Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
TAX CONTROVERSY OVERBURDENED:
A CRITIQUE OF HEIGHTENED STANDARDS OF PROOF
Rutgers College, B.A., 1972; University of Oklahoma, J.D., 1976; University of Miami, LL.M. in Taxation, 1981; member, Hawaii bar. Thanks must be expressed to three fine tax lawyers who read working drafts of this Article and were both generous and helpful with their comments: Robert A. Friedman, Wachtell, Lipton, Rosen & Katz, New York; David Weisblat, Hunton & Williams, Washington, D.C.; and Peter Lowy, Shell Oil Company, Houston. If any errors remain, they are the author’s.
Tax controversy exhibits certain distinguishing features, one of which is the odd but persistent balance of power. Taxpayers come to the table or to the courtroom with superior access to the pertinent facts. The government, however, retains the singular advantage of having prescribed the rules of the game. Another fundamental is the extent to which, particularly in its early stages, tax controversy reflects the inquisitorial model of dispute resolution more closely than the adjudicative. During audits, one party effectively acts as prosecutor, factfinder, and judge; the other, by default and certainly as a matter of selfperception, as defendant. The respective roles and tactical positions of the government and taxpayers do, to some extent, distinguish tax controversy from jurisprudence generally; but less so than many practitioners may have grown accustomed to imagining. The rules of civil procedure and evidence remain the silent but guiding hands from the outset. The essential character and purpose of tax controversy is precisely the same as that which underlies broader civil processes: bringing conflict to closure. The rules are best understood by working backward from the mechanisms in extremis . The Service derives its examination authority from Code section 7602. Faced with recalcitrant witnesses—taxpayers or otherwise—it issues summonses under section 7603. Those summonses are enforceable (or not) only on application to the appropriate district court under section 7604. The Code provides for compromises and closing agreements; it explicitly refers to the function of the Office of Appeals as “dispute resolution.” It distinguishes between “administrative proceedings” and “court proceedings.” These special rules conceded, there is something to be learned from viewing tax controversy broadly. Consistent with that premise, this Article borrows freely from primary and secondary sources that are not tax-related. The reason is simple: not only are these sources interesting, important, and too-often overlooked, but what happens in the course of audits, as well as after the 30- or 90- day letter is issued, is best understood from a broader perspective. Tax controversy exhibits all the best and worst of the adversarial process. The shortcomings of that process, and how they apply and sometimes are magnified in the work that tax lawyers do every day, is the real focus of this Article. Part II lays the foundation for critically looking at specific statutory presumptions by briefing their common law ancestry and sampling their modern codification. In view of the overarching importance of the Service’s presumption of correctness and because it attaches to the results of every audit large or small, Part II examines that presumption closely before proceeding to special considerations relating to civil fraud. Part III analyzes the critical role of the burden of proof in factfinding, and what the different standards of proof mean in terms of corresponding rates of error in outcomes. This analysis is fundamental to assessing what Congress really—albeit inadvertently—accomplishes when it imposes any heightened standard of proof onto the already fragile art ( not science) of factfinding. Finally, the very narrow uses to which the heightened civil standard is almost always restricted by courts and legislatures in nontax contexts are briefed for the purpose of emphasizing its relatively rampant use in tax contexts. Parts IV and V look more closely at instances of Congressional adoption of both traditional evidentiary standards and those that depart from the consensus of the common law. As to the “clear and convincing” standard in particular, Part IV demonstrates its very real contribution to the unpredictability of outcomes, including by way of rather stark empirical indications that courts are as illequipped to deal consistently with the standard as practitioners and taxpayers may be. Part V dissects the nontraditional “standards,” in part to find out whether they should be viewed as discrete standards at all or, alternatively, should be understood as the traditional standards confusingly labeled. Part VI digs deeper still, recognizing that to favor one party with a presumption while assigning to the other the corresponding obligation to rebut necessarily begs the question of the weight of evidence required. The focus is on the many presumptions in the Code that fail to identify a precise standard of rebuttal proof, or that identify a nontraditional standard. These provisions leave taxpayers, the Service, and the courts guessing as to what it was that Congress may have intended. How this question is answered can be critical to outcomes.