We welcome guest blogger Caleb Smith who directs the tax clinic at the University of Minnesota. Here he writes about one of the designated orders that came out during his week of writing up those orders. This one has enough meat to warrant a post of its own. Keith
The primer appears in a designated offer in the case of Siemer Milling Company v. C.I.R., Dk. # 21655-15 (order here)
There are many aspects that make litigation in Tax Court a different experience than other venues. One major difference is the focus (nay, command) that the parties stipulate to the fullest extent possible (see Tax Court Rule 91. As Judge Buch writes (quoting Branerton), “the stipulation process is the bedrock of Tax Court practice.” (Internal quotations omitted.) When that process breaks down, the Court is generally not very pleased with the offending party… or, in this case, parties. For, as Judge Buch notes, neither the government nor the taxpayer are without fault in the case before him.
As this order details breakdowns in the process between these two parties, it also provides insight on how genuine disputes on stipulations may arise.
Clearly, the IRS and the taxpayer in this case are not in agreement on what proposed facts and evidence should be considered established… and that is likely true in a lot of cases. Sometimes a party is unreasonable in thinking that there is (or isn’t) a fair dispute of an item to be stipulated. IRS counsel will share horror stories of taxpayers that refuse to stipulate their address, or that they even filed the tax return (even when the issue of if they filed is not actually relevant to the case). On these more bright-line issues, a party can move under Rule 91(f) to compel stipulation, and the Court may so compel. That is what the taxpayer sought in Siemer Milling Company.
In this case it appears that the taxpayer was a little over-aggressive in what they wanted stipulated, and the IRS was equally heavy-handed in their reasons for objecting to the stipulations. The decision gives insight to how a practitioner may want to frame their objections when dealing with contentious stipulations, and what rationales to avoid.
The IRS listed out 10 separate bases for rejecting the stipulations. Judge Buch lumps the bases into those that don’t work, one that kind of works, and the remaining that do work (which are enough to carry the day for the IRS).
Most of the rationales that do not work are those that “object to the source of the fact.” They are overwhelmingly objections to the contents of source documents –for containing hearsay, subjective statements of intent, or being restatements of the taxpayer’s claims. The inquiry, Judge Buch reminds us, should be to the fact itself and not the source from which it is derived. This is not an immediately clear distinction to me (if you dispute the source, aren’t you almost always implicitly disputing the resulting fact it produces?). Luckily, Judge Buch lays out an example. With regards to an objection to stipulating based on hearsay, Judge Buch asks us to consider:
“In a case involving an accuracy-related penalty, would the Commissioner accept a stipulation that a return preparer told the taxpayer that the item of income should have been included in the return?”
Of course the Commissioner would so stipulate, Judge Buch asserts.
I don’t doubt for a second that the IRS generally would so stipulate, but I’m not sure if the example makes the point Judge Buch wishes to. And the reason I’m not sure, is that it isn’t clear to me that the example illustrates hearsay at all.
On the surface, the scenario seems to track the definition of hearsay well enough: it is obviously an out-of-court statement by the declarant (the tax return preparer). See FRE 801. But the second critical aspect –that it was introduced to prove the truth of the matter asserted, may be lacking. Of course, much depends on the context and purpose of the statement “told the taxpayer that the item of income should not have been included.” If you are bringing that statement into play simply to show that you were given legal advice (that you relied on) and therefore may have an IRC 6664 defense, I don’t believe it is hearsay. It isn’t being used to prove the truth of the matter asserted (i.e. that item doesn’t need to be included in the return). Rather, the statement is being used to show simply that it was said at all. You are trying to prove that tax advice was given, not to prove that what was said (i.e. the advice itself) is true.
The reason I found myself pondering whether this actually was hearsay is that it brings up a more fundamental point: how unfair it would seem to be to be forced to stipulate to something that couldn’t otherwise be brought into Court, and to which you truly doubt the veracity of. Tax Court Rule 91(a)(1) expressly provides that disputes of materiality or relevance aren’t grounds for failing to stipulate, but rather that the party should note their objection (on those grounds) in the stipulations themselves. Is this also the way to address hearsay?
At this point, it should be repeated that the IRS prevailed on its objection to stipulate in this case. Where hearsay is found in proposed stipulated facts, it may indicate that there are other (acceptable) grounds for objection lurking. In this case, such acceptable grounds for objection include (1) overly vague stipulations, (2) stipulations that are pure statements of law, (3) material misstatements of fact, and (4) most importantly, matters that are “fairly in dispute.”
To me, this is all to circle back to the initial inquiry: what is “fairly” in dispute? Objections to stipulations have to get at that inquiry, and not a dispute of how “strong” the stipulation should be. Judge Buch attempts to walk these two gridlocked parties through what constitutes a fair dispute and what doesn’t. In the end, one feels for Judge Buch and the extra work that will need to be done when the two parties can’t work between themselves. As Judge Buch says, “the Court is not in the business of rewriting stipulations,” and “there is little left the Court can do.”