Opinion ID: 326172
Heading Depth: 3
Heading Rank: 1

Heading: What the burden is.

Text: 11 Rule 32 of the Rules of Practice of the Tax Court (now Rule 142(a), see 26 U.S.C.A. § 7453 (1975 Supp.)) places the burden of proof on Rockwell. See Helvering v. Taylor, 1935, 293 U.S. 507, 515, 55 S.Ct. 287, 79 L.Ed. 623. This burden is a burden of persuasion; it requires Rockwell to show the merits of his claim by at least a preponderance of the evidence. Brumley-Donaldson Co. v. Commissioner of Internal Revenue, 9 Cir., 1971, 443 F.2d 501, 504 n.4. The Tax Court was correct in imposing this burden of persuasion on Rockwell. He argues that the only burden Rule 32 placed on him was the less onerous burden of producing enough evidence initially to rebut the presumption of correctness which attaches to the Commissioner's deficiency determination. Not so. 12 First, Rockwell's argument confuses the separate functions of the initial presumption in favor of the Commissioner and of the burden of proof placed on the taxpayer. The presumption in favor of the Commissioner is a procedural device which requires the taxpayer to come forward with enough evidence to support a finding contrary to the Commissioner's determination. Caratan v. Commissioner of Internal Revenue, 9 Cir., 1971, 442 F.2d 606, 608 (taxpayers presented evidence that their lodgings were provided as a requirement of employment and the Commissioner introduced no evidence; taxpayers overcame the presumption and prevailed): Potts, Davis & Co. v. Commissioner of Internal Revenue, 9 Cir., 1970, 431 F.2d 1222 (taxpayer presented insufficient evidence to rebut the presumption and lost). 13 The burden of proof is yet another hurdle. After satisfying the procedural burden of producing evidence to rebut the presumption in favor of the Commissioner, the taxpayer must still carry his ultimate burden of proof or persuasion. Brumley-Donaldson, supra; American Pipe and Steel Corp. v. Commissioner of Internal Revenue, 9 Cir., 1957, 243 F.2d 125, 126-27, cert. denied 355 U.S. 906, 78 S.Ct. 333, 2 L.Ed.2d 261. See also United States v. Rexach, 1 Cir., 1973, 482 F.2d 10, 16-17 n.3, cert. denied, 414 U.S. 1039, 94 S.Ct. 540, 38 L.Ed.2d 330. 14 Second, Rockwell's reliance on our decisions in Herbert v. Commissioner of Internal Revenue, 9 Cir., 1967, 377 F.2d 65, 69; Clark v. Commissioner of Internal Revenue, 9 Cir., 1959, 266 F.2d 698, 706; Niederkrome v. Commissioner of Internal Revenue, 9 Cir. 1959, 266 F.2d 238, 241, cert. denied, 359 U.S. 945, 79 S.Ct. 725, 3 L.Ed.2d 678, and Cohen v. Commisioner of Internal Revenue, 9 Cir., 1959, 266 F.2d 5, 11, is misplaced. To the extent that these cases indicate that, when the taxpayer satisfies his burden of production, the ultimate burden of persuasion shifts to the Commissioner, 1 they are different from the case at bar. Herbert, Clark, Niederkrome, and Cohen each involved a dispute over whether and to what extent the taxpayer received certain funds as income. In such cases, it might make sense to impose on the Commissioner the burden of proving his case because the taxpayer may face practical difficulties in attempting to refute the Commissioner's assertion that the taxpayer received unreported income. We need not here decide that question. 15 Whatever the proper rule may be where inclusion in income is controverted, there is no dispute that the taxpayer bears the burden of proof in substantiating claimed deductions. As we stated in Herbert, supra, 377 F.2d at 71: 16 It appears to us that the Tax Court has confused the burden of establishing receipt of income with the burden of supporting allowable deductions from income. In the former case the burden is on the Commissioner, and in the latter case the burden is upon the taxpayer. 17 In Nor-Cal Adjusters v. Commissioner of Internal Revenue, 9 Cir., 1974, 503 F.2d 359, 361 (affirming the Tax Court's finding that corporate taxpayer's payments to officer-shareholders were dividends rather than deductible bonuses), we said: 18 When as here, a taxpayer claims a deduction which is disallowed by the Internal Revenue Service, the burden is on the taxpayer to prove to the Tax Court the merit of the deduction. The shifting of that burden can only be caused by the interjection of new matter as provided by Rule 32 of the Rules of Practice of the United States Tax Court. 19 Under these principles, the burden of proof falls on Rockwell here, where the principal legal issues are whether the taxpayer was entitled to capital gains treatment, which is achieved through what amounts to a deduction under IRC § 1202 or through the alternative formula provided by § 1201, and certain depreciation deduction. Similarly, whether Rockwell could invoke IRC § 1031 to escape recognition of gain on an exchange of like kind real properties is a question of tax mitigation, provided by legislative grace, and falls within the burden of proof rules applicable to disputed deductions. Also incidentally involved in this case is the self-employment tax issue. Where there is no dispute that Rockwell received gains includable in gross income from his real property endeavors and the issue of whether he is exempt from the self-employment tax is incidental to the question of whether his business was trading in real property, the burden of proof as to that incidental issue likewise falls on Rockwell. 20 The nature of the factual inquiry here bolsters our conclusion that Rockwell must shoulder the burden of proof. Here, as in Brumley, supra, the crucial factual issue is Rockwell's purpose. Here we are concerned with whether he held the properties primarily for sale in the ordinary course of trade or business. There we were concerned with whether the principal purpose of the taxpayer in acquiring a corporation with a net operating loss was the evasion or avoidance of federal income taxes. See IRC § 269. It is logical to place on the taxpayer the burden of proving his reasons for engaging in activities when those reasons affect his tax liability. 21 We hold that it was proper for the Tax Court to impose the burden of proof on Rockwell. Although we agree with him that he carried his burden of coming forward with evidence to rebut the presumption favoring the Commissioner, we cannot say that the Tax Court erred in finding that he failed to carry his additional burden of proof. 22