Dennis L. and Margaret J. Knudsen v. Commissioner

131 T.C. No. 11UNITED STATES TAX COURT
DENNIS L. AND MARGARET J. KNUDSEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 18246-04. Filed November 12, 2008.
Ps filed a motion for reconsideration of our
Memorandum Opinion in Knudsen v. Commissioner, T.C.
Memo. 2007-340 (Knudsen I). In Knudsen I we held that
petitioners were not engaged in their animal breeding
activity for profit within the meaning of sec. 183,
I.R.C. We concluded that we did not need to decide
whether Ps met the requirements under sec. 7491(a),
I.R.C., to shift the burden of proof to R because the
outcome was based on a preponderance of the evidence.
In their motion Ps argue that this Court erred in so
concluding. Ps also argue for the first time that each
factor under sec. 1.183-2(b), Income Tax Regs., is a
separate “factual issue” to which sec. 7491(a), I.R.C.,
applies.
Held: Ps’ motion for reconsideration will be denied.
This Court did not err by concluding that the Court did
*
This Opinion supplements our previously filed opinion in
Knudsen v. Commissioner, T.C. Memo. 2007-340.
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not need to decide whether the burden of proof shifted
to respondent under sec. 7491(a), I.R.C.
Jack D. Flesher and Brian A. Turney, for petitioners.
Ann L. Darnold, for respondent.
SUPPLEMENTAL OPINION
MARVEL, Judge: On December 19, 2007, pursuant to Rule 161,1
petitioners filed a timely motion for reconsideration of this
Court’s Memorandum Opinion in Knudsen v. Commissioner, T.C. Memo.
2007-340 (Knudsen I). In Knudsen I we held that petitioners’
exotic animal breeding activity was not an activity engaged in
for profit within the meaning of section 183. Petitioners
request that we reconsider whether they satisfied the
requirements under section 7491(a) to shift the burden of proof
to respondent.
Reconsideration under Rule 161 is intended to correct
substantial errors of fact or law and allow the introduction of
newly discovered evidence that the moving party could not have
introduced by the exercise of due diligence in the prior
proceeding. Estate of Quick v. Commissioner, 110 T.C. 440, 441
(1998). This Court has discretion to grant a motion for
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect at all relevant times.
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reconsideration but will not do so unless the moving party shows
unusual circumstances or substantial error. Id.; see also Vaughn
v. Commissioner, 87 T.C. 164, 166-167 (1986). “Reconsideration
is not the appropriate forum for rehashing previously rejected
legal arguments or tendering new legal theories to reach the end
result desired by the moving party.” Estate of Quick v.
Commissioner, supra at 441-442.
Section 7491(a)(1) provides that, subject to certain
limitations, where a taxpayer introduces credible evidence with
respect to a factual issue relevant to ascertaining the
taxpayer’s tax liability, the burden of proof shifts to the
Commissioner with respect to such issue. Section 7491(a)(1)
applies with respect to a factual issue only if the requirements
of section 7491(a)(2) are satisfied. Under section 7491(a)(2), a
taxpayer must have maintained all records required by the
Internal Revenue Code and cooperated with reasonable requests by
the Secretary for witnesses, information, documents, meetings,
and interviews.
In their motion for reconsideration, petitioners assert that
(1) this Court erred in concluding that we did not need to decide
whether petitioners met the requirements under section 7491(a) to
shift the burden of proof to respondent, and (2) each factor
under section 1.183-2(b), Income Tax Regs., is a separate
“factual issue” within the meaning of section 7491(a).
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I. Section 7491(a) Burden of Proof Shift
In Knudsen I we stated:
We do not need to decide whether petitioners have
met all of the requirements under section 7491 to shift
the burden of proof to respondent. The outcome of this
case is based on a preponderance of the evidence and
thus is unaffected by section 7491. * * *
Petitioners contend that “Congress did not intend income tax
cases to be ‘unaffected’ by section 7491” and that we must
determine whether petitioners met the requirements under section
7491(a) to shift the burden of proof to respondent. Although
this case is appealable, absent a stipulation to the contrary, to
the Court of Appeals for the Tenth Circuit, see sec. 7482(b),
petitioners rely on Griffin v. Commissioner, 315 F.3d 1017 (8th
Cir. 2003) (Griffin II), vacating and remanding T.C. Memo. 2002-6(Griffin I), in support of their argument.
Petitioners argue that the Court of Appeals for the Eighth
Circuit in Griffin II correctly concluded that section 7491(a)
should be applied in all cases. Petitioners’ argument applies
Griffin II too broadly and fails to acknowledge that Griffin II
is distinguishable from this case.
In Griffin v. Commissioner, supra at 1020, the taxpayers
appealed an unfavorable Tax Court decision and argued that the
Tax Court erred in holding that the taxpayers failed to present
sufficient evidence to shift the burden of proof to the
Commissioner under section 7491(a). The Tax Court in Griffin I
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had concluded that the taxpayers did not introduce credible
evidence and thus the burden of proof remained with the
taxpayers. Griffin v. Commissioner, T.C. Memo. 2002-6.2 The
Court of Appeals disagreed. It concluded that the taxpayers did
produce sufficient credible evidence and stated: “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.” Griffin v. Commissioner,
315 F.3d at 1021-1022.
On remand this Court shifted the burden of proof to the
Commissioner in accordance with the decision of the Court of
Appeals and revisited the trial record. This Court concluded
that the taxpayers were entitled to certain deductions because
the Commissioner had not offered sufficient contrary evidence to
overcome the taxpayers’ evidence, which the Court of Appeals had
concluded was credible. See Griffin v. Commissioner, T.C. Memo.
2004-64.
The Court of Appeals in Griffin II disagreed with this
Court’s finding regarding the credibility of the taxpayers’
evidence, and its opinion is properly read in that context. It
2
In a footnote in its opinion, the Tax Court also stated
that “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.” Griffin v. Commissioner,
T.C. Memo. 2002-6, vacated and remanded 315 F.3d 1017 (8th Cir.
2003).
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is also apparent that once the issue of the credibility of the
taxpayers’ evidence was resolved, the burden shift did affect the
result, as this Court on remand allowed the deductions that it
had not allowed in its earlier opinion on the basis of the
Commissioner’s failure to carry his burden of proof.
Petitioners’ argument in their motion for reconsideration
reads Griffin II too broadly. Griffin II does not stand for the
proposition that a trial court must decide whether the burden of
proof shifts to the Government in all cases where the issue of a
burden shift is raised, nor does it stand for the proposition
that a trial court’s failure to decide a burden shift issue is
always reversible error. The Court of Appeals said as much in
Polack v. Commissioner, 366 F.3d 608 (8th Cir. 2004), affg. T.C.
Memo. 2002-145.3
In Polack v. Commissioner, supra at 613, the taxpayer
appealed a Tax Court decision arguing, among other things, that
the Tax Court erred in not shifting the burden of proof to the
Commissioner after the Commissioner abandoned his initial
valuation theory in favor of an expert’s valuation. The Tax
Court had concluded that it did not need to decide whether the
burden of proof shifted to the Commissioner because the outcome
3
The taxpayer in Polack v. Commissioner, 366 F.3d 608 (8th
Cir. 2004), affg. T.C. Memo. 2002-145, did not argue for a shift
of the burden of proof under sec. 7491(a)(1). Rather, the
taxpayer relied on general principles governing shifting the
burden of proof.
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was based on a preponderance of the evidence. Id. The Court of
Appeals agreed with the Tax Court and explained that “‘The
shifting of an evidentiary burden of preponderance is of
practical consequence only in the rare event of an evidentiary
tie’”. Id. (quoting Cigaran v. Heston, 159 F.3d 355, 357 (8th
Cir. 1998)). The Court of Appeals did not mention its earlier
decision in Griffin II.
In 2005, approximately 8 months after it issued its decision
in Polack, the Court of Appeals for the Eighth Circuit further
clarified its position in Blodgett v. Commissioner, 394 F.3d
1030, 1039 (8th Cir. 2005), affg. T.C. Memo. 2003-212. The Court
of Appeals revisited whether the Tax Court’s failure to shift the
burden of proof to the Commissioner under section 7491(a) was
reversible error and held that, on the record before it, the Tax
Court did not commit reversible error by declining to decide the
issue. The Court of Appeals explained its holding:
In a situation in which both parties have satisfied
their burden of production by offering some evidence,
then the party supported by the weight of the evidence
will prevail regardless of which party bore the burden
of persuasion, proof or preponderance. * * *
Therefore, a shift in the burden of preponderance has
real significance only in the rare event of an
evidentiary tie. * * * Here, the record is clear, if
the tax court did err in failing to shift the burden of
proof, any error was harmless because the weight of the
evidence supported a decision for the Commissioner.
[Id.]
At least two other Courts of Appeals have also held that the
burden of proof shift under section 7491(a) is relevant only when
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there is an evidentiary tie. See Geiger v. Commissioner, 279
Fed. Appx. 834, 835 (11th Cir. 2008) (“any error committed by the
tax court by failing to shift the burden was harmless, because
the burden of proof is of practical consequence only in the rare
event of an evidentiary tie”), affg. T.C. Memo. 2006-271; FRGC
Inv., LLC v. Commissioner, 89 Fed. Appx. 656 (9th Cir. 2004) (the
Court was not required to determine who had the burden of proof
under section 7491(a) when the preponderance of the evidence
favored the Commissioner), affg. T.C. Memo. 2002-276.
Petitioners argue that Griffin II is correct and Polack and
Blodgett are wrong. However, the Court of Appeals for the Eighth
Circuit in Blodgett, upon revisiting Griffin II, held that an
allocation of the burden of proof is relevant only when there is
equal evidence on both sides. We agree with the analysis of the
Court of Appeals in Blodgett.4 In a case where the standard of
proof is preponderance of the evidence and the preponderance of
the evidence favors one party, we may decide the case on the
weight of the evidence and not on an allocation of the burden of
proof.5
4
The Court has often cited Blodgett v. Commissioner, 394
F.3d 1030, 1039 (8th Cir. 2005), affg. T.C. Memo. 2003-212, for
this position. See e.g., Estate of Christiansen v. Commissioner,
130 T.C. 1, 8 n.7 (2008); Grossman v. Commissioner, T.C. Memo.
2005-164; Levine v. Commissioner, T.C. Memo. 2005-86.
5
Petitioners also argue that the reliance of the Court of
Appeals for the Eighth Circuit on Polack is questionable because
(continued...)
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In Knudsen I the weight of the evidence favored respondent,
and consequently, we did not need to decide the allocation of the
burden of proof under section 7491(a) with respect to the section
183 issue. We hold, therefore, that in Knudsen I we did not err
in declining to allocate the burden of proof under section
7491(a).
II. Section 1.183-2(b), Income Tax Regs.
Petitioners argue that the Court should have applied section
7491(a) to each factor under section 1.183-2(b), Income Tax
Regs.,6 to determine whether petitioners were engaged in an
activity for profit under section 183. In other words,
petitioners contend that each factor is a “separate factual
5
(...continued)
Polack did not involve any argument for a shift of the burden of
proof under sec. 7491(a). However, the Court of Appeals in
Blodgett recognized that its reasoning in Polack regarding the
shifting of the burden of proof in a case decided on the basis of
the preponderance of the evidence was equally applicable to the
analysis required by sec. 7491(a). Blodgett v. Commissioner,
supra at 1039.
6
Sec. 1.183-2(b), Income Tax Regs., provides a list of nine
factors used to determine whether a taxpayer is engaged in an
activity for profit under sec. 183. The factors are: (1) The
manner in which the taxpayer carries on the activity; (2) the
expertise of the taxpayer or his advisers; (3) the time and
effort expended by the taxpayer in carrying on the activity; (4)
the expectation that assets used in the activity may appreciate
in value; (5) the success of the taxpayer in carrying on other
similar or dissimilar activities; (6) the taxpayer’s history of
income or loss with respect to the activity; (7) the amount of
occasional profits, if any, which are earned; (8) the financial
status of the taxpayer; and (9) elements of personal pleasure or
recreation.
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issue” to which section 7491(a) applies and that we must analyze
each factor to determine whether petitioners satisfied the
requirements of section 7491(a) to shift the burden of proof to
respondent with respect to that factor.
Petitioners raise this argument for the first time in their
motion for reconsideration. Petitioners never argued at trial or
on brief that each factor under section 1.183-2(b), Income Tax
Regs., is a “separate factual issue” to which we must apply
section 7491(a). Rather, petitioners argued on brief that they
satisfied the requirements under section 7491(a) to shift the
burden of proof to respondent with respect to the issue of
whether their animal breeding operation was an activity engaged
in for profit. In their brief petitioners stated:
In this case, Petitioners have introduced a
considerable amount of credible evidence concerning the
profit motive of Petitioners with respect to their
exotic animal breeding operation. * * * Since
Petitioners have met the requirements of IRC Section
7491(a), the burden of proof with respect to Issue I is
on the Commissioner/Respondent. [Emphasis added.]
Issue I of petitioners’ brief is titled “Whether Petitioners’
Exotic Animal Operations Constituted an ‘Activity Not Engaged in
for Profit’, Within the Meaning of Code Section 183”.
Because petitioners never raised at trial or on brief the
issue of whether each factor under section 1.183-2(b), Income Tax
Regs., is a “separate factual issue” to which section 7491(a)
applies, we decline to address petitioners’ argument asserted for
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the first time in petitioners’ motion for reconsideration. See
Stoody v. Commissioner, 67 T.C. 643, 644 (1977). As stated
above, reconsideration is not the appropriate forum for
petitioners to advance new legal theories to reach their desired
result.7 Accordingly, we shall deny petitioners’ motion for
reconsideration.
An appropriate order and
decision will be entered.
7
Even if we were to address the application of sec. 7491(a)
on a factor-by-factor basis in this case, we would still conclude
that the allocation of the burden of proof would not change the
result. Petitioners did not introduce evidence on a factor-by-
factor basis to show that the requirements of sec. 7491(a) were
satisfied with respect to each factor. In fact, if we analyzed
each of the factors to decide whether the sec. 7491(a)
requirements were met, we would conclude that petitioners did not
satisfy the requirements of sec. 7491(a) for the reasons that we
identified in Knudsen I. Of the six negative factors, five
factors (manner in which petitioners conducted their activity,
the expertise of petitioners and/or their advisers, expectation
that assets would appreciate, the amount of occasional profits,
and petitioner’s history of income or loss) were negative, at
least in part, because petitioners did not introduce credible
evidence to establish that the factor weighed in their favor.
See sec. 7491(a)(1).