This post will not be about substantive tax law but rather the Federal Rules of Evidence (it just so happens that I am taking Evidence now, so my ulterior motive is studying for the final exam).
Mr. Lawson failed to file tax returns for all years at issue. The IRS assessed deficiencies based on a reconstruction of his income. Before addressing the substantive tax issues, the Tax Court made an evidentiary ruling on an exhibit the IRS wanted admitted into evidence. In the end, Mr. Lawson loses.
While the Tax Court has its own rules of procedure, they generally follow The Federal Rules of Evidence pursuant to section 7453 of the Internal Revenue Code. Here, the rules of evidence play an important role in the IRS's case because without evidence they cannot prove Mr. Lawson earned income. As was the famous line, "if the glove doesn't fit, you must acquit," so this case goes, "if the income is not mine, i don't pay a dime."
At issue is an exhibit that the IRS wanted admitted into evidence. The exhibit is a deposition Mr. Lawson gave during a prior lawsuit. The IRS needed the deposition to prove Mr. Lawson owned income-producing assets during 2004 and 2005. In fact, the deposition directly contradicts Mr. Lawson's testimony given at the tax trial.
In this case, there are three hurdles the IRS must jump to get the exhibit admitted into evidence: relevance, hearsay, and authentication. They jump each hurdle with ease.
The threshold for relevance is pretty low. Evidence that has "any tendency to make the existence of any fact that is of consequence . . . more probable or less probable than it would be without the evidence" is relevant. Fed. R. Evid. 401. The deposition is relevant because it will help the IRS prove that Mr. Lawson earned income in 2004 and 2005.
Secondly, the IRS must establish that the deposition is either not hearsay, or if it is, then show a hearsay exception applies. I will do my best to explain, but this topic can get complicated real quick.
Why would the deposition be hearsay? Because it is an out-of-court statement offered to prove the truth of the matter asserted. Fed. R. Evid. 801. First, the deposition is a statement made out of court, that is, outside the matter currently before the Tax Court. Second, the deposition asserts Mr. Lawson does in fact own income-producing assets (truth of the matter asserted).
The Tax Court holds the exhibit gets admitted under either of two exclusions provided by Rule 801 - this means the deposition is not hearsay. The first exclusion is called a prior inconsistent statement. Mr. Lawson's deposition (the prior statement), made under oath, is inconsistent with his current testimony, also made under oath, at the tax trial. Hence, a prior inconsistent statement.
The second exclusion is a party admission. The party admission exclusion is exactly what it sounds like, and it's easier to use than the prior inconsistent statement. A party admission does not need to be made under oath.
Finally, Because the IRS wants the deposition entered into evidence, and not just someone's recollection of the deposition, it must be "authenticated." That is, the Court must be sure that the exhibit offered is in fact what it purports to be. Without authentication, we would have no assurance that the IRS is providing the real deposition. But as in the case of relevance, the threshold for authentication is low.
Rule 901(b) provides ten illustrations of how to authenticate a document. The IRS relies on 901(b)(1) and 901(b)(4). Rule 901(b)(1) authenticates based on testimony of a witness with knowledge. At trial the IRS called its revenue agent to testify that he received the deposition from Mr. Lawson's attorney - the attorney actually took the deposition. I would argue that the revenue agent does not have the requisite knowledge to authenticate because he received the deposition second hand (this is the point in class where my Prof. goes, "overruled").
Rule 901(b)(4) authenticates based on the document's contents, distinctive characteristics, and the circumstances. The Tax Court relies on this illustration for proper authentication. The exhibit appeared to be a deposition, both in form and content, Mr. Lawson admits being deposed in a prior law suit, and of course the revenue agent testified to receiving it from Mr. Lawson's attorney.
So, just how important are the rules of evidence in a tax case? Just ask Washington, DC's infamous council member Marion Barry. The U.S. Attorney's office recently filed suit to revoke Mr. Barry's probation for failure to file tax returns. The suit was dismissed because the U.S. Attorney did not call any witnesses. It is awfully hard to present evidence during trial without any witnesses - probably impossible.