The background, highly summarized, is that one James Haber was a promoter of a tax shelter in which the taxpayer, an LLC treated as a partnership, participated. I cannot say that I am familiar with the particular shelter involved, but I am familiar with Haber's tax shelter activity. He was long a subject and perhaps a target of the major tax shelter probes and prosecutions in SD NY (those probes, some of which involved Haber shelters, included the KPMG, E&Y and Daugerdas / Jenkens probes beginning in the early to mid-2000s). For some reason never known to me, Haber was never prosecuted despite the fact that he was at the center of shelters that were prosecuted against others.
The taxpayer in this case argued that Haber was at the center of the shelter and was the key witness. "Petitioners represent, and respondent does not contradict, that the principal witness having knowledge of these issues is James Haber, the President of The Diversified Group Incorporated. Diversified is the Tax Matters Partner of AD Investment and AD Global.The Tax Court sustained Haber's assertion of the Fifth Amendment privilege. The taxpayer urged that it was not fair that the Government's continued threat of prosecution of Haber should prevent it from getting a fair trial based on truth and not failure to meet the normal burden of proof assigned to taxpayers in the Tax Court.
Petitioners represent, and respondent does not contradict, that, in the absence of Mr. Haber's testimony, petitioners will find it difficult or impossible to carry their burden of proof at trial. Petitioners describe Mr. Haber's role in the transactions at issue; they list facts that they will be difficult or impossible to prove without his testimony.At the Court's suggestion, the IRS attorney asked USAO SDNY "whether the United States Attorney would be willing to grant Mr. Haber immunity in connection with his tax shelter activities." USAO SDNY responded "that the United States Attorney would not do so 'and would not explain why.'"
The taxpayer urged that, in effect, the IRS and the USAO for SDNY which refused to grant immunity were agencies of one Government and should not impair the search for truth and the Court's obligation to render justice by forcing on the taxpayer a burden that its own actions prevented it from meeting.
The Court agreed and held:
Rule 142 addresses the burden of proof. In relevant part, Rule 142(a)(1) provides: "The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court" (emphasis added). We think that, given the central role that Mr. Haber played in the transactions in question and his importance to petitioners' case, the interests ofjustice will be served if we grant the motion.
It is, therefore,
ORDERED that petitioners' motion to shift the burden of proof is granted, and respondent shall in these consolidated cases bear the burden of proof.JAT Comments: The order raises some interesting issues:
1. Apparently what Judge Halpern asked about was immunity criminal prosecution from his tax shelter activities. Isn't the proper inquiry whether the U.S. would give him use and derivative use immunity as to the testimony he gives? See Fifth Amendment Act of Production Privilege and Encrypted Data Files (Federal Tax Crimes Blog 2/25/12), here. As a practical matter, in most cases use and derivative use will often practically be equivalent to transaction immunity. See Third Circuit Addresses Kastigar Requirements After Immunized Testimony (Federal Tax Crimes Blog 7/19/12), here. But I would think that, in Haber's case, USAO SDNY could give derivative use immunity and still survive a Kastigar hearing by closing its already extant case files and bringing in new prosecutors without access to the Tax Court testimony. That is dicey for the Government and probably not necessary in order to achieve justice in the Tax Court case for the reason noted below in paragraphs 2 and 3.
2. In civil tax cases, the normal burden of proof is the preponderance burden -- more likely than not. Judge's often discuss the concept as meaning that the party bearing the burden of proof loses if the trier is in a state of equipoise as to the existence or nonexistence of the critical fact. This is often illustrated by percentages -- equipoise is a state in which the trier is only 50% convinced of the existence of the fact. If the trier is 51% or 49% convinced, then he is not in a state of equipoise and the proponent bearing the burden wins in the former case (51%) and loses in the latter (49%). But the win or loss respectively is not based on equipoise or the burden of proof. Judges often say that the assignment of the burden of proof is irrelevant if the trier is not in equipoise. So, bottom line, the order may be just a way station to the same result regardless of who has the burden of proof and is not in any way outcome determinative.
3. I am somewhat familiar with Haber's genre of shelters and they have not fared well regardless of the standard civil trial burden of proof. Nor, as an aside, have they fared well in criminal prosecutions.
Finally I incorporate the portion of the current draft my Federal Tax Procedure book dealing with the role of burden of proof in the context discussed above.
f. The Limits of Burden of Proof.
Cases are replete with burden of proof discussions as if burden of proof played a role in the decisions. Of course, in criminal cases, burden of proof beyond a reasonable doubt is critical and a constitutional requirement. But in civil cases the assignment of the ultimate burden of proof -- the burden of persuasion -- merely determines who wins and who loses if the trier of fact is in equipoise -- i.e., is unable to find that the fact more likely than not existed or didn't exist. If the trier believes that the evidence establishes that the fact more likely than not existed, then it doesn't matter which of the parties had the burden of proof or any component of it. Similarly, if the trier believes that the evidence establishes that the fact more likely than not did not exist, then it also doesn't matter which of the parties had the burden of proof or any component of it. It is only where the trier is unable to make the affirmative finding that the case is affected by which party bore the burden of proof (or any component). n1741 Most trial observers feel that it is rare that a trier – whether judge or jury – is in this state of equipoise so that the assignment of the burdens of proof may not ultimately be that important an issue, but it is important in framing and trying a case, of course. n1741 In fact, in judge tried cases, it is common for the trial judge to discuss in the opinion the burden of proof (i.e., the burden of persuasion) to a greater or lesser extent, but then to say that, after all, the discussion is irrelevant because he is not in a state of equipoise as to any issue. n1742
n1740 An interesting recent case illustrates the phenomenon where the trier is in equipoise so that the resolution turns upon the assignment of the burden of proof, meaning in this case the burden of persuasion. In Forste v. Commissioner, T.C. Memo 2003-103, the issue was whether the taxpayer could exclude $45,615 from income under a prior version of § 104. The court first determined that recently enacted § 7491 which we discuss in more detail below applied to assign the burden of proof to the IRS as to $25,130. The Court held that the IRS had failed to meet that burden and thus, without an affirmative finding, held that that portion was excluded under § 104. As to the balance of the payment, the Court held that the taxpayer bore the burden of proof and held for the IRS because the taxpayer had not met his burden of proof. In other words, as to both components, the Court was in equipoise so that the assignment of the burden of proof controlled the result.
n1741 Cigaran v. Heston, 159 F.3d 355, 357 (8th Cir. 1998) (“The shifting of an evidentiary burden of preponderance is of practical consequence only in the rare event of an evidentiary tie . . . .”); see also Polack v. Commissioner, 366 F.3d 608, 613 (8th Cir. 2003) (citing the Cigaran case) Blodgett v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2004); and Knudsen v. Commissioner, 131 T.C. 185, 188 (2008).
n1742 In doing so, the judges often cite the cases cited in the preceding footnote to this text or whatever their circuit’s variation of this theme. Estate of Jorgensen v. Commissioner, 2011 U.S. App. LEXIS 9203 (9th Cir. 2011) (“When, as here, the tax court decides the case based on the preponderance of the evidence and without regard to presumptions of correctness, § 7491's burden-shifting is simply not relevant”). Moreover, if a trial judge does not expressly say that he is not in equipoise, a court of appeals may effectively so determine by saying that the allocation of the burden of persuasion did not affect the decision. See e.g., Whitehouse Hotel Ltd. Partnership v. Commissioner, 615 F.3d 321, 332-333 (5th Cir. 2010) (“there is no indication that the tax court's decision turned on the allocation of the burden”).