TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, November 26, 2018

Lesson From The Tax Court: NOD Reprints Are Not Copies, But May Still Trigger Presumption Of Correctness

Tax Court (2017)One of the challenges of administering the tax laws to hundreds of millions of taxpayers is recordkeeping.  Since the 1960’s the IRS has increasingly met this challenge by computerizing its systems of records. As a consequence, it often no longer keeps paper copies of important documents but instead relies on accurate recordation of those documents in its computerized system of accounts.  For example, when the IRS sends out a Notice of Deficiency (NOD), an IRS employee inputs data to reflect the content of the NOD and inputs to reflect the issuance of the NOD.  If a taxpayer (or representative) later wants to see what was in that particular NOD, the IRS can re-print the content of that NOD but does so on a new form.  That’s not a copy.  It’s a reprint.

The difference between a copy and a reprint was an important to last week’s case of Jeffrey D. Gregory v. Commissioner, T.C. Memo 2018-192 (Nov. 20, 2018).  There, Mr. Gregory contested the Office of Appeals’ CDP determination that the IRS had taken the proper administrative steps to assess his 2009 tax liability.  In particular, Mr. Gregory argued that because the IRS was unable to produce an actual copy of the actual NOD it actually sent him, the Office of Appeals could not credibly verify that the IRS had properly sent the NOD.  The IRS argued that its computer records created all the evidence necessary for the Court to apply a strong presumption of correctness that the NOD existed and had been properly mailed.

Judge Halpern’s careful and thorough opinion is well worth your time, but in case you have too much holiday shopping yet to do, today’s blog will give you the short of it.  The takeaway lesson  here is that the IRS does not have to have an actual copy of an NOD to show it complied with administrative requirements, so long as it has sufficient other evidence to trigger a strong  presumption of correctness the courts give to IRS records.

The Law: The Presumption of Correctness

When a taxpayer succeeds in obtaining a CDP hearing, §6330(c)(1) requires that the Settlement Officer (SO) verify that the IRS has properly met the requirements of any applicable law or administrative procedure.  One requirement is that, when the IRS assesses a tax liability based upon a deficiency, the IRS first send to the taxpayer’s last known address a proper Notice of Deficiency (NOD) and then give the taxpayer a statutorily prescribed period of time (generally, 90 days) to petition the Tax Court. §6212.

When the IRS sends out an NOD, it is supposed to keep a copy of the NOD in the files.  IRM 4.8.9.11 (06-19-2015)(“Disposition of Copies”) provides that NODs “will generally be prepared in duplicate” and requires that a copy be “kept in the case file as evidence that the notice of deficiency was sent to the taxpayer.  The file is then retained by the issuing office pending its ultimate disposition.”

When a taxpayer raises the question of whether the IRS properly sent the NOD, the government must produce enough evidence to show (1) an NOD actually existed and (2) the NOD was mailed to the taxpayer’s last known address. Coleman v. Commissioner, 94 T.C. 82 (1990);  Welch v. United States, 678 F.3d 1371 (Fed. Cir. 2012). Once the IRS comes forward with sufficient evidence as to both elements, it gets a strong presumption of correctness and the burden shifts to the taxpayer to rebut that presumption.  Cropper v. Commissioner, 826 F.3d 1280 (10th Cir. 2016).  Sometimes that burden is heavy and sometimes not so much.  Judge Halpern has a nicely nuanced discussion of the taxpayer’s burden to rebut the presumption of correctness in Garrett v. Commissioner, T.C. Memo 2015-228.

Typically, the IRS meets the first element with a copy of the NOD.  Typically, the IRS meets the second element by using Post Office Form 3877.  Some courts, however, allow the IRS to meet its burden of production for both elements with other evidence if that evidence is “otherwise sufficient.”O’Rourke v. United States, 587 F.3d 537, 540 (2d Cir.2009).

If the IRS does not come forward with sufficient evidence to meet both elements, it loses the presumption.  For example, in Pietanza v. Commissioner, 92 T.C. 729 (1989), affd. 935 F.2d 1282 (3d Cir.1991), the IRS had lost the administrative file and so could not produce a copy of the NOD.  It was only able to produce a draft NOD.  While it produced proof of mailing through the use of the Post Office’s Form 3877, that proof only showed it had mailed something and did not show the content of the item mailed.  The Court emphasized that “there is no indication in this record, other than the bare existence of postal service Form 3877, that a notice of deficiency is, or ever was, in existence. We know only that a draft of a notice was prepared.”

Facts

In Gregory the IRS had based the assessment on a deficiency but could not provide either the SO or the Tax Court with a copy of the NOD.  Instead, it provided (1) a reprint of what it said would have been the content of the NOD and (2) an internal tracking document called the “Certified Mail List” that the IRS uses to track NODs sent to taxpayers each day.  The IRS submitted a Certified Mail List for November 13, 2012, the day it said it mailed the NOD to Mr. Gregory.  If the IRS did indeed mail a proper NOD to Mr. Gregory on November 12, 2012, then the resulting assessment of his 2009 tax liability would have been timely. 

Mr. Gregory argued that without a copy of the actual NOD sent to him, the IRS could not show: (1) that it even sent an NOD to him; (2) that the NOD was properly mailed to his last known address; (3) that the NOD was signed by someone with authority to sign it; and (4) that the NOD contained the information necessary to show him the basis for the proposed deficiency. 

In response the IRS argued that the reprint showed an NOD had actually existed at one point in time and was a “duplicate” admissible for the truth of its contents under Federal Rule of Evidence 1001(e).  It further argued that its internal Certified Mail List was functionally as reliable as the Post Office Form and showed a proper mailing of the NOD on November 13, 2012. 

Lesson: A Reprint Can Trigger the Presumption of Correctness because of Computerized Records

As to the first element, the IRS had to come forward with evidence to show the existence of an actual NOD.  Mr. Gregory argued the reprint was not sufficient.  He pointed out that the reprint did not (and could not possibly) show the certified mail number of the actual NOD or the actual date of issuance.  Mr. Gregory also pointed out that because the reprint was re-printed years after November 2012, it contained different pre-printed names on it. 

Judge Halpern agreed that the reprint was not a “duplicate” of the actual NOD for purposes of Federal Rules of Evidence 1001(e).  So it could not be admitted as a duplicate.  But he thought it was still probative evidence “that respondent prepared a notice of deficiency for petitioner’s 2009 taxable year.”  The reason it was probative was because the database used to reprint the NOD (called the Access database) contained the data that went into the actual NOD.  Since the information was in the database (as evidenced by the reprint), that created an inference that the NOD had actually existed.  Thus, even without a copy of the actual NOD, the IRS had produced “sufficient evidence” to trigger the presumption of correctness.  Query whether this is consistent with Pietanza where the Tax Court refused to infer the existence of an actual NOD from the IRS’s copy of a draft NOD.  The data in the database could, arguably, be equated more closely to the draft NOD in Pietanza than to an actual NOD.  That is, the data in the computer is evidence that someone input the data, not evidence that any final document was actually produced.  But it does not appear Mr. Gregory argued that point.

As to the second element, the IRS needed evidence that it had mailed the document that Judge Halpern inferred existed.  Mr. Gregory argued that the prior case law required the IRS use the Post Office Form 3877 to track mailings.  Judge Halpern rejected this argument based on his prior opinion in Garrett where he had explained why the internal tracking system was as reliable as the Post Office Form. 

For these reasons, Judge Halpern concluded that the IRS successfully triggered the presumption of correctness.  For me the key lesson is this: reprints may not be copies, but sometimes they are good enough for government work.

Coda: One mystery to me is why the IRS did not rely on the transcript of account or on Form 4340 to get the presumption of correctness.  In similar cases, courts have allowed the Form 4340 to trigger the presumption.  For a good recent example see United States v. Austin, 2018 WL 3801244122 A.F.T.R.2d 2018-5417 (D.N.Mex. September 5, 2018).  There, the Magistrate Judge did not believe a Form 4340 alone would support an IRS motion for summary judgment but the District Court Judge reversed.  I cannot find a free link online; you will need to look it up in a tax service.  For a good online discussion of Form 4340, where another Magistrate Judge found it unreliable but, again, the District Court judge reversed, see Pursifull v. United States, 849 F. Supp. 597 (S.D. Ohio 1993).  I cannot find the Magistrate Judge's opinion online (it is on LEXIS) but it's a good opinion on some of the reasons why a Form 4340 might be unreliable.

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.

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Comments

Bryan,

A picky point. Judge Halpern does not refer to a presumption of correctness. Rather, his conclusion is based on the following analysis:

Even if the reprint the parties submitted in the present case does not qualify as a duplicate, we see no reason [*15] cannot serve as evidence that respondent prepared a notice of deficiency for petitioner's 2009 taxable year. We infer from the inclusion in respondent's database of the information shown on the reprint that respondent created a notice of deficiency for petitioner's 2009 taxable year in accordance with his customary practice. n3
n3 We also infer, on the basis of Mr. Juster's description of his supervisory duties, that the Access database program that produced the reprint is customarily used to generate notices of deficiency mailed to taxpayers.
We draw that inference not from the document the parties submitted but instead from the information included in respondent's database. The reprint simply evidences information that had been stored in the database before the reprint's creation. Thus, we conclude that the reprint is sufficient to support Appeals Officer Weber's determination regarding the existence of a notice of respondent's determination of a deficiency in petitioner's 2009 Federal income tax. n4

JAT Comments:

1. In other words, Judge Halpern found as a fact that the notice of deficiency was prepared and sent because of inferences he drew from the facts. That is not the same as basing a result on the presumption of correctness.

2. The Government bears the burden of proof with regard to a timely mailed notice of deficiency (a predicate to a valid assessment). I don't think that any supposed presumption of correctness will substitute for some type of affirmative persuasive proof of that key fact.

3. This is analogous to a timely assessment. The Government bears the burden of proving that the assessment is timely. It does not do that by a presumption of correctness. It does that by showing assessment within the periods authorized by Section 6501. For example, if the assessment is outside the normal 3-year period of Section 6501(a), the Government has to show an exception. The closest analogy to the Judge Halpern's Gregory situation that I am aware of is a consent to extend the statute of limitations which extends under Section 6501(c)(4). If the IRS cannot produce a signed consent, that does not mean that it cannot prove that the signed consent once existed. One of my early jury trials with DOJ Tax involved a situation where the IRS could only produce an unsigned consent. We established to the jury's satisfaction through circumstantial evidence (no direct testimony) that there had been a signed consent. No Government person could specifically recall having seen it. The taxpayer denied having signed one. Yet, the circumstantial evidence persuasively established that it had existed. The jury held for the Government. The point is that, unless there is some specific provision of law that requires the original or a copy to be physically produced in the subsequent litigation, then circumstantial evidence of the existence of the document will suffice. Again, that is proof of the fact without the artificial support of any presumption of correctness.

4. Indeed, while with DOJ Tax Appellate in 1971, I prepare a position paper on burden of proof that, with review and approval of my superiors, was circulated to all attorneys for guidance on how to treat burden of proof issues in briefing. My position was that the presumption of correctness should rarely, if ever, be used to force or justify a result that the proof and normal burdens of proof did not support. This would be speculation, but I suspect that Judge Halpern's careful avoidance of the presumption of correctness was based on the same analysis. (I at one time had a copy of that memorandum and even had it pdf'd, but now am unable to put my hands on it; I will continue to look.)

Posted by: Jack Townsend | Nov 26, 2018 11:44:49 AM

@Jack: Thanks for those comments! I’m not sure you disagree with anything except my terminology. I use the idea of a presumption because the government has the burden of proving proper mailing of a notice of deficiency by competent and persuasive evidence. Coleman, 94 T.C. at 90. But the IRS gets a lot of help in meeting that “competent and persuasive” requirement by a presumption. Call it a presumption of correctness or presumption of regularity or presumption of propriety. Whatever you call it, it’s a short-cut or a break that courts give the IRS in meeting its burden to show proper mailing of an NOD. As the Federal Circuit in Welch summed it up: “where the IRS has (1) established the existence of a notice of deficiency and (2) produced a properly completed PS Form 3877 certified mail log it is entitled to a presumption of mailing, and the burden shifts to the taxpayer to rebut that presumption by clear and convincing evidence.” I don’t think the Tax Court applies much of a different standard except that (a) the IRS can use its internal database rather than From 3877 and (b) the taxpayer’s burden to rebut the presumption might vary depending on circumstance.

I think that when the only evidence that the IRS actually prepared an NOD is the information put in the computer (as evidence by the reprint) one must presume that the data input resulted in the actual printing and mailing of an NOD. But I agree with you that one could view the matter differently and think the evidence supports the fact to be found without the use of a presumption. But still the IRS must meet both elements to get the overall presumption of doing the right thing and complying with the administrative rules for NODs.

Posted by: bryan | Nov 26, 2018 1:01:00 PM

It seems that having a true copy (with old applicable data from the timeframe supposedly mailed,,,if truly mailed then) would be the best proof for everyone. The reprint with new data seems lacking, in my opinion.

Posted by: Tax Accountant | Nov 26, 2018 2:45:26 PM

Bryan,

It may be a terminology only difference between us. But, sometimes terminology has consequences. I think it does have consequences -- indeed misconsequences (if that is a word) -- with the use and misuse of the presumption of correctness (or whatever formulation it appears in).

What does the presumption of correctness mean? Does it mean that, if the IRS makes an assessment of a tax, penalty or interest, the IRS wins? I don't think it means that or should mean that.

Rather, in my mind, the predicate issue is who should have some type of burden with respect to the issue at hand. Sometimes that will be determined by the legislature (Congress for the federal government). For example, Congress has said in Section 7419 that certain burdens apply in some cases. But, in other cases, the courts have developed rules for the application of burdens. In tax law, the courts early adopted the concept that the taxpayer bears a burden of proof with respect to tax liability determinations made by the IRS. Often that assignment was couched in language of presumption of correctness, but I think more properly it was that the taxpayer is usually the party with access to the facts of the taxpayer's liability and thus should bear the burden of persuasion with respect to the facts upon which the liability is based. The procedural device the courts use may be in terms of presumption of correctness (or some such). But, it really is a device for allocating the burden of persuasion (and thus, in most cases, the burden of production) to the party with the best ability to bear that burden in a complex system requiring some party to bear a burden.

That's why I think the presumption of correctness is a false reason to state in deciding cases.

An analogous issue is the incessant court discussions of burden of proof, meaning burden of persuasion (and, of course, a predicate burden of production, without which there can be no persuasion). Burden of persuasion is important only in those rare instances where the fact finder is not persuaded to the more likely than not standard in civil cases. In those rare instances only, the burden of persuasion is outcome determinative. But one would get the misimpression that the burden of persuasion is more important in the resolution of cases than it really is. I think the same is true of the presumption of correctness.

Posted by: Jack Townsend | Nov 27, 2018 11:55:26 AM