these purposes if the taxpayer merely makes implausible factual
assertions, frivolous claims, or tax protestor-type arguments. The introduction of evidence will
not meet this standard if the court is not convinced that it is worthy of belief. If after evidence from
both sides, the court believes that the evidence is equally balanced, the court shall find that the
Secretary has not sustained his burden of proof.
Nothing in the provision shall be construed to override any requirement under the Code or
regulations to substantiate any item. Accordingly, taxpayers must meet applicable substantiation
requirements, whether generally imposed or imposed with respect to specific items, such as
charitable contributions or meals, entertainment, travel, and certain other expenses.
Substantiation requirements include any requirement of the Code or regulations that the taxpayer
establish an item to the satisfaction of the Secretary. Taxpayers who fail to substantiate any item
in accordance with the legal requirement of substantiation will not have satisfied the legal
conditions that are prerequisite to claiming the item on the taxpayer's tax return and will
accordingly be unable to avail themselves of this provision regarding the burden of proof. Thus, if
a taxpayer required to substantiate an item fails to do so in the manner required (or destroys the
substantiation), this burden of proof provision is inapplicable.
The provision also provides that in any instance in which the Secretary uses statistical
information from unrelated taxpayers solely to reconstruct an individual taxpayer's income (such as
average income for taxpayers in the area in which the taxpayer lives), the burden of proof is on the
Secretary with respect to the item of income that was reconstructed by the Secretary.
Further, the provision provides that, in any court proceeding, the Secretary must initially
come forward with evidence that it is appropriate to apply a particular penalty to the taxpayer before
the court can impose the penalty. This provision is not intended to require the Secretary to
introduce evidence of elements such as reasonable cause or substantial authority. Rather, the
Secretary must come forward initially with evidence regarding the appropriateness of applying a
particular penalty to the taxpayer; if the taxpayer believes that, because of reasonable cause,
substantial authority, or a similar provision, it is inappropriate to impose the penalty, it is the
taxpayer's responsibility (and not the Secretary's obligation) to raise those issues.
The provision applies to court proceedings arising in connection with examinations
commencing after the date of enactment.