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Burden of Proof – General Principles The IRS’s deficiency determination in a civil tax case is generally presumedcorrect, and the taxpayer bears the burden of proof Standard = preponderance of credible evidence The burden of proof may shift to the IRS in certain circumstances, such as: Increase in the amount of the deficiency New matters not included in the Notice of Deficiency Affirmative defenses pled by the IRS (e.g., res judicata, collateral estoppel) The taxpayer also bears the burden of proof in a tax refund suit The taxpayer must establish that there was an overpayment of tax Courts generally will not examine the IRS’s conduct in asserting adeficiency or denying a refund Will not “look behind” notices to examine motives, compliance with administrativeprocedures, etc. Tax cases are generally “de novo” proceedings2
Burden of Proof – Transfer Pricing Cases The IRS’s determination in a transfer pricing case is generally entitled to aheightened presumption of correctness This heightened presumption arises from the broad discretion given to the IRSunder Section 482 To overcome this presumption, a taxpayer generally must show that (i) theIRS abused its discretion (i.e., that the IRS’s Section 482 allocations are“arbitrary, capricious or unreasonable”) and (ii) the taxpayer’s own transferpricing was arm’s length Whether the IRS has abused its discretion is a question of fact As a practical matter, these two burdens are often collapsed (e.g., by showingthat its own pricing was arm’s length, the taxpayer may also establish that theIRS’s allocations are arbitrary, capricious or unreasonable) Courts typically determine their own Section 482 allocations if they conclude thatneither the IRS’s nor the taxpayer’s methodology is defensible, though somecourts have expressed reluctance to do so3
Page 1: TP Audit Procedures and Adjustments
Page 5 and 6: Burden of Proof - Transfer Pricing
Page 7 and 8: Burden of Proof - Transfer Pricing
Page 9 and 10: Correlative Adjustments A working d
Page 11 and 12: Interaction Between §482 and Forei
Page 13 and 14: Rev. Proc. 99-32 Rules Election to
Page 15 and 16: Simple Example - Rev. Proc. 99-32 D
Page 17 and 18: Transfer Pricing Information - IRS

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