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Section 7491, which is generally effective for court
proceedings arising in connection with examinations commencing
after July 22, 1998, authorizes the burden of proof to be shifted
to the Commissioner if certain requirements are met. Section
7491(a)(1) provides that “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.” However, section
7491(a)(1) applies with respect to a factual issue only if the
requirements of section 7491(a)(2) are satisfied. Section
7491(a)(2) requires that a taxpayer must have complied with all
substantiation requirements, that a taxpayer must have maintained
all records required by title 26 and must have cooperated with
reasonable requests by the Secretary for witnesses, information,
documents, meetings, and interviews, and, if the taxpayer is a
corporation, the taxpayer must satisfy the net worth requirements
of section 7430(c)(4)(A)(ii).
In the instant case, petitioners did not raise the
application of section 7491 with respect to any factual issue
either before or during trial. In a footnote of their reply
brief, petitioners asserted that they had produced credible
evidence with respect to the reasonableness of the amount of the
TMI expenses and that the burden of proof on that issue should
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