The 9th Circuit recently vacated a Tax Court decision because the Tax Court failed to shift the burden of proof to the IRS and failed to provide adequate explanation for its valuation of stock held by an estate.

Paul Mitchell, co-founder of the highly successful hair-care products company of the same name, died on April 21, 1989. His estate filed for and received a six-month extension of time to file its estate tax return, so the return was due on July 21, 1990, a Saturday. The estate mailed its return on Friday, July 20, 1990, and the IRS received it the following Monday.

On July 21 1993, the IRS mailed a notice of deficiency to the estate, determining a deficiency of more than $45 million. The IRS asserted that the estate had undervalued its stock in John Paul Mitchell Systems (JPMS) by $76.5 million.

Before the Tax Court, the estate claimed that the notice of deficiency was not timely, since it was mailed on July 21, 1993_one day after the three-year statute of limitations had expired if the estate tax return was timely filed when it was mailed on July 20, 1990. The Tax Court rejected this argument, explaining that under §7503 the estate tax return was timely filed when the IRS received it on July 21, 1993. The "timely mailing is timely filing" rule of §7502 only applies in cases where the return would be untimely filed on the date it is received by the IRS.

Next, the estate claimed that it did not bear the burden of proof. According to the evidence, the estate argued, it owned a 49.04% minority interest in JPMS at the time of Mitchell's death, and this evidence did not support the figures determined by the IRS. The estate argued that the burden should be placed on the IRS to justify its assessment or to submit a figure that fits the evidence. Without explanation, the Tax Court rejected this argument and issued its own opinion on the value of the JPMS stock. The Court determined a value of $41.5 million, $13 million more than the value reported on the estate tax return.

The estate appealed to the 9th Circuit. Though the 9th Circuit upheld the timeliness of the notice of deficiency, it concluded that the Tax Court erred in denying the estate's motion to shift the burden of proof to the IRS. According to the 9th Circuit's ruling, the estate had shown the determination of the IRS to be invalid, at which point the IRS "has the burden of proving whether any deficiency exists and if so the amount."