Frequent guest blogger Carl Smith alerted us to the importance, from a tax procedure perspective, of the recent death of former Congressman James Traficant of Ohio. Congressman Traficant played an instrumental role in the passage of one of the mosre heavily discussed but little used provisions of RRA 98. Carl’s discussion below lays out the history and comes from a handout he gave to his tax procedure class. You will never think of this code provision the same after reading this post. Keith
Section 7491 was added to the Code by the IRS Restructuring and Reform Act of 1998 to shift the burden of proof to the IRS in some civil tax cases. To understand why it was enacted and why it is deliberately so ineffective, one needs to know a little history – particularly that of former Congressman James Traficant of Ohio.
Traficant had been a college football star. Later, he worked as the head of a drug program in a county in Ohio for almost a decade. In 1980, he was elected sheriff of Mahoning County, Ohio. While running for sheriff, he took bribes from two different branches of organized crime to look the other way about their illegal activities should he be elected. Unfortunately for Traficant, the FBI caught him on tape taking some of the bribes. When the FBI played the tape to him, Traficant signed a confession. In 1983, the federal government charged him under RICO, for a pattern of bribe-taking, and, under Code section 7206(1), for filing a false 1980 income tax return. Despite the evidence against him, Traficant decided to fight the charges in court before a jury. He moved to suppress both the FBI tape and confession and lost both motions. United States v. Traficant, 558 F. Supp. 993 and 558 F. Supp. 996 (N.D. Ohio 1983). Though not a lawyer, he then decided to represent himself at trial. Shockingly, a jury of his constituents found him not guilty of all charges. The fame of his single-handedly beating a RICO charge endeared him to his constituents as a lovable rogue. So, in 1984, they elected him to Congress.
The federal government did not take its criminal litigating loss lying down. Instead, in 1984, it issued a notice of deficiency to Traficant determining additional income taxes for 1980 on $108,000 of unreported bribes and a civil fraud penalty. In Tax Court, Traficant admitted to taking a much smaller amount of bribes. He also was permitted to take the Fifth Amendment when asked certain questions by IRS counsel. The Tax Court held that under its Rule 142(a), Traficant had the burden of proving the exact amount of the bribes and that his failure to testify was not affirmative evidence meeting that burden. The Court upheld the deficiency. It also ruled that under Code section 7454(a) and Rule 142(b), the IRS had the burden of proving fraud by clear and convincing evidence, and that the IRS had met that burden. The Court rejected Traficant’s argument that his criminal acquittal barred the IRS from seeking the tax or penalty as a civil matter. Traficant v. Commissioner, 89 T.C. 501 (1987), affd. 884 F.2d 258 (6th Cir. 1989).
Traficant was furious about this loss, and decided to make it his personal crusade to shift the burden of proof to the IRS on all issues in civil tax cases. Thus, he wanted to make it the IRS’ burden in Tax Court to, say, disprove that you made the charitable contribution of $5,000 that you listed on Schedule A of your income tax return – even if you had thrown out all your records and cancelled checks and were uncooperative with the IRS in the audit. His bill, H.R. 367, introduced in the 105th Congress in 1997, proposed a new Code subsection, which would read simply: “Notwithstanding any other provision of this title, in the case of any court proceeding under this title, the burden of proof with respect to all issues shall be upon the Secretary.”
In Congress, Traficant was famous for his unorthodox behavior and speech, his bad and badly-fitting clothes, and, most of all, his terrible bouffant gray hair. Traficant also loved to go to the well of the House at night and make one-minute speeches to the empty chamber railing against government waste and, most especially, the IRS. He peppered his speeches with the famous phrase from “Star Trek”, “Beam me up!” The speeches were so unusual that they got quite a following on C-Span. It was like watching a terrible “American Idol” audition or a car wreck. You knew you shouldn’t, but it was hard to resist. But, the speeches had the effect Traficant desired. Eventually, over years, members of Congress from all over the country got more and more constituent mail demanding that the burden of proof be shifted to the IRS in civil tax cases. To give you an idea of Traficant speeches on this subject, below are two that had been delivered from the well of the House, quoted from his website (which has since been taken down):
September 23, 1997:
Mr. Speaker, according to news reports, the IRS has a quota system. IRS agents got bonuses for ripping off taxpayers. And many times, taxpayers settled their cases, even though they were innocent. What is so shocking about that? The American people have known this for years. And the American people have been telling us, ‘The IRS is incompetent. The IRS is arrogant. The IRS has abused their powers.’ It has gotten so bad, the IRS is even above the law. That is right: In America, the accuser has the burden of proof, but not in a civil tax case. The IRS accuses; the taxpayer must prove their case. Beam me up! Let me say this: There can be no true reform in American tax law without changing the burden of proof. It is time to handcuff them to a chain link fence and flog them with their own hefty Tax Code. I yield back their unauthorized seizures and excessive penalties.
See Congressional Record 105th Congress. For video footage, see “September 23, 1997 House Session,” C-SPAN, at 00:03:30.
October 6, 1997:
Madame Speaker, asking the Congress to stay out of it, the IRS is promising to reform themselves. Like a wounded TV evangelist, the IRS is begging the American people for forgiveness. They said, ‘This time we really mean it. Cross our hearts. Hope to die.’ Spare me, Mr. Speaker. Who is kidding whom? Allowing the IRS to reform themselves would be like allowing Jeffrey Dahmer to head up the Boy Scouts. The IRS is guilty, guilty, guilty! And every time they get caught with their finger in our 1040’s, they plead for forgiveness. Enough is enough! I say it is time to kick these computer cowboys right up their hard drives. Pass H.R. 367 and change the burden of proof in a civil tax case. That will get it done. With that, I yield back all those crocodile tears at the Internal Revenue Service.
See Congressional Record 105th Congress. For video footage, see “October 6, 1997 House Session,” C-SPAN, at 00:05:10.
Knowledgeable members of the private sector and the government resisted Traficant, knowing that if his proposal were adopted, the IRS would probably never win another case in the Tax Court. Not only revenue from tax deficiencies would disappear, but revenues from voluntary reporting of taxes would tumble. So, for a time in 1997, there was a stalemate. On September 11, 1997, Traficant lashed out at his critics with another speech from the well of the House:
Mr. Speaker, the American Bar Association does not want it. Former IRS Commissioners do not want it. The current IRS Commissioner does not want it. Tax attorneys do not want it. IRS collection agents do not want it. All of these bureaucrats and special interest people do not want Congress to change the burden of proof in a civil tax case. Some surprise, Mr. Speaker. All of these bureaucrats and special interest people have one major thing in common: They all make big bucks off the backs of the American people. Beam me up! I must admit: The only people in America that support changing the burden of proof in a civil tax case are the American people, in record numbers, and it is very simple: They are taxed off. They are fed up. And they want Congress to right this major wrong. Congress was not elected to represent special interest bureaucrats and the IRS.
See Congressional Record 105th Congress. For video footage, see “September 11, 1997 House Session,” C-SPAN, at 00:04:45.
Eventually, the drafters of the 1998 IRS Restructuring and Reform Act knew that they would have to include a provision which they could say to their constituents shifted the burden of proof to the IRS in civil tax cases, without its really doing so in the vast majority of cases. So, Congress enacted Code section 7491. The section is largely cosmetic. It is deliberately designed to fail nearly all the time because of the conditions attached therein before the burden is shifted. Essentially, section 7491 almost always requires a taxpayer to prove his or her case the same way as in the old days. Only then, after proving the case, the burden shifts to the IRS. But at that point, the IRS usually has nothing to introduce as contrary evidence, so the taxpayer wins, and the burden shift is irrelevant.
And what became of Congressman Traficant? First, he claimed victory in section 7491. Second, he continued his corrupt ways while in Congress: He demanded thousands of dollars in goods and services from businessmen in return for official favors, including contacting the Director of the FAA, the Secretary of State, and the King of Saudi Arabia. He paid inflated salaries to his staffers, who were required to kick back the difference to him. He even forced his Congressional staffers to bale hay, repair plumbing, and reinforce barns at his show-horse farm.
In May 2001, an Ohio federal grand jury indicted Traficant for bribery, obstruction of justice, conspiring to defraud the United States, filing false tax returns, and RICO. Once again, Traficant defended himself in court. This time, he wasn’t so lucky. He was convicted, expelled from Congress, and, in 2002, sent to jail. See United States v. Traficant, 368 F.3d 646 (6th Cir. 2004). The national news media had great fun covering his second trial, his expulsion from Congress, and even his release from jail on September 2, 2009. (When he was released, he immediately did all the Cable TV news shows.) But the media found that the biggest story of all was in publishing his prison mug shot. Only then was it revealed that the terrible hair on the top of his head was just a bad toupee. He had been bald all along.