Robert Griffin v. CIR ( 2003 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 02-2030
___________
Robert Griffin; Julia Griffin, *
*
Appellants, *
* Appeal from the United States
v. * United States Tax Court
*
Commissioner of Internal Revenue, * [TO BE PUBLISHED]
*
Appellee. *
___________
Submitted: November 4, 2002
Filed: January 14, 2003 (Corrected: 1/15/03)
___________
Before McMILLIAN and MELLOY, Circuit Judges, and LONGSTAFF,1
District Judge.
___________
PER CURIAM.
Robert Griffin, a real estate developer, and his wife, Julia Griffin (together
“appellants”), appeal from an order of the United States Tax Court sustaining the
findings by the Commissioner of Internal Revenue (“Commissioner”) that appellants’
1995 and 1996 federal income tax payments were deficient in the amounts of
$47,775 and $53,144, respectively, as a result of improper business expense
1
The Honorable Ronald E. Longstaff, United States District Judge for the
Southern District of Iowa, sitting by designation.
deductions. Griffin v. Comm’r, No. 7315-00 (Jan. 8, 2002) (hereinafter “Tax court
order”). For reversal, appellants argue that the tax court erred in holding that (1) real
property taxes paid by Robert Griffin on behalf of two partnerships were not
personally deductible under the circumstances and (2) appellants failed to present
sufficient evidence to shift the burden of proof to the Commissioner under 26 U.S.C.
§ 7491(a). For the reasons stated below, we vacate the order of the tax court and
remand the case for further proceedings consistent with this opinion.
Jurisdiction was proper in the tax court under 26 U.S.C. § 6213. Jurisdiction
is proper in this court under 26 U.S.C. § 7482. The notice of appeal was timely filed
pursuant to Fed. R. App. P. 4(a).
Background
During 1995 and 1996, appellants jointly owned all of the stock of Griffin
California Enterprises, Inc. (“Griffin California”), a subchapter S corporation. Griffin
California owned 60% of the stock of each of two California partnerships: Orange
Tree Commerce Center Partnership (“Orange Tree”), which owned a small shopping
mall in Vacaville, California, and Solano Commercial Investors, d.b.a. Texas Jacks
(“Texas Jacks”), which owned a western dance hall in Vacaville, California. Neither
Robert Griffin nor Julia Griffin is a partner in either Orange Tree or Texas Jacks, nor
has any direct ownership interest in either the shopping center or the western dance
hall. Orange Tree and Texas Jacks financed the construction of their respective
properties with bank loans secured by the properties and personally guaranteed by
Robert Griffin.
During the years 1995 and 1996, Robert Griffin paid delinquent real property
taxes on behalf of Orange Tree and Texas Jacks to avoid foreclosures on the shopping
mall and western dance hall. Appellants claimed these real property tax payments as
deductible expenses on their Schedules E, filed with their 1995 and 1996 jointly-filed
-2-
personal federal income tax returns (“the 1995 and 1996 returns”). Appellants
indicated on their Schedules E that the real property tax payments were paid in
connection with rental property they owned in Fairfield, California, which was listed
on their Schedules E. In fact, the real property tax payments had nothing to do with
appellants’ property in Fairfield, California, or any other property listed in Part I of
their Schedules E for taxable years 1995 and 1996.
On October 6, 1999, the Commissioner began auditing the 1995 and 1996
returns. The Commissioner determined that appellants had improperly deducted as
their own business expenses the real property tax payments made on behalf of Orange
Tree and Texas Jacks. The Commissioner concluded that the payments could instead
be treated by appellants as capital contributions to their subchapter S corporation,
Griffin California, and deducted as business expenses by the Orange Tree and Texas
Jacks partnerships, resulting in a flow through of 60% of the deductions to Griffin
California. The Commissioner sent appellants a notice of deficiency on May 2, 2000,
finding appellants’ 1995 federal income tax payment deficient by $47,775 and their
1996 federal income tax payment deficient by $53,144.
Appellants filed a petition in the tax court disputing the Commissioner’s notice
of deficiency. The Commissioner filed an answer to the petition. See Appendix at
3-7 (petition and answer). A trial was held before the tax court on January 29, 2001.
At the start of the trial, the parties submitted to the tax court stipulated facts with
attached exhibits which were received into evidence. See id. at 8-105 (joint
stipulation of facts and exhibits), 107 (trial transcript at 1). Based upon the stipulated
fact that the Commissioner’s audit of the 1995 and 1996 returns began after July 22,
1998, the effective date of 26 U.S.C. § 7491(a), counsel for the Commissioner
brought the provision’s applicability to the attention of the tax court. See id. at 108
(trial transcript at 3).
-3-
Section 7491(a) provides in relevant part:
(a) Burden shifts where taxpayer produces credible evidence.–
(1) General rule.– If, in any court proceeding, a taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer for any tax imposed by subtitle
A or B, the Secretary shall have the burden of proof with respect to such
issue.
26 U.S.C. § 7491(a)(1).
Without conceding the matter, counsel for the Commissioner offered to
proceed first at trial in light of the novelty and uncertainty of applying § 7491(a). See
Appendix at 110-11 (trial transcript at 5-6). She argued, however, that appellants had
not produced sufficient credible evidence to shift the burden to the Commissioner to
disprove the deductibility of the real property tax payments because appellants had
not introduced “factual evidence regarding the existence of a separate trade or
business, distinct from the S-corporations and their partnerships, which were
investment activities.” Id. at 111 (trial transcript at 6). The tax court ruled that it
would proceed at trial “in the normal course of order,” and the parties could, in their
post-trial briefs, argue the impact of 26 U.S.C. § 7491(a) upon the resolution of the
issues. Id. at 114 (trial transcript at 9).
Counsel for appellants called two witnesses: Robert Griffin and William
LaRue, a certified public accountant who had prepared appellants’ 1995 and 1996
returns. Counsel for the Commissioner cross-examined each of appellants’ witnesses,
but presented no additional witnesses.
Following the trial and the parties’ submission of briefs, the tax court entered
the written order presently on appeal. The tax court noted that, as a general rule, “a
-4-
taxpayer may not deduct a payment made on another’s behalf unless the payment
represents an ordinary and necessary expense of the taxpayer’s own business, as
distinct from the business of another person or of some other entity in which the
taxpayer may have an ownership interest.” Tax court order at 6 (citing, e.g., Lohrke,
48 T.C. 679 (1967); Gantner v. Comm’r, 905 F.2d 241, 244 (8th Cir.) (“A shareholder
is not entitled to a deduction from his or her income for payment of corporate
expense.”), cert. denied, 498 U.S. 921 (1990)). The tax court recognized an exception
to this general rule, however, allowing such a payment to be personally deducted if
it qualifies as an ordinary and necessary expense of one’s own business or trade
(hereinafter referred to as “the Lohrke exception”).2 See Lohrke, 48 T.C. 688.
The tax court next considered the question of which party bore the burden of
proof regarding the Lohrke exception, in light of 26 U.S.C. § 7491(a). See Tax Court
order at 7-8. Noting that the only statutory prerequisite at issue was whether
appellants had introduced “credible evidence” of deductibility, the tax court held that
appellants had not met that requirement and therefore retained the burden of proof.
See id. at 7-8 & n.3.3
2
See also Capital Video Corp. v. Comm’r, 311 F.3d 458, 464-66 (1st Cir. 2002)
(discussing and applying the Lohrke exception).
3
Section 7491(a) provides in full:
(1) General Rule. – If, in any court proceeding, a taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer for any tax imposed by subtitle
A or B, the Secretary shall have the burden of proof with respect to such
issue.
(2) Limitations. – Paragraph (1) shall apply with respect to an issue
only if –
(A) the taxpayer has complied with the requirements under this
-5-
On the merits, the tax court held that appellants had not met their burden to
prove that the real property tax payments made by Robert Griffin on behalf of Orange
Tree and Texas Jacks were ordinary and necessary expenses of a business or trade
separate from the subchapter S corporations in which he and his wife were mere
investors. See id. at 8-12. The tax court reasoned:
[Appellants] have introduced no credible evidence to show that [Robert
Griffin] made the tax payments to protect the reputation of any business
operation conducted in [appellants’] individual capacities. On the basis
of [Robert Griffin’s] testimony, we are unable to conclude that the tax
payments would have represented ordinary expenses to advance any
business carried on in [appellants’] individual capacities, as opposed to
capital outlays to establish or purchase goodwill or business standing,
or contributions to the capital of Griffin California (consistent with the
title to substantiate any item;
(B) the taxpayer has maintained all records required under this
title and has cooperated with reasonable requests by the Secretary
for witnesses, information, documents, meetings, and interviews;
and
(C) in the case of a partnership, corporation, or trust, the taxpayer
is described in section 7430(c)(4)(A)(ii).
Subparagraph (C) shall not apply to any qualified revocable trust (as
defined in section 645(b)(1)) with respect to liability for tax for any
taxable year ending after the date of the decedent's death and before the
applicable date (as defined in section 645(b)(2)).
(3) Coordination – Paragraph (1) shall not apply to any issue if any
other provision of this title provides for a specific burden of proof with
respect to such issue.
26 U.S.C. § 7491(a).
-6-
[the Commissioner’s] characterization in the notice of deficiency).
Id. at 12 (citations omitted). The tax court thus concluded that the payments in
question were not deductible business expenses of appellants and upheld the
Commissioner’s deficiency findings. In a footnote, the tax court commented: “Even
if the burden of proof were placed on [the Commissioner], we would decide the issue
in his favor based on the preponderance of the evidence.” Id. at 9 n.4.
This appeal followed.
Discussion
26 U.S.C. § 7491(a)
We begin by addressing the burden-of-proof issue. Appellants challenge the
tax court’s holding that they did not present credible evidence on the factual issue of
whether Robert Griffin made the real property tax payments to protect or promote his
own real estate and construction business. The evidence upon which appellants rely
is Robert Griffin’s testimony that he had been a building contractor and real estate
developer since 1965, that he had developed 25 to 30 major projects, that obtaining
financing is essential to a successful real estate development business, and that a
default on the Orange Tree and Texas Jacks loans would have, in effect, destroyed his
ability to obtain future financing. Robert Griffin testified: “I had to pay [the real
property taxes] to preserve my integrity and my standing with the bank, and my good
name, my good will. And in order to stay in business, I had to pay the taxes.”
Appendix at 120 (Trial transcript at 15). Appellants further argue that their 1995 and
1996 returns corroborated Robert Griffin’s testimony because, on each return,
Schedule C shows the principal business of Robert Griffin as “construction.”
Appellants maintain that § 7491(a) was enacted by Congress to “bring some balance
to the Tax Court,” where previously the presumption of correctness afforded the
-7-
Commissioner, combined with the burden of proof resting on the taxpayer, put
taxpayers at a “severe disadvantage.” Brief for Appellants at 22.
In response, the Commissioner points out that a deduction is “a matter of
legislative grace” and the taxpayer generally must establish the statutory and factual
bases for any deduction claimed. Brief for Appellee at 21 (quoting New Colonial Ice
Co. v. Helvering, 292 U.S. 435, 440 (1934)). Moreover, as a general rule, the
Commissioner’s deficiency findings are generally presumed correct and must be
disproved by the taxpayer by a preponderance of the evidence. Id. The
Commissioner concedes that § 7491(a) applies in the present case because the
Commissioner began auditing the 1995 and 1996 returns after July 22, 1998, the
effective date of the statute. Nevertheless, the Commissioner argues, the burden of
proof does not shift in the present case because Robert Griffin’s testimony, even if
uncontradicted, was facially implausible. The Commissioner further argues that
Robert Griffin’s testimony was not credible because the 1995 and 1996 returns and
the testimony of appellants’ own accountant, William LaRue, established that the real
property tax payments in question were made in connection with the business of their
subchapter S corporations, which were listed on their Schedules E. Therefore, the
Commissioner concludes, Robert Griffin’s uncorroborated and self-serving testimony
was not enough to overcome the clear evidence of non-deductibility and did not
create any issue of fact under Lohrke and its progeny. Finally, the Commissioner
argues, this burden-shifting issue is irrelevant because the tax court determined that
the Commissioner would prevail even if he bore the burden of proof. See Tax court
order at 9 n.4.
We review the tax court’s interpretation of a federal statute de novo. See, e.g.,
Lee v. Ernst & Young, LLP, 294 F.3d 969, 974 (8th Cir. 2002) (“We review the
-8-
district court’s interpretation of a federal statute de novo.”).4 In interpreting the term
“credible evidence” in § 7491(a)(1), we adopt the definition suggested by the
Commissioner, which is sensible, consistent with the law’s underlying purpose, and
derived from the legislative history. See Lee v. Ernst & Young, LLP, 294 F.3d at 976
(when the meaning of a statute is questionable, courts should give it a construction
that is sensible and comports with the conditions and purposes of its enactment).
Accordingly, we hold that “credible evidence,” for purposes of interpreting and
applying § 7491(a)(1), is “the quality of evidence which, after critical analysis, the
court would find sufficient upon which to base a decision on the issue if no contrary
evidence were submitted (without regard to the judicial presumption of IRS
correctness).” Brief for Appellee at 22 (emphasis added); accord Okerlund v. United
States, 53 Fed. Cl. 341, 356 n.23 (Fed. Cl. 2002) (adopting same definition based
upon legislative history).
Viewing Robert Griffin’s testimony in the absence of any evidence or
presumptions to the contrary, we conclude that appellants did produce sufficient
“credible evidence” to support their personal deductions of the real property tax
payments at issue. We therefore hold that the tax court erred in failing to shift to the
Commissioner the burden to prove the non-applicability of the Lohrke exception in
the present case. Cf. Capital Video Corp. v. Comm’r, 311 F.3d 458, 465-66 (1st Cir.
2002) (holding that the burden of proof did not shift to the Commissioner where the
taxpayer presented no evidence linking the payments in question to the promotion of
the taxpayer’s business).
Our application of 26 U.S.C. § 7491(a) in the present case does not resolve the
merits of the deficiency issues. On the record before us, we cannot determine
4
Under 26 U.S.C. § 7482(a)(1), we review decisions of the tax court “in the
same manner and to the same extent as decisions of the district courts in civil actions
tried without a jury.”
-9-
whether the Commissioner has met his burden of proof. It is not sufficient to
summarily conclude that the outcome is the same regardless of who bears the burden
of proof; if that were the case, § 7491(a) would have no meaning. We therefore
remand the case to the tax court for further proceedings on the merits. On remand,
the tax court may reconsider all of the evidence properly before it or hold a new
hearing. In either case, the tax court is instructed to make new findings of fact in
light of the shifted burden of proof. If the same conclusion is reached by the tax court
without a new hearing, an explanation is warranted as to how the existing record
justifies the conclusion that the Commissioner has met his burden of proof.
Conclusion
For the reasons stated, we vacate the tax court’s order and remand the case for
further proceedings consistent with this opinion.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
-10-