Friday, June 14, 2013

The Burden of Proof and Tax Law: Deja Vu Silliness

-- Posted by Neil H. Buchanan

In my Dorf on Law post yesterday, I described the simply embarrassing "fact check" provided by PolitiFact regarding the following statement from a Republican Congressman: "The IRS doesn't have to prove something against you. They can walk in and you've got the burden of proof."  The statement is clearly false, and I had even provided the PolitiFact reporter with the statutory language demonstrating it to be false.  Even so, PolitiFact ended up deeming the statement "mostly true."  As a matter of journalism, this really was an embarrassing episode.

What is, in some ways, even more interesting is the underlying story behind the current rule regarding the IRS's burden of proof in legal proceedings.  It turns out that this silly Republican talking point -- that the tax system is un-American, because only there do citizens bear the burden of proof, rather than being presumed innocent -- was already the source of much Republican chest beating back in the mid-1990's.  The current version of the law is, in fact, directly the result of that contrived claim by the Gingrich-led forces (of Contract on America fame) during their relentless attacks on the IRS.  Now, as then, the underlying assertion -- that in tax cases, citizens are presumed guilty until proven innocent -- turns out to be simply meaningless.

As the current IRS non-scandal-scandal continues to demonstrate, most of the real problems with our tax collection agency date from passage of the "Internal Revenue Service Restructuring and Reform Act of 1998" (RRA98).  That law followed a series of show trials, where Republican-led congressional hearings trumpeted lurid (and false) charges of IRS abuse of innocent citizens.  After RRA98 was passed, and in the 15 years since then, the IRS has been under increasingly intense attack, with an inadequate budget and decreasing morale.  This has led to, among other things, undertrained staff being told to process thousands of applications for nonprofit status by "social welfare organizations."  Nothing could go wrong with that, right?

But back to the burden of proof question.  As part of the Republicans' 1990's attacks on the IRS, someone in the pre-Karl Rove netherworld noticed that the Internal Revenue Code placed the burden of proof on the taxpayer.  That is, the Code said that the taxpayer had the burden of production of evidence, as well as the burden of proof of the legal claim.

Horrors!!  Un-American!  Guilty until proven innocent!  And what about the Magna Carta?!?!?!  (In the PolitiFact article that I ridiculed yesterday, they lead off with a ringing defense of the presumption of innocence, tracing it to "ancient times," citing a Supreme Court case from 1895 that takes the concept back to "the Bible, Sparta, Athens and Rome.")  So the self-styled defenders of American freedom in the mid-1990's decided to flip the burden to where they thought it should be, on "the accuser," which is supposedly the government -- although, as I described yesterday, what is really happening in tax cases is that the taxpayer is the one who is making affirmative claims, not the government.

The problem is that flipping all of the burdens in tax cases would have created havoc.  That is, imposing both the burden of proof and the burden of production on the government would have been insane, because doing the latter would have led to untenable situations like this: a taxpayer says that he has $50,000 in miscellaneous unreimbursed expenses, and the IRS has to produce evidence proving that the taxpayer's assertion is not true.  Short of invasions of privacy that would make this month's revelations about NSA spying look like child's play, such a legal rule would simply mean that every taxpayer could make any assertion that came to mind, knowing that the IRS could not produce evidence to disprove the claim.  Taxable incomes would quickly go to zero -- for everyone.

Of course, for some of the crazier Republicans at the time (and for the entire base of the party now), that was the point.  In the 1990's, however, cooler heads prevailed.  Maybe, they suggested, we could keep the burden of production on the taxpayer (to prevent mass tax evasion), but switch the burden of proof so that it is formally on the government.  The result was section 7491, from which I quoted in my post yesterday.

For a Republican Congressman now to be complaining about the burden of proof, therefore, is a bit like complaining about, say, the supposed evils of the Interstate Commerce Commission.  Whatever one thinks about the ICC, it was abolished in 1995!  Maybe Rep. Forbes is also angry about Prohibition, or the Works Progress Administration.  Republicans still like to repeat Ronald Reagan's apocryphal story about the burglar who fell through a skylight and sued the homeowners, so maybe the burden of proof in tax cases is just something that Republicans feel the need to complain about.

It is not just a matter of deja vu, however.  When RRA98 shifted the burden of proof, it did not "fix" anything.  Even though the burden of proof really had been on the taxpayer prior to 1998, it did not matter, because these are civil cases, not criminal cases, which means that the standard of proof is "by the preponderance of the evidence."  That means that, once the relevant evidence has been heard, the party that bears the burden of proof only has to barely surpass the 50/50 breaking point.

In tax cases, what does that mean?  In some instance, the question is never going to be close to 50/50.  For example, if a taxpayer claims to have given $80,000 to charity, and takes a deduction for that amount, the evidence would show whether he gave $80,000 to an entity, and whether that entity is authorized as a 501(c)(3) organization.  There is no 50/50 call involved at all.  It is all or nothing.

On the other hand, suppose that a taxpayer wants to claim certain expenses as medical deductions.  Section 213 allows deductions for money spent " for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body."  As one might imagine, that is a very blurry area of the law.  A famous Tax Court case involved a guy who wanted to deduct the cost of paying a kid to mow his lawn, because his doctor told him that his hay fever was worsened by exposure to mowed grass.  Was this within the definition of "medical care," for tax purposes?  The court said no, but reaching that conclusion -- though clearly correct -- was still not a 100% call.

Suppose, then, that you are a taxpayer who is in a legal dispute with the IRS.  Does it matter to you whether, under a preponderance standard, you bear the legal burden of proof?  I suppose that one could imagine a truly close case, where the decision was actually 50/50, and you would lose if you bore the burden of proof, but you would win if the government bore that burden.  In the real world, however, it is never that close (in tax cases, or in any other civil case, as my CivPro-teaching colleagues can attest).  In fact, a study in 2008 (ten years after RRA98) showed that shifting the burden of proof under the 50%-plus-a-tiny-amount standard simply makes no difference in tax cases.  The outcome is the same, no matter who formally bears the burden of proof.

This, by the way, is why the PolitiFact article that I discussed yesterday was especially confused.  They described Rep. Forbes's assertion as only "mostly true" because the government bears the burden of proof in criminal cases.  That, however, is not the point.  What matters is that the standard of proof in criminal cases is "beyond a reasonable doubt."  If it were the preponderance standard, then the legal burden would not matter there, either.

I considered, by the way, mentioning all of this history briefly in my reply to the PolitiFact reporter last month.  I decided not to do so, however, because the answer to the question at hand is so blatantly clear under current law.  I also guessed that saying that "it really doesn't matter who bears the burden, under a preponderance standard" would merely confuse the people who ultimately wrote the story.  It is now clear that I was right about that.

In any event, the return of Republican wailing about the burden of proof in tax cases demonstrates that they cannot even take yes for an answer.  As unnecessary as it was, Congress in 1998 shifted the burden of proof onto the government, leaving the burden of production where it should be.  Now, the claim is that the burden of production and the burden of proof are the same thing, kind of, and it is all un-American.  And the press goes along.  Is it any wonder that the political system is broken?