Thursday, November 14, 2013

Shifting the Burden of Proof in a Tax Refund Case

    After a federal district court bench trial, it was determined that the Estate of George Batchelor was entitled to refund of income taxes, plus interest, because the IRS had erroneously determined that Mr. Batchelor had under-reported almost $5.8 million in interest income from an installment sale in the year 2000. Batchelor-Robjohns vs. United States, Case No. 12-20038-Civ-Moreno (11/13/2013, Miami, Florida).

    The procedural history of the case was as follows: In 2004, in the midst of an earlier trial between the United States and the Batchelor Estate involving the very same sale transaction which generated the interest income at issue (United States v. Batchelor-Robjohns, Case. No. 03-20164, herein referred to as “Batchelor #1").  In the midst of Batchelor #1 proceedings, the IRS began an income tax examination of Mr. Batchelor’s 2000 income tax return. In spite of being provided with extensive documentation to support Mr. Batchelor’s return position for 2000, the IRS issued a notice of deficiency for 2000 finding that approximately $5.8 million in interest was not reported. The Estate elected to pay the asserted deficiency rather than to contest it (without first paying the asserted tax) in Tax Court.  Thereafter, in 2006 the Estate filed a refund claim for the entire amount it had paid.  The refund claim was denied after being reviewed by a Revenue Agent in yet another examination during which the Batchelor Estate met with the Revenue Agent and provided him with all requested documents. The claim was finally disallowed by IRS Appeals in 2011. Thereafter, the Estate filed its refund suit in District Court.

     At trial, the United Stated admitted that it erroneously had asserted that the $5.8 million in interest had been omitted from income in the year 2000. However, during the refund suit, the United States raised a brand new theory to maintain its position that the Estate was not entitled to a refund.

    In granting the Estate’s refund claim, the court found first that under Code Section 7491 shifted the burden of proof to the United States because the Estate proved that it met the requirements under Section 7491 necessary to shift the burden to the government. In particular, despite the position of the United States that documentation had not been provided to it,  the court found that the Estate was able to demonstrate that it cooperated with all reasonable requests for documents, information and meetings as requested by the IRS.  The IRS, having raised a new theory at trial was unable to present “facts” to carry its burden.

    The court then concluded that the United States was prevented by res judicata or “claim preclusion” from contesting the Estate’s refund claim,  because the claims of the United States in the 2013 refund trial could have been brought in Batchelor #1, but were not.  The elements of res judicata were met because: Batchelor #1 had: (1) was between the identical parties, i.e., the United States and the Batchelor Estate, (2) involved the same installment sale transaction and payments, (3) concerned the same cause of action and the same operative nucleus of facts, and (4) had been resolved in favor of the Batchelor Estate in 2005 by a final summary judgment on its merits.

    This decision is one in which the United States was unable to prove it case on the facts, in part because it could not carry its burden of proof. Further, due to res judicata, the United States was unable to prevail as it was barred from doing so by law. 

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