Can’t Wait?

Case dispositions involving concessions by both the Government and the taxpayer for the purpose of settlement where there is substantial uncertainty in event of litigation as to how the courts would interpret and apply the law, or as to what facts the courts would find, are designated as mutual-concession settlements.

Appeals is expressly authorized by Policy Statement P–8–47 to enter into such settlements. In such a case there is substantial strength to the position of both parties, so that neither party, with justification, is willing to concede in full the unresolved area of disagreement.

Resolution of the dispute involves concessions for the purpose of settlement by both parties based on the relative strength of the opposing positions. Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment, type of agreement is generally used in mutual-concession settlements.

Do not use the term "overall settlement" in the discussion of an issue being settled unless there is a clear and precise discussion of the specific concessions being made by both parties.

Policy Statement P–8–48 states Appeals may enter into settlements based on a percentage or stipulated amount of the tax in controversy, but such settlement, identified as a "split-issue" settlement, is only used when no other method of settlement is appropriate.

A split-issue settlement is a form of mutual-concession settlement of an issue which, if litigated, would result in a decision completely for the Government or the taxpayer. The distinguishing feature of a split-issue settlement is that the agreed result would not be reached if tried.

In deciding whether to make a split-issue settlement, consider whether it has some effect upon later years, particularly in a carryover or carryback situation, and in most gift tax cases. If so, it is preferable that the split-issue settlement be expressed in terms of an adjustment of taxable income rather than in a percentage or an amount of tax.

It is important the taxpayer have a clear understanding of the effect of the split-issue settlement in terms of tax liability and taxable income. Either a closing agreement or a collateral agreement is advisable.

In all cases involving the "trading" of issues, the discussion of the hazards must clearly support the conclusion that relative values of the issues being traded are equal. Not all issues are traded.

Penalty issues are not traded in Appeals. Penalties are settled, but the settlement is based on the merits and hazards surrounding each penalty issue standing alone.

Policy Statement P–8–47 states no settlement will be made if it is based on nuisance value to either party. Nuisance value is any concession made solely to eliminate the inconvenience or cost of further negotiations or litigation and is unrelated to the merits of the issues. Appeals neither exacts a concession nor grants a concession solely to relieve either party of such inconvenience or cost.

The judicial attitude is one which reasonably appraises the facts, law, and litigating prospects; uses sound judgment and ability to see both sides of a question; and is objective and impartial. Any approach which contemplates a maximum possible result in favor of the Government or a deficiency in every case is incompatible with a judicial attitude and the Appeals mission.

Do not take advantage of a taxpayer's lack of technical knowledge. Assist the pro se taxpayer in every way possible. In the absence of an agreement, ensure the taxpayers fully understand their appeal rights.

The Internal Revenue Service Restructuring and Reform Act of 1998 ("RRA 98" ), which was signed into law on July 22, 1998, states under certain circumstances the Internal Revenue Service (" Service" ) has the burden of proof in any court proceeding with respect to a factual issue if the taxpayer introduces credible evidence to ascertain the taxpayer's income tax liability.

Congress believed that placing the burden of proof on taxpayers created a disadvantage for them when they litigated against the Service, and that it should be the Government's responsibility to show that a taxpayer's determination of liability is not correct. Congress also felt it was not appropriate in all cases to make the taxpayer disprove unreported income when the Service determined income solely based upon statistical information from unrelated taxpayers. Furthermore, Congress believed during court proceedings the Service cannot rest on the presumption of correctness if it does not provide any evidence relating to penalties.

The burden of proof provision, under IRC 7491 , applies to income, estate, gift, and generation-skipping transfer taxes. (For purposes of this provision, self-employment taxes are treated as income taxes.)

The burden of proof provision applies to court proceedings arising in connection with examinations commencing after the date of enactment (July 22, 1998) of RRA 98. Where there is no examination, the burden of proof provision applies to court proceedings arising in connection with taxable periods or events beginning or occurring after the date of enactment of RRA 98.

An audit is not the only event considered an examination for purposes of the burden of proof provision. For example, matching an information return to an amount reported on an income tax return is an examination for purposes of this provision. Also, the review of a claim for refund prior to the issuance of the refund is an examination for purposes of this provision.

IRC 7491(a) places the burden of proof on the Service in any court proceeding where the taxpayer introduces credible evidence with respect to factual issues relevant to ascertaining the taxpayer's tax liability. To qualify, the taxpayer must:

IRC 7491(b) places the burden of proof on the Service in any court proceeding where the Service reconstructs a taxpayer's income solely through the use of statistical information of unrelated taxpayers. This rule only applies to individual taxpayers.

IRC 7491(c) states the Service has the burden of production in a court proceeding relating to the appropriateness of applying any penalties, additions to tax and additional amounts imposed by the Internal Revenue Code to the taxpayer. This rule only applies to individual taxpayers.

The burden of proof encompasses both the burden of production (also known as the burden of going forward with the evidence) and the burden of persuasion.

The burden of production is met if the party who bears it comes forward with evidence supporting its position. The burden of production requires a party to demonstrate it has concrete and positive evidence, as opposed to a mere theoretical argument, that there is substance to their position. Once a party has established this threshold burden, the burden of production (going forward) shifts back to the other party.

In the past, the taxpayer bore the initial burden of production with respect to both the deficiencies and penalties. By requiring the taxpayer to produce credible evidence sufficient to base a decision if not rebutted, the Act leaves the burden of production on the taxpayer. However, under IRC 7491(c), the Service now bears the burden of production with respect to the determination that a penalty applies. Once the Service meets the burden of production, the taxpayer retains the burden of persuading the court that the penalty is not appropriate, by raising defenses to the penalty, such as reasonable cause.

To say that a party bears the burden of persuasion is to say the party must persuade the court that its position is correct. If the party fails to meet its burden, it loses the case. Stated another way, a party that meets the burden of persuasion persuades the Court that its evidence outweighs the evidence of the other party.

In the past, the taxpayer bore this burden and had to convince the Court the Service was wrong. Based on the legislative history of RRA 98, the burden of persuasion shifts to the Government. Since the Government has the burden of persuasion, the Government only prevails if the preponderance of the evidence (more than 50%) favors the Government.

If the taxpayer complies with the statutory requirements, the Service must now assume the burden of showing to the satisfaction of the Court the tax liability as determined is correct, and the taxpayer no longer bears the burden of proof.

It is critical that examiners now document their workpapers to reflect the degree of taxpayer cooperation. In addition, the examiners must fully describe documents used to support audit conclusions and proposed tax adjustments. Examiners must also prepare documents which fully describe the steps taken and the analysis which supports audit conclusions. Similarly, in unagreed cases, Appeals personnel must address the degree of taxpayer cooperation in their Appeals Case Memos. This confirmation is needed by Counsel in addressing the burden of proof issues during preparation for trial.

Good auditing and good litigation practice, similar to most determinations in the past, ordinarily produce sufficient evidence to sustain the burden of proof. The Service and Chief Counsel have not, in the past, generally relied upon the taxpayer's failure of proof to sustain the asserted liability, but rather have affirmatively shown the proper liability. Continued adherence to these practices satisfies the new standard, but is now extremely important that a thorough examination and documentation of the liability be performed prior to the initiation of litigation.

The Servicecannot take the following actions:

The Service can take the following actions:

The settlement approach and elements of evaluation are not affected by the status of the case. An unacceptable settlement in non-docketed status does not become acceptable solely because it is reconsidered in docketed status; nor does it become more acceptable in a trial calendar period than it was in a prior period. This, of course, does not preclude recognition of changes in judicial interpretation of the law and changes in Service position. It is also recognized that in reconsideration of a case or trial preparation, additional facts may arise which could affect evaluation of the case.

If a trial cannot be recommended on an issue, concede the issue even though it may have some merit.

Do not make or accept minor concessions on the basis the outcome of litigation is never absolutely predictable.

Occasionally settlement is required for issues where the " Golsen Rule" is applicable. The "Golsen Rule" originated with the case of Jack E. Golsen, 54 T.C. 742, (1970). In this case, the Tax Court held it would follow the rule of law laid down by the Court of Appeals to which an appeal in the case before it would lie.

Problems arise when the rule of law laid down by the local circuit conflicts with a Revenue Ruling, Revenue Procedure, or other announcement of Service position in regard to the same issue(s). In cases where the " Golsen Rule" is applicable, consult with Counsel as promptly as possible to determine the amount of litigation activity in other circuits and other relevant information on the Service's posture on the issue(s) involved.

Exercise care in a case where a tentative agreement was reached with the taxpayer and a change in the position of an applicable authority occurs which affects the agreement in a substantive and material manner. If a tentative agreement was not finally reflected on Form 870-AD or Form 906 and signed by a Service official authorized by the Commissioner to approve negotiated settlements, the tentative agreement is subject to modification if the law or legal precedent relied upon to formulate the tentative agreement changes. If the change is substantive and material, the agreement is renegotiated. For purposes of this section, the word "substantive" means the change in law or legal precedent results in a meaningful change to Appeals' assessment of the hazards of litigation. The word "material" has the same meaning under this section as it has in IRM 8.6.1.5 relating to general guidelines for raising new Issues.

Advise taxpayers that tentative agreements not finalized using Form 870–AD or Form 906 are subject to renegotiation in the circumstances described above.

When evaluating an issue which was the subject of litigation, it is imperative to check whether an Action on Decision (Action) was published when the court ruled adverse to the Service's position. Actions represent the Service's litigating posture on controversial issues in a specific case and provide the legal basis for the Service's position on those issues. Actions are valuable guides for evaluating similar issues so apply them in resolving cases. However, exercise caution in extending the application of the decision to a similar case unless the facts and circumstances are substantially the same, and consideration is given to the effect of new legislation, regulations, and revenue rulings as well as subsequent court decisions and actions. Actions are prepared by the Chief Counsel, and simultaneously made available to the public and Service personnel after litigation is completed.

Aim negotiations toward resolution of all issues in a case. If this cannot be done, attempt to reach agreement with the taxpayer on all issues capable of resolution.

Issues such as reasonableness of salaries, capital gain v. ordinary income on recurring sales of property, hobby losses, etc., are resolved on the basis of the facts and circumstances applicable to each year separately. In such cases settlement has no effect on later years where a similar issue arises. Be sure the taxpayer understands this.

Where settlement involves issues such as basis of property, category of income, or amount of income from installment collections, it is desirable to incorporate the effect on later years into the settlement by use of a closing agreement or collateral agreement.

This section provides formal procedures for Compliance to voice their concerns about an Appeals settled case. These procedures are not intended to replace any informal procedures currently in use at the local level. Local management in Compliance and Appeals continue to address and resolve disagreements over case resolutions at the lowest possible level. These formal procedures are used when the informal process results in Compliance still having unresolved significant concerns about the Appeals disposition of an issue.

Disagreement are expressed, formally, by written dissent, and clearly state the nature of the dissent and the supporting rationale, including:

Compliance prepares dissents and forwards it to the appropriate Appeals Area Director, through the Territory Manager for SB/SE and LMSB cases, or the Area Manager for TE/GE cases, within 90 days (extensions may be mutually agreed upon) of receipt by Compliance of an ACM.

The Appeals Area Director forwards the dissent to the appropriate Appeals Team Manager (ATM).

Upon receipt of a dissent, the ATM, in collaboration with the Appeals Team Case Leader (ATCL), Appeals Officer (AO), Settlement Officer (SO), and/or specialist/specialist manager, prepares a written response to the dissent, addressing each of the concerns expressed therein; sends the written response to the Area Director for concurrence within 60 days of receipt of the dissent; and provides a status report to the Area Director when 60 days is not practical under the circumstances.

The Area Director, within 30 days of receipt of a response, concurs with, amends, or returns the response to the ATM for additional consideration when it is deemed necessary. If returned for additional consideration, a revised response is due back to the Area Director within 15 days for concurrence. The Area Director may then accept the response or draft a new response and send a copy to the ATM and ATCL, AO, SO, and/or specialist/specialist manager. The Area Director sends the final response to the Compliance Territory Manager or Area Manager, as appropriate.

Once Compliance receives the response, they may, within 15 days, request a post-Appeals conference by contacting the Appeals Area Director. A conference is normally scheduled at a mutually agreeable date, time, and location. If a conference is held, use caution to follow the ex parte guidelines set forth in Rev. Proc. 2000-43 at Question 26. If Compliance does not wish to request a conference, a final response can be submitted in lieu of a conference.

Any decision to reopen a case rests solely with Appeals. Appeals is guided by Policy Statement P-8-3 (formerly P-8-50), which covers reopening cases closed by Appeals.

The above procedures, in most instances, ultimately serve to satisfy all concerns of both Compliance and Appeals regarding the disposition of a given case. When this is not the case, forward the dissent file to the appropriate Appeals Director of Field Operations (or further, if needed) to pursue with his/her counterpart in Compliance, the reconciliation of any further differences between the two divisions.

If a TAS case is reopened and the determination changed as a result of this process, Appeals notifies TAS of the change.

These procedures do not preclude any of the activities already in place involving the Advisory Boards or the exchange of information between Compliance analysts and Appeals analysts.