Burden of Proof in Tax Cases: Valuation and Ranges - An Update

Draft of Article for Publication in the ABA’s The Tax Lawyer (Spring 2020) (Forthcoming)

39 Pages Posted: 9 Dec 2019

See all articles by John A. Townsend

John A. Townsend

University of Houston Law Center; Independent

Date Written: November 5, 2019


In this article, I update a previous article, John A. Townsend, Burden of Proof in Tax Cases: Valuations and Ranges, 2001 TNT 187-37 (2001). I discuss the difficulty in many valuation cases of determining a finite valuation point by the required degree of persuasion (more likely than not in most civil cases). This point was made cogently in a frequently cited opinion of by the Delaware Court of Chancery (which I quote in the next paragraph):

It is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date. Valuation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts' opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge’s task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.

Sometimes where ranges are identified, arbitrary conventions (such as the midpoint as in the case of publicly traded stock) can be used to determine the issue in litigation. But where there is no such convention that should be applied, the burden of persuasion can resolve the case by identifying the range. The party bearing the burden of persuasion (or risk of nonpersuasion) then has persuaded only as to the end of the range that does not favor that party and the value, based on persuasion, is determined accordingly.

The party bearing the burden of persuasion in tax cases is usually the taxpayer. In the article, I discuss interesting features of the burden and how, at least in the Tax Court, the burden of persuasion might shift to the Commissioner under Helvering v. Taylor, 293 U.S. 507 (1935), which I think is often misunderstood.

Another benefit of identifying the range is that, if it is determined on appeal that the trier of fact misapplied the burden of persuasion but did identify the range, the court of appeals can resolve the case by picking the other end of the range (unless a successful attack is made on the choice of the ends of the range).

Keywords: Burden of Proof, Burden of Production, Burden of Persuasion, Valuation

JEL Classification: H29

Suggested Citation

Townsend, John A. and Townsend, John A., Burden of Proof in Tax Cases: Valuation and Ranges - An Update (November 5, 2019). Draft of Article for Publication in the ABA’s The Tax Lawyer (Spring 2020) (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3489925 or http://dx.doi.org/10.2139/ssrn.3489925

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