Liberty Global and the Burden of Proof

In a recent case, the IRS sued a corporate taxpayer in district court for supposedly unpaid taxes—without issuing a notice of deficiency first. The taxpayer claimed that this move was improper, but the district court sided with the IRS. In an opinion issued in June, the court held that the deficiency process is essentially optional for the IRS.

We discuss this case—United States v. Liberty Global, Inc.—in a recent Tax Notes article. We suggest that the IRS might not take a similar approach in other tax disputes because of the so-called “burden of proof.” Normally, the taxpayer bears the burden of proving that the IRS’s adjustment is incorrect. Presumably, if the IRS initiates suit, it bears the burden of proving that its adjustment is correct. It could not simply pick holes in the taxpayer’s arguments, but would instead need to build an affirmative case. The IRS might not want to do that except in exceptional circumstances.

The IRS might be especially reticent to bear the burden of proof in a transfer pricing dispute. When the IRS asserts a transfer pricing adjustment under section 482, the taxpayer has the double burden of proving that the IRS’s position is arbitrary, capricious, and unreasonable and that its position is correct. It stands to reason that the IRS would bear this double burden if it initiated suit.

Our Tax Notes article is available here.

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